What is the Typical IRR for a deal type?

Hi all, I am currently interviewing for a development shop that is looking for an acquisitions analyst. I was curious What would be the typical IRR for a development deal(they do multifamily, office and niche types). 

Is there an online forum or database where I can gather the data. I am also aware of the pension fund that acts as the LP for most of their deals. Anyway I can get an idea what returns the pension fund is looking for? Would that be public information.  

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Comments (13)

  • Analyst 1 in RE - Comm
Jun 12, 2021 - 1:29am

I'm in brokerage and am in no ways an expert, but to me I think you should look at risk profile of a deal. Ie core, core plus, value add, opportunistic. For ground up development  I believe that would fall into opportunistic due to the rate of return and leverage used on a deal. You're generally targeting an X% IRR (unleveled and levered) and if you play around with a model you can get a better idea. Feel free to correct me if anyone thinks this is incorrect. 

In terms of pensions funds I'd say they target "safer" deals. They're dealing with people's retirement and overall they don't need a yolo very risky investment return over all their money. I think they would put the majority of their money in safer assets like a core deal (think Class A office, prime NYC, top tenancy and long term leases) with a small portion down the spectrum of risk to get higher returns.

Again anyone who knows better and thinks I'm wrong feel free to correct me.

Jun 12, 2021 - 2:06pm

Pretty spot on. Firms typically look at returns based on risk profile and every firm's appetite for risk is different for numerous reasons - cost of capital, experience, recent company performance, current portfolio, etc. Just to throw out a number, around 20% IRR is what is usually floated for opportunistic development. But 1000% sure that pension funds are looking for lower returns and have a low appetite for risk. Pension funds and life companies are just looking to gradually appreciate their capital. They're ok with average/slightly above average returns. They're not in the game to kill it like say Blackstone or Apollo. 

  • Analyst 1 in RE - Comm
Jun 15, 2021 - 10:25pm

Great thank you, I actually had a question regarding core, core plus, value add, opportunistic. Had an excel test where they asked what kind of deal I thought it was. Based on leveraged IRR of over 20% I said opportunistic. I was confused because it had high occupancy of over 90% and going in cap rate was 5%. Thoughts on this? To me those make it seem like it's not an opportunistic deal because high occupancy and a lower cap rate usually mean safety and thus more like core/core plus (to me) and if I changed the going in cap to say 7% the IRR went crazy high so was just overall stuck on this part.

Most Helpful
Jun 12, 2021 - 7:41am

Okay, so, it's an easy but not so easy question to answer. I thought I posted an answer last night, but I don't see it here.. 

So, first off, you can, and you can't, set a return for a specific deal type. Every firm has different parameters and leverage. For instance, one developer may get maximum leverage and shoot for a 20% leveraged IRR (irrespective of what the unleveraged returns look like) while I Life Co may do that same deal unleveraged and aim for a 9% IRR (unleveraged). This Life Co may not put debt on the deal. You also need to understand how long each investor will hold the asset, because that will effect firms' returns too. What I'm getting at, is, firms will do different deals for different returns depending on who they are and their cost of capital. 

Next, there is a market for this stuff. Generally, once you see enough flow, you'll know approximately where things will trade. For instance, pre pandemic core/core plus office in NYC traded for a discount rate of approximately 5.5%-6.25% on a 10 year, unleveraged IRR

So, where do you get this information of where discount rates are? (1) brokers, (2) appraisers, (3) feel for the market after operating in it. Brokers and appraisers track unleveraged discount rates. You should always look at your deal unleveraged because you loan structure can change the returns so much. Looking at it unleveraged all the time will allow you to compare apples to apples. When you have conversations with brokers and appraisers, they can generally tell you this stuff. 

With all the above said, yes of course you can say generally where core, core plus, value add, and development deals will trade once leverage is put used. But this also takes into account cost of capital. My first Life Co I worked at would do a value add deal for about a 12%-14% IRR but the same private equity firm I moved to needed a 17%-20% for the same type of deal. So cost of capital comes into play.

Does this make sense? 

  • Analyst 1 in RE - Comm
Jun 13, 2021 - 9:58pm

Thanks! This is actually helpful and gives me some direction to look. What I am really trying to do is find a benchmark. So far I can derive discount rates and typical cost of debt from core/agency multifamily by looking at bonds and after talking to a couple of guys at CalPERS. I take it development deals are not super homogeneous.  

I was just curious there was a big, buyer for development deals that ends up securitising the loans or throws some of the preferred equity into a public investment vehicle.

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Jun 14, 2021 - 2:45pm

I would only add that brokers and appraisers won't have a great idea of what anything is worth, or if they do, are unlikely to give you an honest answer.

Jun 12, 2021 - 12:22pm

I think the best way, and how most senior guys look at opportunities (possibly other than the private equity side, but common there as well) is return on cost.

Once you start doing this enough, you basically know where the returns are supposed to be falling in the beginning, but the roc usually confirms it.

For example, I know that on a 3-4 year hold, if the trended ROC is 180-200 bps above my exit cap rate, it'll be a high teens / low 20's levered IRR with market rate debt (60-65% of cost) and then you can work backward from there. On the Unlevered side, that should be a mid teens return over the same time period.

On a 5 year hold, the returns on that same deal would decrease 100-200 bps on the levered side depending on when the renovation or development is happening.

I basically only look at Return on cost, the IRR's and multiples should just confirm that and if it doesn't, something is probably up.

I use a simple spreadsheet to do that before I put anything into a model.

Hope that helps.

Jun 14, 2021 - 12:37pm

1. Yes there are pretty defined targets for development deals, anyone who says otherwise is doesn't have capital partners. I can speak to multifamily, for development you're going to be targetting an 18% IRR gross of fees/promote, net is going to be 13%-15%.

2. Preqin is the best source for fund return information.

3. For pension fund targets the best place to look would be the public documents they put out on fund performance, there was a post with a few of them recently. I'd start there.

I do some of the fundraising for our shop and deal with pension funds and their consultants on a regular basis.

Edit: to be clear these are levered returns.

  • NA in CB
Jun 14, 2021 - 1:06pm

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