Just had another one blow up in my face today. Selected buyer was 10% over guidance, $2mm hard at PSA execution.
There are only so many recaps or off market deals we can do. Is anyone else worried about hitting their acquisitions goals this year? How are you coping?
| +82 | LP coming into deal at higher land basis. How to model returns to GP? | 18 | 13h | |
| +76 | Increasing RE Industry's Cash Compensation, Collectively | 43 | 13h | |
| +72 | Major Decisions | 13 | 1d | |
| +28 | Niche down to an operator or stay an allocator | 9 | 3d | |
| +24 | Breaking into CRE late 20s | 7 | 4d | |
| +23 | Thoughts on joining an early-stage REPE fund | 7 | 11h | |
| +22 | Self Storage ECRI | 9 | 2d | |
| +20 | Doom Loop or Creative Urban Reemergence? | 3 | 6d | |
| +19 | How to get good at RE Modelling? | 16 | 1h | |
| +18 | 3 Hour Condo/Rental Excel Test - What Can Be Expected | 2 | 4d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
I'm a merchant developer. All we've heard last year and this year is that there is infinitely more money out there that needs to be placed than there are deals to do or buy. You can't blame a group for overpaying a bit in order to get that cash out the door or blame the owner for picking the highest bidder.
In this kind of environment, I have no time for the kind of bs buyers pull. Give me cash up front and close when you say you will. I've had more than enough of buyers pulling some nonsense and then not officially going hard until the closing date.
I completely understand a seller's perspective here. Our fund has actually doubled our planned dispositions for 2020 given how much capital is out there, so it would be hypocritical for me to "blame" the sellers.
I'm more curious how institutiona capital is staying competitive on the buyside through this market (adjusting UW assumptions, lowering return thresholds, simply not participating, etc.).
Ya boy is out here adjusting exit caps, cranking rent growth later in the hold, assuming semi-aggressive refinance scenarios, and generally accepting lower returns.
Works every time, baby
Worrying about PSF is so 2010
Return requirements are coming down as a result of current environment as well as sovereigns/pensions/etc... investing directly at the opco level and thus, cutting out the required spread at the intermediary level.
It's super challenging out there. It is a seller's market - plain and simple. It is really really difficult to generate alpha / purchase deals at attractive pricing on a one off basis. Those with an edge - i.e. blackstone - are best positioned here.
My recommendation is to think long and hard about your acquisition strategy and the types of deals you are targeting. Tailor your strategy to your capital structure. Think about where you might have an edge with your current source. If you're an operator with existing relationships this exercise becomes easier as there are multiple partners with varying capital.
It's not 2015-2016-2017 anymore. There are no more layups. Every deal is seemingly hard fought. Really need to think to get stuff done these days
It really depends on what your capital is willing to do. Interest rates are keeping things interesting enough in the MF/industrial spaces for long term holders. On the complete opposite end of the spectrum, we're still finding meaningful margin in entitlement deals.
Sounds like a deal in Phoenix that market is so competitive today
Every major market has become this competitive. From capital leaving the west coast to Phoenix, Denver and Texas...to capital leaving the northeast to the Carolinas down to Florida.
It's fking awful in Phoenix. Same trends in Texas and other markets I am looking at in Western United States. You have to assume market rent growth of 5-7% to make a deal pencil for value add using market rents post renovation on a couple of deals in Phoenix that have closed that I re-underwrote once I got info from the broker post close. I have seen deals trade for 10 to 15% above whisper with exit price assumptions trading above new product today for 1970s POS product. It's nuts...some brokers have said off the record they underwrite to a 10-12% IRR (using broker numbers, this is probably a 0-5% IRR if you use real numbers). You have to use above market rent growth, BS expense margins, flat or lower exit caps and lever up to make deals work. Brokers pitching 2nd or 3rd generation deals that have traded 2 or 3 times during the last decade with each owner making renovations as value add. It's making my job almost impossible... even Boise, a tiny ass market with less than $150M in total MF transaction activity in 2019 is showing crazy valuation (more mom and pop submarket than institutional groups here are doing weird shit just to buy deals). way too much dry powder on the side lines and people are just collecting fees, really fking frustrating!!
yeah but is it a bubble?
I am literally just doing this so I can read it - It's fking awful in Phoenix. Same trends in Texas and other markets I am looking at in Western United States. You have to assume market rent growth of 5-7% to make a deal pencil for value add using market rents post renovation on a couple of deals in Phoenix that have closed that I re-underwrote once I got info from the broker post close. I have seen deals trade for 10 to 15% above whisper with exit price assumptions trading above new product today for 1970s POS product. It's nuts...some brokers have said off the record they underwrite to a 10-12% IRR (using broker numbers, this is probably a 0-5% IRR if you use real numbers). You have to use above market rent growth, BS expense margins, flat or lower exit caps and lever up to make deals work. Brokers pitching 2nd or 3rd generation deals that have traded 2 or 3 times during the last decade with each owner making renovations as value add. It's making my job almost impossible... even Boise, a tiny ass market with less than $150M in total MF transaction activity in 2019 is showing crazy valuation (more mom and pop submarket than institutional groups here are doing weird shit just to buy deals). way too much dry powder on the side lines and people are just collecting fees, really fking frustrating!!
We are getting deals done through aggressive underwriting and accepting lower returns.
"It's not like anyone ever asks how the deals on your resume performed."
-Senior Acquisitions Associate
I said to one of my friends today "It's over for the little guy". Its basically impossible for anyone who isn't a large, well-capitalized fund to win deals with all the money in the market. I originate Agency and CMBS debt and I can see how hard it is for acquisition guys. Some of these cap rates (especially on the multifamily side) are outrageous. A lot of my clients are seeing deals off-market, but its not the prettiest stuff.
We closed on 1 deal recently (Class A) and have some others under contract (think Phoenix/Austin/LA/Orlando for all) that are class A developments. Our LP's are basically throwing money at us tbh.
what kind of net return are inverstors actually getting in these deals?
We UW deal level returns to a 16%, LP (us) return to a 14-15%, with net investor returns at a 12%.
Unfortunately, I think you need to chop 300bps off of each of those thresholds in today's market. But if you do that, it's hard to raise investor capital. It's chicken and the egg.
In what asset class are you trying to get those? How much hair are you willing to accept?
On very attractive deals we're doing a ton of DD upfront, hard money before DD, depending on how many buildings/tenants we offer very very short DD periods, quick close all cash after that then refi afterwards.
Obviously on top of all that offering the highest price...
In today's market you need a reason to give the seller to not accept all the offers that come in after a deal has already been awarded to you.
how do you get DD upfront? Do you get an access agreement and drag out PSA negotiations? Get your engineer to inspect the property undercover?
We've been trying both and sellers are opting for buyers that are willing to go hard immediately.
We offer to do all our DD simultaneously with PSA negotiations. Our DD periods are often a week or two (with the exception of title and survey which are long lead items) so we are often hard 100% by contract signing so offering some pre DD "hard money" is ice in the winter.
Without getting into specifics because I think that can cloud the discussion more than help because everyone is looking at different shit, today you need to be willing to do DD concurrently with PSA negotiations and speed is everything, be willing to spend more on legal to help with DD, it will be worth 50K to bring your DD from 30 days to a week or so.
I know many who work institutional firms cant do this but we also do not have to receive final PCA or ESA reports to finish DD. We can do it with a summary letter or a phone call giving an all clear and wait on final reports later.
As I said before we also close all cash and finance later. This is an important distinction from no financing obligation because inevitably people are calling sellers asking for a bit more time for financing even though there is no obligation in the deal.
Quick summary: Do DD concurrently with PSA negotiations, Offer "hard money deposit" upon signing PSA (this should be ice in the winter), be willing to spend more on legal time to help shorten your time table.
Market therapy.
So much more money in the market since 08. Cash is as cheap as its been for decades, so valuations are for sure proportionally that much higher
On a serious note, today's market is a skilled operator's market. If you're willing to get into ugly flex/industrial or retail product, or even MF in extreme tertiary markets and apply some leverage you can still turn some 5-handles into solid levered cash returns. If you really know what you're doing and have solid corporate partnerships with credit-worthy industrial or retail tenants and can execute repositioning projects with consistency, you can still crush value-add plays. Many funds are doing it, the key is to find the Operators who have a solid game-plan that they can execute consistently.
But yeah, if you're a $1 - $3B AUM equity deal shop looking to passively throw JV equity at whatever Class B MF deals your capital markets brokers are bringing you, things are tough.
is OP in multifamily ? .... shit is everyone in the RE forum in multifamily? if so, that's your fuckin problem
I bet 75%+ of the RE forum is Multifamily
Yes but it seems every other asset class is seeing the same thing, too much capital and not enough deals
As someone in hotel development right now, everyone else's problem (too much capital) seems to be our blessing haha.
Industrial here is doing great. Doing a fair bit of repositioning in MCOL growth metros.
As a partial outsider all the economics on this confuses me a bit.
We’ve under built housing significantly over the last ten year. Actually the worst building crisis we’ve seen ever in this country. New construction has only kept pace new family formation (ie. we haven’t replaced any housing stock that’s gone obsolescence).
More of a public markets guy but went into the home builders in dec on the under building thesis and strong environment for housing (low rates, lowest unemployment ever, etc).
What upside do you see in homebuilding with rates that can't get much lower, labor and materials costs that continue to rise, and relatively stagnant household incomes?
That was a much different environment then. Though thesis may still hold true.
Until this corona shit we had low rates, gained like 300k. Jobs today and had solid wage growth.
Materials and labor were a concern. But demand should have been there was just a matter of whether we could build them.
No clue now. Out of 9/11 housing boomed though which is somewhat similar.
In our market the only deals we find pencil are, as Nudnick McMooch said, ugly. We have a ground-up flex warehouse deal that we are getting ready to close on and in our market, there is a large under-supply of product. Our users will be anywhere from 2,000 - 20,000 sqft with 10% office space and the remainder warehouse. I think the ugly nature of these deals is slowing our competition. We are still learning this asset class, but I think there's opportunity.
What market are you in? Low build-out, shallow bay is hot AF, we're starting to see hard deposits day 1 which I've never seen (yeah imagine that MF guys). Institutions heavy even on deals sub-$10mm, retail dudes throwing money around not knowing anything - it's absurd.
I can assure you shallow bay is not where to find yield in 99.9% of markets lol.
Charleston, SC is my market, so definitely a hot market. I'm not sure I understand when you say shallow bay is not where to find yield. Are you saying yield through development or purchase. Your comment makes it sound like you are talking about purchase?
This will be our first flex ground up development, but I had hope we could fill a niche in the under 10MM space. Hoping to be in the Goldilocks price range.
Furthermore, I'm having a really hard time finding market data on warehouse space that is under 10,000 FT. Supply/Demand of product in the market is something I'm looking for. If my competition is mom and pop developers working off of gut instinct, then if I can use data to choose new locations, I'd be ahead of my competitors. Again, this is current logic and due to change as I grow from being a monkey to a gorilla!
Error doloremque at sint ut quos dolorum et. Consequatur et qui qui et blanditiis pariatur esse.
Dolores quis qui error molestiae atque. Facilis dolorum iure exercitationem fuga. Velit ipsam nemo ipsam id.
Sint quo officia ex aut nobis voluptatum. Iste sequi cum aut quis facilis nobis. Qui distinctio rerum dicta doloribus. In qui nemo maxime recusandae maiores architecto et sit. Mollitia sit consequatur sit natus molestias. Blanditiis eum enim explicabo quis et placeat.
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...
Ipsum atque sunt assumenda voluptas perspiciatis. Qui nesciunt illo sint voluptates. Aut necessitatibus natus esse nihil voluptas rem. Esse sapiente et laudantium at nihil placeat. Voluptatem explicabo tempore cumque repudiandae ea modi sunt.
Sit possimus est et porro ab error ab. Est blanditiis beatae magnam dolorum iure voluptatum.
Autem enim nesciunt nostrum aut. Distinctio iste numquam id hic repudiandae perferendis quo ipsam. Est et fugiat est corporis dolor animi aut.
Magni officiis aliquam odit suscipit sed. Impedit id itaque quo enim et cupiditate ipsa. Numquam at aut blanditiis aut ut provident.
Asperiores a et qui quis modi architecto. Eos dicta tempore ex deserunt explicabo commodi.