My firm focuses on major markets and prices are insane right now. Some of the prices these brokers tell me along with $250k-$1mm hard money day 1 are baffling to say the least.
Who is buying vintage product at sub 5 caps in second tier markets? My only thought is long term holders who can tolerate lower returns, mostly family offices?
Anyone else seeing similar trends?
Posted Aug 8, 2017, 6:26 PM UTC
We are developers and are running into the exact same thing. We're getting out bid by millions and value ads just doesn't seem to work. We bid on a 70's vintage property outside Richmond and there were 20 other bidders. Thinking we will focus on smaller, local deals until the market cools down.
until the market cools down.
How do you foresee this happening? This is my first rodeo (RE cycle)
Good question, it's my first rodeo too!
Most major markets in Texas are above 5 caps. Things are expensive but they're not crazy like other areas.
I'm glad I'm not the only one that's noticing this. How are some of these people making money after buying so high?
Of the past 7 deals we lost, the brokers gave us a similar story: long term holders, fixed rate debt, family offices just looking to park their money somewhere.
My firm's money is institutional so unfortunately we don't have this flexibility, which is killing us!
Larger, better funded groups looking for yield. Even with such low caps they're doing better than other fixed income assets. Heard on some CRE podcast a week or so ago some wall street firms are beginning to buy smaller one to four family properties around a 130-140 grm where smaller, individual guys need something closer to 90 or so.
What podcast do you listen to?
There are a few my phone automatically downloads, but I only routinely listen to a couple...
Thanks!
So the question is, for those of us looking for deals that are closer to the value add type category and really need to get in at a low basis, what is the angle right now? As I said in my previous comment, seems to me we focus on being local market experts, whereas before we were looking mostly outside of our local area.
But the low basis doesnt exist when there are buyers will to buy at sub 5 caps and hold for 10 years
Right. I just started with my family's business on the investment side of commercial real estate and am in the process of learning. What you describe is the reason we haven't gotten any deals since I started 6 months ago even though we've bid on at least 10. I'm trying to figure out where the pockets of opportunity are for us as developers/operators.
Oh, for sure people are buying right now. I see multifamily and industrial properties being bought like crazy right now, albeit at a smaller rate than 15' and 16' but multifamily is still in demand. Probably why you're getting such high rates ;)
There has been a trend this year of lower transaction volumes across the board. People are sitting on the sidelines much more than last year. So if you bid a lot you may discover that you are only one of a few offers at the table. In other words, I think because of aggressive pricing less people are showing up to auction and I think you'll see cap rates rise once existing owners can't refi with aggressive leverage.
As long as owners have the option to buy long-term high levered debt if the sale doesn't pan out, I think you'll continue to see aggressive asking prices.
Having said that, if someone has to sell, I think you will see more price discovery and cap rates slowly going up.
With long term (35 yr amo) HUD non recourse debt (w/ interest rates around 3.3-3.5%) on B class properties trading in the 5.5-6.25 cap range the cash flow is still decent (7-9% cash on cash yr1) +-15%IRRs. This is with about 6 mo of IO. This is in the midwest (Indiana, Ohio, Kentucky). In the process of closing on three deals. I see more room for rates to compress, at least in our market. If not, that's ok, we would never do a deal we wouldn't mind holding for the long term while they cash flow.
Funds. All funds who have raised capital and have to deploy it and don't care about putting large sums of money at risk.
Don't forget all the 1031ers who are selling at the top and forced to rebuy at the top!