What Going-In Cap Rate Are You Seeing on Class B & C Garden Style Multifamily (Non-Core)
Looked at a few core MF deals recently (West Coast Gateway) markets where the seller & selling brokers seemed to be under the impression that taking on negative leverage for a year or two is the norm for core multifamily buyers right now. But it's also my understanding that San Fran / LA core markets are their own world.
I'm at a value-add fund, doing predominantly commercial value-add, where we typically scoop up properties that are like 60-85% leased for cap rates in the high 6% range, sometimes low 7% if there's real distress. We have been eyeing suburban, sunbelt multifam (like everyone else in the world) for some time now as a growth area for us though. From what I'm seeing however, cap rates for this product type for ~90% leased properties are still floating around mid/high 5% range? I think part of our problem is we're having a hard time understanding the potential for further cap rate compression as we stabilize / improve the properties, if they're already trading at narrow spreads to mortgage debt.
Bump
For West Coast MF cap rates it is highly dependent on vintage / location as groups are needing higher cap rates for the older vintage or inferior located assets. I would say right now core is 4.5% - 4.75% and value add is 4.5% - 5.5%.
4.5%-5.5% on 2MM of NOI
Is 44M-36MM and that is probably also what a bid sheet looks like, hence why no deals are getting done.
Sorry I should have clarified more in detail
1980+ or newer well located value add is 4.5% - 5%
1970’s - 1980’s and inferior location is a 5% - 5.5%
And actually on the contrary if the asset is priced appropriately meaning not looking for 2021 - mid 2022 pricing deals are getting done. There is limited product on the market some deals are seeing 20+ offers with wide bandwith in pricing of 50 basis points.
Yeah you're not buying sunbelt multifamily above a 6 cap unless it's beat to shit. It's arguably the most in-demand product today and there are plenty of savvy (and/or crazy) operators buying at negative leverage because they have the ability to leverage economies of scale to create efficiencies in their opex and the market knowledge/leasing capability to realize increased rents and get out of that situation within 1-2 years.
Remember this product was trading in the 3-4 cap range for several years prior to rate hikes. There's plenty of room for compression if rates come back down.
Hey man this is a stupid question but what’s negative leverage?
5% Cap Rate = Property Value: 10MM, NOI: 500K
Interest Rate: 7% at 75% LTV, Loan Amt: 7.5MM
Interest Payment: 525,000
Super simplified version but basically the yearly interest payment is 25,000 more than the NOI of the property you are buying. The idea is you think you can increase rents greater than the debt you throw on it, risky but possible in the right area/ right property/ location
Negative leverage is when your interest rate is higher than your yield/cap rate. At this point the equity is earning less than the debt while taking on more risk. Generally you aim to be positive leverage within 2 years. For value add this can make sense for stabilized product with low rent growth not so much.
This is what I was missing, I'm a nooby and didn't know that the stated product type trades that low in general.
I think one conclusion from this I have is that multifamily seems to see lower spreads between core and non-core product than Commercial / Retail. Implying there is a lot more additional/incremental risk in non-core office than there is going from core to non-core multifamily real estate? In other words the difference in risk between Class A stabilized and Class C underutilized office is more profound than the difference in risk between Class A stabilized multifamily and Class C lease-up multifamily?
I think this was the most obvious sign of a "bubble" forming in value-add multi in 2021/2022. Class C multi should not trade at roughly the same cap rates as Class A, because the capex needs at each over the next 10-15 years are dramatically different. Even if the property was "renovated", I doubt in most cases they were doing a full gut of the building systems. Too many operators were buying value-add 80's multi, doing a lipstick reno, stabilizing to a 5% ROC and expecting to sell for a 4% cap. There should be a meaningful spread between buying stabilized Class A and stabilized Class C and the spreads just got too low at the peak.
5.25%
Cap rate is lower than where you are borrowing aka your interest rate.
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