Hello Everyone,
Right now I'm interviewing for a REPE analyst position and feel like they will ask me when should one develop vs acquire a commercial property and Why? I know this because I've been dinged for a REPE internship because I didn't know the answer to this one question. Can anybody give a brief description to when it would be more suitable to develop or acquire a commercial property? I looked everywhere on the internet and couldn't find any real answer. Thank you.
RoC of the development vs the cap rate of existing assets is probably the textbook answer.
Untrended return on cost ("ROC") needs to be greater than cap rate by 100-150bps for an equity shop. For developers, UW spreads are probably 150-200bps because we massage numbers and don't use stabilized taxes since we are merchant build anyways.The ROC is NOI/Cost and cap rate is NOI/PP. If you are taking development risk, you need to be rewarded so the ROC needs to be greater than Cap Rate.Cap rate is a fancy RE term for an inverse PE ratio. IE a 4.25% cap is the same as 20x earnings for those that are new to RE.The hotter the market, the lower the cap rate or higher the PE ratio with stocks. That's why developers do so well in hot markets bc of cap rate compression.
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