A question to all you experienced, cycle tested monkeys out there:
How are you thinking about exit cap rates in this rising rate environment?
1 - From my limited experience in the market, the debt markets seem to be all over the place with the fwd forecasts. Lenders seem to be holding back quite a bit, while waiting for prices to settle.
2- And with forecasted interest take hikes coming up, future refi's or sales might to a huge extent be shaped by the senior/ mezz rates buyers could get in the market.
3- Even now, there are buyers in the market who arent able to execute cause they cant able to secure proper financing.
So in all of this, how much cap rate expansion are all of you budgeting? How are you getting deals to pencil?
We were underwriting 50-75 bps. Have recently bumped up exits another 50 bps across the board.
Is anything penciling with the extra 50bps spread? Or are you getting aggressive with growth rates to offset the extra 50bps on exit?
New construction not really. Exit values down, costs still holding, debt significantly worse, seller expectations not fully adjusted to new environment.
Value add is starting to get pretty interesting. Some office owners in a bind and a lot of potential buyers on the sidelines.
50-75 bps on a 3-5 year exit from now. Varies by market.
Are you underwriting exit caps tighter than debt coupon rates today?
As in 5-7-10 year treasuries or something else ? What debt instrument are you referring to?
For the ask on some of these deals/ portfolios: Exit cap would be just about there, or even below, in terms current debt coupons (for stabilized assets), from what I am seeing.
Does that make sense? I would've thought that if the base case ahead is a stagflation scenario, 3-5yr debt coupons should be 50-75bps higher by themselves?
Is this an American centric practice? I can't imagine how you'd get anything to stack doing this in Europe.
stressed is 25bps per year on the cap rate. rate stress is spring cap/IR cap over SOFR.
Thoughts on a short term value add? Not to be dull, but if you’re looking at a 3 year reno and sell, and you got your purchase price at market range, do you need to be that worried about exit? Sure, you may hit a 10% IRR opposed to a 12-13% (I know this can impact some investment decisions), but so long as you’re not overpaying up front, and you’re in a growing market, are you that worried about the exit cap? You’re delivering a top of the line asset, even if cap rates expand, you’re selling a different asset. I’d be more concerned with your entry payment right now than anything. If you’re looking long term, buy for cash flow now and if you need to hold longer for caps to come down, well..
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