As an investor looking for higher risk adjusted yields, how can you find any decent returns in the market?

Industrial and MF caps are so compressed you need rental growth of 7-10% per year on a 3Y hold, in office you have to find a building where the tenants is essentially locked in. Our investors are used to us getting 10-15% CoC in pretty stable deals, now you are either risking your entire capital in renewals with office space, or incredibly aggressive in hot assets. Is the current market at an inefficient place for smart investors looking for income driven deals? 

As an associate who is looking to build a pipeline of acquisitions, has anyone had any luck finding assets that have enough stability as well as yields?

Comments (4)

Jan 14, 2022 - 1:40pm

For big deal sizes yes, the majority of capital in the market is investing on a relative returns basis and are benchmarking to bond yields so they're happy to take a 3-4% CoC. You're not going to find 10-15% on stable assets in this market and need to temper your investors' expectations or look to pivot to value add if those are the types of returns you're targeting (and be prepared to carry at more like a 5% for value add until you realize the value).

You can likely still find this type of return on occasion at smaller ticket prices from finding mispriced assets, but as an associate its unlikely you have the network to get those deals brought to you unless you're taking over relationships for someone more senior at your firm. They're unlikely to hit the market.

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  • Associate 1 in RE - Comm
Jan 14, 2022 - 2:36pm

I agree with your last point, I don't have the network yet to really bring in deals that will likely net us a mispriced asset. 

On your first point though, what do you consider a big deal size? We are closing a deal that I brought in at $130M with a CoC at 12%, but it's an odd deal that has higher risk than we are used to, but WALT at 10.5Y mean we are getting our equity back before any potential stress beyond default. Every other deal I see around that deal size is around 5% CoC, are investors doing solely fee deals then? No one is getting promote or carry on a deal like that.

  • Associate 1 in RE - Comm
Jan 14, 2022 - 4:06pm

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