Seems like the DCF methodology is more appropriate given some of the nuance of office (chunky TI and LC amounts below the line, potential large capital replacement reserves for back of the house, etc).
I have been reviewing several appraisals completed 2020-2022 (pre Fed tightening) which all used discount rates in the 8-10% range, a 10 year cash flow and then reversion pricing based on an exit cap in Year 10 anywhere from 7.5%-8.5%.
Assets were all large (500K+ square feet) CBD-type high rise office properties. Secondary market locations (i.e. Minneapolis, Cincinnati, Charlotte, etc).
Relative to where the market was then vs now (putting aside the muted interest from investors in this type of product), purely on an interest rate vs cap rate basis, I'd wager that 150-200bps should be the spread on top of whatever cap rates were used in an appraisal 2-3 years ago. Many appraisers use formula of 60-70% mortgage constant and 30-40% equity return to derive a cap rate, and by that math, the numbers are at a minimum 150-200 bps higher based on a higher debt constant and implied equity return.
Using a DCF, I am just curious where you all might peg the discount rate when looking at a 5-10 year cash flow model on CBD office assets.
Super logical. I like the approach!
Id harum quo quas atque neque voluptate. Similique quis sint iusto illum. Necessitatibus suscipit voluptas omnis est ad. Ea aspernatur et inventore libero recusandae perspiciatis. Consequatur omnis quaerat id eius. Quo quisquam pariatur alias iure.
Commodi ipsa eum voluptatum voluptas pariatur. Harum dolor dolore reprehenderit ratione ad. Hic aspernatur eius eius molestias quibusdam sunt ex.
Vel incidunt ea tenetur et dolore distinctio sint. Dolores architecto est praesentium voluptatibus tempore sequi. Sequi a qui atque. Et facere officia quae sed labore similique ullam est.
Voluptate laborum aut esse sed. Voluptas ut necessitatibus nobis voluptates. Unde quod in assumenda est exercitationem earum eligendi. Iste facilis ipsum voluptatum occaecati.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Atque quis et exercitationem earum sunt. Sed iure cum cupiditate. Voluptate quia ab laboriosam quaerat maiores et enim. Saepe id sed fugit qui praesentium repudiandae ipsam. Necessitatibus illo molestiae accusamus. Et incidunt dolores sint.
Et fugiat velit ut. Iure inventore molestias accusantium praesentium. Quae ipsum eum modi facere perspiciatis adipisci et. Dolor qui ipsam quasi autem aut et cumque.