Are there really buyers who purchase CRE at 3-5% cap?
[deleted]
[{"id": "hx7w5pw", "text": "Right? Especially when practically everyone expects long term interest rates to go up. WTF, there are going to be a lot of bag holders waiting for a long time to get whole especially on the long term net leased deals with limited rent increases.", "replies": [{"id": "hx9puaq", "text": "Had to chuckle today, got an email blast about a new carwash leaseback, 4.25 cap, 15yr NNN with 1% bumps. So, you take the profit on building yourself a carwash, operate it for 15 years with me taking all the interest/inflation risk, and then you hand over this beat-to-hell asset that needs a complete rebuild? What a business model!", "replies": [], "depth": 2}], "depth": 1}, {"id": "hx7wxe4", "text": "At one point there was a lot of money from Europe and Japan coming into us cre. They have negative rates there so are fine with low cap rates so long as their currencies don\u2019t depreciate.", "replies": [], "depth": 1}, {"id": "hx7xha8", "text": "Depends, but usually the buyer expects to increase the rents and fill vacancies that arise from it. I sold an 8 cap 4 years ago that is at 20 cap now. Deferred maintenance really hurts rental rates, but fixing stuff up and being reimbursed for most of it by the NNN makes it okay in the end. Real estate isn\u2019t as volatile as the market, but it\u2019s a lot more work and can be leveraged if needed while producing an income.", "replies": [], "depth": 1}, {"id": "hx8ak9a", "text": "Appreciation and rental increases. It's a 3% cap today but if it's appreciating at 6% a year, year after year, does it even matter?\n\nIf rents are sky rocketing (like they are in many places), if the cap is 3% today then in a couple of years when your rent is up 40% and you're running a 10% cap, does it really matter? Combine it with appreciation...\n\nPeople aren't buying $20 million complexes in San Francisco for today's cashflow.", "replies": [{"id": "hxbd8v1", "text": "This is the answer. Curious if people are adjusting exits caps due to the probable fed interest rate increases. IMO, we have about 50 basis points of cushion in the 10 year before it will lift cap rates.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hx8aych", "text": "A lot of multifamily deals end up with sub 5% cap rates because of projected rent increases. Cap rate = r-g where r is the required rate of return and g is the rental growth. R is also lower because interest rates are pretty low, not as high of a return is required when cost of debt is low.", "replies": [], "depth": 1}, {"id": "hx8ghvu", "text": "Tons of institutional shops buying multi and industrial for sub 2-3 caps. Crazy to think about, but what are they going to do? Not invest?", "replies": [{"id": "hxbdddv", "text": "Yeah. This is why I don\u2019t invest with them.", "replies": [{"id": "hxc4j49", "text": "Different goals for sure. These institutions definitely have opportunistic buckets, but their LPs are moreso pensions/swfs who are capital allocators. So it makes sense they keep investing in core properties in core markets", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hx8iic4", "text": "People who pay those prices don't expect the NOI to stay the same.", "replies": [], "depth": 1}, {"id": "hx8inzf", "text": "MF and industrial in top markets are selling at 2-4 cap all day long.", "replies": [{"id": "hx8p4ay", "text": "With unlevered IRR\u2019s in the 5 to 5.5% range.  It truly is a strange time to be in CRE", "replies": [{"id": "hx98jj7", "text": "Unlevered IRR is the cap rate, no?", "replies": [{"id": "hx98mhd", "text": "Discount", "replies": [{"id": "hx9azs6", "text": "I assume you\u2019re including the exit?", "replies": [{"id": "hx9brkf", "text": "Correct.  The low cap rates people are talking about is typically the year 1 implied cap.  In DCF analysis, the terminal cap will be higher.", "replies": [{"id": "hx9m6xe", "text": "Writing our exits around 4.5%", "replies": [{"id": "hxa095x", "text": "What are you writing for going-in cap rates?", "replies": [{"id": "hxayydj", "text": "What are we writing or what does it end up at? I\u2019d say writing in the high 3/low 4 in-place yr 1 mostly, but during the sale ends up dropping to to low 3.", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hx8sg5d", "text": "My teams 1 year average is 3.37% on 42 transactions", "replies": [{"id": "hx8vk9k", "text": "how big is your team? what kind of deal size are you guys looking at?", "replies": [{"id": "hx9loba", "text": "8 and avg deal is around 130M i\u2019d say. So much larger than private capital deals, those are still closer to 4-5", "replies": [{"id": "hxanjzb", "text": "Just crushing $6B a year huh?", "replies": [{"id": "hxayhlw", "text": "Just shy of that yea", "replies": [{"id": "hxb69jp", "text": "In what market does $10-20B+ transact but private capital still trades in the 4-5%?\n\nNot asking because I don\u2019t believe you, I will genuinely invest there tomorrow", "replies": [{"id": "hxb7f5b", "text": "My team has over 50% of the market. Think total sales were just at 10M.\n\nAlso PC tend to be heavy value-Add", "replies": [{"id": "hxbsm1h", "text": "Interesting.  My team is also the dominant player in our asset class/market with similar volume, but private capital is just as (if not more, in some cases) competitive from a pricing standpoint.  We just sold a stabilized, new construction 2.3% cap\u2026insanity", "replies": [{"id": "hxbzlui", "text": "We classify PC as anything below 50M but sometimes have a few deal of PC below 100M. May be why", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hx9uxzr", "text": "Yep. Do nation wide lending to mostly institutional buyers and this is normal.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hx8io85", "text": "We have money that needs to be vested, as a REIT you can only vest into qualified vehicles. It\u2019s not so cut and dry.", "replies": [], "depth": 1}, {"id": "hx8joni", "text": "Amen!  You are right most people in CRE are profiting on the spread between their investment yield and what they are borrowing at.  As rates have been surging we'll probably see a little bit of a lag because nobody is in a rush to devalue their property.  If there is lots of inflation perhaps/hopefully rental rates will go up to match it.  But every market and every property type are very different in those regards.  Some people go IO or borrow shorter term/floating rate loans which means they can get crazy low rates sub 2% and maybe still make money for the time being.\n\nHowever, since a lot of Commercial leases are longer term it could be that cap rates are even below 3% on in place rents, although most brokers are marketing it based on the 'proforma' market rents.\n\nMost people I know buying assets now are going at least 50% equity on their purchase.  Some big funds profit from placing money, not from making money so its not their problem.  Also anyone selling an asset might think they are better off overpaying by 20% on a 1031 exchange to defer their tax bill than give up 40-55% when selling since you'll get a step up anyway.", "replies": [], "depth": 1}, {"id": "hx8rekb", "text": "Idiot proof investments. The kind that can take care of the investor's widow or orphan(s) if the investor dies.", "replies": [], "depth": 1}, {"id": "hx8rsae", "text": "Value add. Low 3s all day as long as I can pump NOI 80-100% within 5 years and refi.", "replies": [], "depth": 1}, {"id": "hx8uou9", "text": "Value add. Improving NOI @ lower cap = big $$$.", "replies": [{"id": "hxapzry", "text": "Wouldn\u2019t improving NOI at a higher cap be more ideal?", "replies": [{"id": "hxaud9t", "text": "Every dollar you increase NOI at a 4% cap increases value by $25, whereas a dollar of NOI increased at a 10% cap only adds $10 in value.", "replies": [{"id": "hxb579d", "text": "That\u2019s on the sell side. If you\u2019re buying at a 4 cap you\u2019re planning on increasing NOI but betting that cap rates don\u2019t go back up. \n\nThat $1 of NOI is worth $25 if you sell at 4%, but if you bought at 4 and sell at 5 you\u2019ll need to increase NOI by 25% just to break even.", "replies": [], "depth": 4}, {"id": "hxegoqx", "text": "That\u2019s only on reversion. Let\u2019s assume you buy a property that you think you could add $500k in NOI\u2026wouldn\u2019t you rather buy that property at a 6 cap, vs buying it at a 3 cap?", "replies": [{"id": "hxenegi", "text": "Well of course you want to buy the same property at a lower cap rate. But what I assumed he was referring to was relative, if you buy a value add industrial at a 3 cap when stabilized trades at 4% vs a value add office at an 8% when class A trades at say 10%. $500K of added NOI adds $12.5M of value for industrial vs $5M in office", "replies": [{"id": "hxfmqrj", "text": "If the market is a 4 cap and you can add $500k of NOI, it would still be better to buy at a higher cap rate. If I can buy at an 8 cap, add $500k of NOI, and sell at a 4 cap, that would be much better than buying at a 3 cap, adding $500k of NOI, and selling at a 4 cap.", "replies": [{"id": "hxfnidj", "text": "You are right I\u2019m not saying it\u2019s better to buy the same property at a worse cap rate, but rather increasing NOI in an asset class that trades at a lower cap rate (e.g. triple NNN STNL) is more valuable than increasing NOI in asset class that trades at a lower cap rate.", "replies": [{"id": "hxg8r4g", "text": "Ah I see what you mean now.", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "hxe0d43", "text": "Selling or refinance. Add laundry to 20 doors and increase each rent by $100. $2000 month or $24k annually. At a 3 cap that adds $800,000 in value. Take that to your lender and do it again.\n\n@ 8 cap = $300,000 in value add.", "replies": [{"id": "hxegjgj", "text": "I understand but, if I could buy a deal at a 6 cap vs a 2 cap, and add the same value, wouldn\u2019t you rather start from the 6 cap? Your comment is making it seem like starting at a lower cap is better for some reason.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hx8vn3r", "text": "I'm under contract at a 4cap right now. Phoenix multifamily market is basically at or even sub-4 right now.", "replies": [], "depth": 1}, {"id": "hx8y0m5", "text": "I saw a 1.3 cap on some office in 2018. Heavy value add play. They hit their IRR hurdle", "replies": [], "depth": 1}, {"id": "hx93dnx", "text": "Just signed a contract to purchase a 3.5% cap in Florida.  Industrial.  Rents are 200% below market though!", "replies": [{"id": "hx98pl5", "text": "Is that mathematically possible?", "replies": [{"id": "hx9g2id", "text": "My thought as well", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hx96ceb", "text": "Inflation!  You transfer out of cash into cash flow.  The value of the asset appreciates.  The value of your cash is losing 10% a year.  Institutions know better than the fed.  And yes, rent increases in industrial are easily 10% a year over the last 24 months.", "replies": [{"id": "hx9d2ek", "text": "This", "replies": [{"id": "hx9ncl8", "text": "Anyone have any concern on reliance of rent growth in their models? Lower the cap and raise rent growth to make a deal work.", "replies": [{"id": "hxblby7", "text": "Usually bring a new tenant and have a long term plan to increase value (change use, Reno, etc)", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hxcbpr2", "text": "But the problem is with price so high and rents behind, you aren\u2019t getting any good cash flow for first two years until the rents catch up. They are likely to increase and catch-up but there\u2019s only so much people could pay.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hx97ffa", "text": "Yes, I used to work for one of these firms out of college. Big multifamily deals. Up to $130m for a single property.", "replies": [], "depth": 1}, {"id": "hx9ll0e", "text": "All day long in CA", "replies": [], "depth": 1}, {"id": "hx9lu69", "text": "Yes.", "replies": [], "depth": 1}, {"id": "hx9nynz", "text": "Some of the big institutions buy at sub 3% cap. They invest for sovereign funds that don't have a high required rate of return. In addition, if they buy enough volume they are able to have some synergies through lower property management, maintenance, repair, etc expenses that allows them to get a greater yield.", "replies": [], "depth": 1}, {"id": "hx9unw3", "text": "My firm is bidding on something at a 1.9% cap\u2026", "replies": [], "depth": 1}, {"id": "hxa3io7", "text": "The way that this was explained to me the best was this:\n\nEverything else being equal...\nA lower cap rate usually suggests that rents are expected to appreciate faster than a higher cap rate. Additionally, a lower cap rate might suggest a lower vacancy rate, or an expectation of higher demand for real estate in the future.\n\nEg.\n\nThere are two markets, A and B, and a property is for sale in each market for $1M, or that is your investment budget.\n\nIn market A, there is no expected appreciation in rent over the next 5 years. Vacancy is 10%. The cap rate is 5%\n\nIn Market B, there is an expected 5% to 6% annual increase in rents for 5 years, Vacancy is 0%, cap rate is 4%. \n\nFor both markets, assume that after 5 years the markets will have changed to become more similar, and cap rates for both will be assumed to be 5%, and that rents will go up at 2% for each market. Lastly, we are using basic numbers so 'time value of money' doesn't apply, and we have a 5 year time horizon.\n\nIn the first 5 years, the property in market A will return $50k x     (1-10% vacancy) = $45k per year x 5 years = $225k. \n\nThe property in market B will return $40k, $42.5, $45k, $47.5k, $50k so $225K\n\nBoth of these returned the same total rents over 5 years. All of a sudden they look more like comparable investments. Now consider that market B might have higher appreciation in land over that time period, say that population is younger and increasing very quickly and the population in market A is older and shrinking......maybe market B starts looking more attractive than market A despite the lower cap rate.", "replies": [{"id": "hxcdzup", "text": "Problem is crap property in D class location is trading at B class cap rate. Lower cap rate itself isn\u2019t a problem, the problem is cap rate compression on shitty deals.", "replies": [{"id": "hxd5woa", "text": "Yep, too much money chasing to few deals", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hxa45u6", "text": "French analyst here working for logistic developer! We recently signed a JV with an institutional partner and sold our seed portfolio with cap rates as low as 3.10%. At the end of the day it all comes down to your market but in France land is become very scarce, and results in an important upside for rent growth. We even see building with low WALT priced along building with long lease term because of reversal potential.", "replies": [], "depth": 1}, {"id": "hxa8lf0", "text": "CAP rates have been absurd for 8-10 years.  It's all been a bet on appreciation.  The fed has just made it worse during the pandemic..", "replies": [], "depth": 1}, {"id": "hxalpkf", "text": "A broker proposed a 4.25% cap on a 200K NOI Absolute Net telling me it can sell for $4.5Million. How can I confirm that investing $500K can help me sell my building for $4.5 million?", "replies": [], "depth": 1}, {"id": "hxanl0e", "text": "Standard multifamily cap rates around Austin are ranging from 3.25% to 4.0% right now. Not unusual at all for a $70 million property to be under contract in less than a month.", "replies": [], "depth": 1}, {"id": "hxaz5me", "text": "While many will not invest in 3-5 CAP properties, they fit other investment profiles just fine.  Not everyone has the same investment goals as you.\n\nExample: A couple in their late 60s would rather purchase a property with a national bank Tenant with a 10 year initial term with two (2) five year options at 4%.  Why?  It nets more income versus any savings account or CD.  It's safer than the stock market.  It can be passed onto their children for continued passive income.  Other reasons is to conduct a 1031 after selling off a profitable investment to avoid taxes on capital gains.\n\nNot everyone has the same investment goals as you.", "replies": [], "depth": 1}, {"id": "hxazyes", "text": "I have a client who is retiring from residential landlording and bought a small space with an NNN tenant to park the 1031 money until they die and their kids get the stepped up basis, saving over $200k in taxes over what is likely to be the next 4-5 years.", "replies": [], "depth": 1}, {"id": "hxcitzc", "text": "This is where cap rates lose traction and you need to understand investor yields to understand why these deals are happening. Cap rates are shockingly limited because they\u2019re based on very little information, just income and value at a point in time, terminal cap rates are supposedly incorporated into an overall cap rate, but really lack the depth to explain what a DCF might reveal for five years down the road.  Abs like others have said, there are loads of reasons different investors might do something that\u2019s profitable for them but wouldn\u2019t be so for another investor, typically because of some tax issues.", "replies": [], "depth": 1}, {"id": "hxgsz08", "text": "Class A apartments in prime markets here in DFW are easily selling at a 3 cap", "replies": [], "depth": 1}, {"id": "hxko6zx", "text": "My last NNN I got a 5.25 cap Hardee\u2019s in Florida. That\u2019s as low as I\u2019ll go. Most of my NNNs I\u2019ve built and placed the tenant so I have a nice return. \n\nOnly way I\u2019ll buy below that is if I\u2019m 1031ing.", "replies": [], "depth": 1}]