Hey WSO - So value investors buy below replacement cost. Right?
The story goes if you can buy cheaper than a competitor can build, say, right next door, you're protected from such product as you can charge lower rents and still achieve an acceptable yield. Maybe people don't build because rents wont support the total cost. Build when prices are above replacement cost, you'll get a better yield with the same rents. OK. Got it. Not complicated if we're talking about buildings that are 3 years old.
But what about in a city like NYC where could easily pay $850psf for a 1920's office building? Is this below replacement cost because a new shiny tower in its exact location will run you $1,250psf? Is the true "replacement cost" some cheap build that gets you to a quality equivalent to a 100 year old building? This is where I'm lost.