Curious as to what returns people are solving to on the ownership side in different asset classes to stay competitive?
I work in the retail asset class (on the brokerage side), specifically multi-tenant shopping centers (grocery anchored, power centers, lifestyle centers, neighborhood shopping centers, and unanchored strips).
Depending on property type, location, and whether its stabilized, has some value add component etc we would try to solve to a specific return metric to come up with pricing.
for core + stabilized assets we are modeling approximately 11-12% levered IRR's
value add or with some vacancy obviously more like 14-6% LIRR
Wondering what people typically see on the multifamily side and industrial as well. Feel like clipping a 10-12% IRR really isnt going to make generate significant wealth, but i understand for many capital deployers this is a diversification play and they can get comfortable with certain return metrics.
Based on the most helpful WSO content, here are some insights into the returns people are solving to in different asset classes:
Multifamily:
Industrial:
General Observations:
Additional Considerations:
These insights should help you understand the competitive return metrics across different asset classes and the factors influencing these returns.
Sources: For those of you in multi-family, Value-Add Multifamily Investments, What is Your ADDITIONAL Reason to invest in Multi-Family?, Lunch & Learn -Ins and Outs of Multifamily, How to choose what asset type to work with in investment sales?
I know it's not what you're looking for, but on the multifamily dev side we target at least 20% IRR, and hopefully a 150 bp spread on the yield. All of our deals have been real thin lately though, and we're stretching to hit that 20% and our spreads are closer to 100-110 bps.
Not a RE guy. When you say 150 spread on yield. What does that refer to?
Difference between yield on cost and cap rate. Yield on cost = NOI/total project cost; cap rate = NOI/market value. So essentially the difference between what it costs to build vs what you can sell it for
What hold periods are we referencing? This has a big impact on IRRs for this discussion.
typically 10-year holds. I have only been modeling 5-year holds or 7 year holds if there is some sort of lease-up value add component thats taking place in year 1-2-3 or vacating a tenant like big lots for example in year 4-5-6 etc.
At a multi owner operator. We are transacting on value add deals in the 16-19% range. Core deals are more like 10-12% with a longer hold.
So on the core deals, is that about 7% unlevered IRR? And value add is about a 9% UIRR?
I've always felt it's an apples to oranges question because everyone underwrites differently. I can have a group tell me they're underwriting their multifamily deals to a 16 - 18% IRR but if you pick up their model it's aggressive on rent growth, cutting opex, exit caps, etc. Such small changes can easily take a deal from a 14% to an 18% so it's almost something that's in the eye of the beholder.
It’s not apples and oranges. Accurately pricing risk is the art of underwriting and is how the lions separate themselves from the zebras.
What’s getting conflated here is risk profile vs cost of capital. Risk profile is driven by the necessary business plan, ie ground up is opportunistic, fully stabilized in top market is core. Cost of capital is the required return that your investors require to use their money.
Good investors match cost of capital with risk profile. Bad investors take on high risk for low real returns (ie value-add risk with core plus returns). Great investors take on less risk for higher returns (ie core plus risk for value add returns).
The skill here is getting compensated fairly or disproportionately for the risks you do take.
I also think it be helpful to quote IRR's on an unlevered basis because everyone use different leverage.
Not a RE guy but what about multifamily deals where you are underwriting to a some NOI uplift by spending $18-20K/door? What if your equity also benefits from an existing portfolio so the newly acquired assets are a smaller portion and a lot of the portfolio is stabilized at say 55% LTV
What is your question?
Dolorem enim assumenda accusamus et nobis nemo placeat assumenda. Dolor voluptas dolore voluptates dolore necessitatibus excepturi asperiores. Consequuntur rem vero est illum.
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...