Given todays market conditions, what do you think is the best investment strategy if you HAD to buy right now. I know most deals are not penciling out, but I'm curious what you guys think would be the best approach. Is there a specific way that you'd try to finance a deal?
I know a lot of people are waiting to see where things go so this can be totally theoretical. I'm pretty new to CRE and I'm just trying to get a better understanding the big picture strategies, the thought process, and what ppl are looking for, specifically with the changing environment (interest/caps/inflation/growth).
Thanks ahead of time for any responses! It's much appreciated.
P.S. I know this is a very broad and differs from company to company or individual to individual, so it's probably best to give a more generalized answer. If it helps, feel free to add some context/background that would add more understanding for the reasoning behind any investment approaches.
kbdotz, sorry about the lack of response. Maybe one of these topics will help:
More suggestions...
Fingers crossed that one of those helps you.
On financing - we're seeing more creative financing structures to make deals happen. Seller financing at under market rates (e.g. 70% LTV, 5% I/O for 30 months), delayed closings (seen some land deals structured 12+ months out), power of attorney to rework tenant rolls with long closings, etc. We're in the LMM/MM space ($5-25MM) where most vendors are just private regional groups/families...they seem to be more receptive to creative structures vs. more institutionalized space (ballpark $30MM+).
On cap rates/inflation/dilutive leverage - folks are still quite bullish on the multifamily and industrial space in our markets even if initial leverage is negative on acquisition. Material shift to hairier value-add deals to get to the same returns - more heavy lifting/operator risk to grow income...working assets instead of just relying on market rent growth. We are evergreen holders so we're thinking in terms of market share in our markets in 10-20+ years and may have a different framework/incentives vs. groups with defined investment life cycles.
What do you mean by this?
E.g. Buyer goes hard with a 18 month closing for a value-add deal. During this period the buyer has authority to work the asset (kicking out MTM tenants, leasing, altering the building, etc.) - usually goes hand in hand with a rent guarantee to the vendor. So by closing, the income has grown and the buyer's able to make more sense of the contractual purchase price + better for financing.
Why would a seller provide financing at such a rate? Are you assuming the buyer takes over the existing loan that’s on the property or that the seller is providing a fresh loan? Only reason I could see is that the seller is distressed. But they would have to be distressed AF to both sell at a sharp discount and then also offer to finance your purchase at a rate that is below market ?
Seller carries note, not a mortgage assumption. Usually these vendors have owned the asset for a long time and have little mortgage on it.
Couple of reasons, amongst others:
1. Buyer can't finance as-is - MTM leases, enviro remediation issue, etc.
2. Seller wants to hit a number but doesn't want to budge on pricing...think of the VTB as a delayed payment...
These are unique situations that realistically happen 5% of the time. These aren't distressed sellers, they're long term owners with lots of equity in their deals that don't need to unlocked all at once.
We just closed on 75% LTC seller financing at 4%. We are employing most of the strategies slightlyhappiereveryday outlined at the moment and concur its pretty much the only way to get deals done right now. I'm not going out to the capital market to finance anything till Q2 next year most likely.
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As someone else said, there's not really a specific strategy that works right now (if there was, everyone would be doing it instead of being pencils down) - truth is, nobody knows how things are going to shake out right now and the environment is so volatile few people are willing to place big bets. If you were to say a specific asset class is going to skyrocket, you'd likely be wrong.
What you can do right now is be opportunistic and get creative in structuring deals. Am I going to buy multifamily/industrial at a 3 cap today? Not personally, I'm not willing to make that bet (many people are though). But would I happily buy a strong performing power centre at a 10 cap when it was trading at a 7-7.5 a few months ago? 100%, and those deals are popping up here and there from motivated sellers. Then as someone else said, creative financing/closing structures, building flexibility/optionality into deals, etc. is another way to make things work.
Only sharks and those in pain are doing deals currently!! EQR had to cash in REFI a deal than cash out!!! I mean, Wtf??!! This is the grave Dancer getting caught with his pants down, some one will get fired!!
The folks doing pref equity are making an exit cap rate bet that rates will come down materially in 24 Months or unique language to allow pref slug to take control when things go belly up!!
Cap rates are up easily 100 bps in most market, with interest rates in mid 6 range.
You would have to be extremely delusional, 100% OPM with no recourse or a jerk to be ok with negative leverage for 2-3 years, to hope that things will course and enable you to make $$$$! Rents just started falling in multifamily, office is dead and you are seeing cracks in industrial.
Despite the madness, opportunity abounds for those with balls of steal!!
Is there any link to read further on what happened to EQR on this deal? trying to better understand what went wrong with the deal and how this can be indicative of future distress.
Can anyone who works in debt elaborate upon where they see oppurtunity ? I’m in development so not too familiar with that side of the business?
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How exactly does the back leverage work and what spread are they charging and what spread are you charging on your mezz debt? Are you guys providing mezz on value add / development or on stabilized assets? Are you essentially making the spread between the repo line and the spread you charge? Isn't it hard to push a lot of money out the door since mezz may only be 10-15% of the capital stack? How are borrowers able to afford the rate you charge on mezz? For example, in development, the Untrended YOC (as of today) is less than or equal to SOFR + 275ish for a senior construction loan we get from a bank. So we are already underwater on that as of today. I’m assuming mezz would make that even worse. So who exactly is borrowing mezz and how are they affording it?
Spec industrial developments are still printing money for us, although rising interest rates are making it more difficult for sure
What assumptions are you making about exit caps on developments that are a year out? That seems like a bigger deal that construction loan interest per se.
On value-add and ground-up new development, construction costs need to come down substantially so that deals can pencil with the new, higher exit cap assumptions. I'm seeing some signs that this is starting to happen, depending on the GC or sub in question.
All of the GCs and subs are busy now, but some of them are seeing deals fall out and realizing that, later in 2023, things could get pretty slow for them. This depends on the company in question, but some of them can see far enough down the road to realize that they need to bid things more tightly right now to stay busy. If you have the ability to competitively bid things to a bunch of GCs and subs, I think you're going to start finding some better pricing from some of them than you would have seen 6 or 9 months ago. And there are signs that the insane supply chain issues are easing up a little.
Find sellers bleeding on the ground, then kick them more while they are down. Pretty simple really.
Buying cheap deals with the plan to hold unlevered for a year until the Fed wimps out.
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