I've seen some discussion on this but never consolidated into a thread which I think could be helpful for GPs regarding exit caps that LPs will tolerate (assuming a 5 year hold from today). For context - I am on the owner / operator side (GP). We mainly look at multi deals in the Southeast ranging from core-plus to VA in institutional markets with the lionshare being off market. I think we've lost some from being too conservative on exit caps and would love to be proven wrong with tangible evidence for our IC since the name of the game is can we find LP equity for these deals. Here is where I am at, but LPs feel free to chime in on other SE cities and TX.
Charlotte: 4.25-4.5% (depending on pocket and vintage)
Raleigh-Durham: 4.25-4.5%
Charleston: 4.5-4.75%
Tampa: 4.5%
DFW: 4-4.5%
Houston: 4.5-4.75%
Edit: providing rough sizing of your firm and what side you're on (GP/LP would be helpful as well).
Size: 15-20,000 units
GAV: $1.5-$2.5B in Real Estate
You're definitely too high. Most folks transacting are at 4.00%-4.15% in all of those markets. Definitely know of folks underwriting sub-4's in the sunbelt.
Thanks man. I agree 100%. Are LPs accepting these low to sub 4 caps? That's always been the pushback I've gotten in our internal ICs.
Honestly metrics have changed very, very rapidly and LPs have more money than they can get out. You'd be amazed what LPs are accepting.
Yes, they know the market has moved. There is so much money flowing in from abroad that needs a home, fundamentals are rock solid, risk-adjusted yields on a relative basis are still attractive globally, and sunbelt multifamily is the second prettiest girl at the dance right now.
There are large billion dollar portfolios in the market where the Blackstones, Starwoords, etc. are underwriting sub 4-exits. World we live in right now. I know people underwriting 3.75% exits in Austin... shit is wild.
I backed into a 3.71% this week… Midwest market
Hope that was going-in and not at the exit!
As much as everyone thinks low exit caps are not a good thing - there’s a flip of the coin no one discusses.
The lower the exit cap, the higher the appreciation potential. Every dollar of NOI added is worth more. Which, in a sense, makes it easier to achieve your appreciation and IRR/equity multiple targets. The question really just becomes, do you believe these exit caps. If so, move ahead, if not, don’t.
With that said, this feels like the NYC mindset of buying at 3 caps and exiting at 4 caps may begin playing out across the country. This is slightly exaggerated for effect, but point being, real estate could very well turn to an appreciation mindset as opposed to a cash flow and appreciation mindset - which NYC is and has been an appreciation game.
I'm seeing deals regularly 3.25-3.75% caps in PHX with ~3.75% caps in some other west coast markets dependent on property specifics (Seattle, Reno, etc)
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