I'm seeing deals fall through or sellers take off market because exits are no where near pro formas. I saw a KKR backed deal up for sale a year or two after acq; looked at their capex history and it was a huge spend, little rent growth achieved, sponsor was started by some brokers a few years ago, etc etc.
I've seen similar with big name LPs, although smaller than KKR. Is anyone else seeing valuations not pan out during sale a few years after their acq's, or groups getting burned due to purchasing at high basis?
These same deals I'm seeing, if you back their purchase price into a /unit or /sf basis, they are basically offering to exit at their 'par', so your achieved coc becomes your return... pricing always starts out at a price wayyy above replacement too, which may be justified to in place rents/cap rate, but still, the values are so off base from the cost of the hard asset....
Thoughts?
I could literally write an entire essay in response to this but I'm strapped for time. Good thread dude.
My squad has been mostly active in the industrial space and that's where my comments are probably most applicable:
Some developers with recently completed projects who underwrote 2-3 year holds are victims of flagging leasing velocity and are being forced to exit unstabilized. Lucky for them, they are being bailed out by inexorable rent growth over the past few years, the resultant being an exit near pro forma. This is okay for now as it is an acceptable passage of risk and healthy capital flows between types of investors. However, rent growth is decelerating as well. I think we are nearing a time where the bid-ask spread is too much. I expect we'll see some developers get burned on spec builds in the next 2-3 years.
Replacement cost is a really weird barometer in today's market. I'm seeing less and less groups with "below replacement cost" as a check the box. The way construction costs are going it's almost a misnomer. ie; core fund buys brand new building occupied by amazon for 10 years above replacement cost (obviously) but replacement cost is increasing at a 1%/mo clip in some markets. How is that a reliable benchmark then? The hypothetical amazon deal sounds pretty darn good now doesn't it? Regardless, this is another issue on the horizon. Like everything else, construction costs don't always go up... The construction cost put will come to an end eventually and at some point there will be a handful of assets that are on the books for multiples of their now hard costs. This is a distant future problem however.
Now to address your question, not really. I see cracks here and there. The fact is there is a ton of money that needs to go out the door. I've seen deals not get the attention the owner though it would but to be bailed out by less than smart money. Fact is, if an acq team that needs to get money out the door is told by the broker, "hey dude, you need to be here or there is no deal" and you don't think it's a bluff then what do you do? Good opps are few and far between right now, you've spent a ton of time this thing, and you need a win on the board. A lot of bigger guys will stomach that bid-ask spread in today's environment which is toxic and leads to a crazy market, ala today's market place.
TLDR; not really seeing many stressed deal processes but seeing cracks in the breastplate.