Multifamily Cap Rate Gut Check?
Just checking in for a pulse here...What are we seeing being marketed today on either in-place or realistic Y1 ProForma cap rates for stabilized multifamily? Drop the location as well for reference.
Mar 03, 2023
Mar 03, 2023
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Comments ( 27 )
We are UW 5.25-5.50 exits on a 3 year term in tier 1 mkt. need minimum 7.5% YoC. cant pencil out anything. brokers need to understand the math here and communicate to sellers or the market is going to be locked up for a bit.
Targeting 7.5% YOC by when? Year 3?
Is this for class B value-add?
Do you think brokers are in the business of taking six weeks out of their lives to prepare and market deals that don't trade because seller/buyer expectations don't meet? Did I mention brokers don't get paid when that happens?
....Brokers aren't getting paid at the moment. OM asking prices are ~30% too high from what I've seen which is more or less the loss of value attributable to a rise in cap rates from 4% - 5.5%. Sellers are hanging on to 2021, buyers are living in the present. there's a disconnect right now.
Reminder that brokers don't set pricing expectations.. sellers do. You may think we have much more say but we don't. Brokers are probably the MOST dialed in to where the market is willing to transact right now. Sellers are not and we answer to them
Not winning any deals either
An appraisal in SW Florida just used 4.75% on new multi. Ive heard 5-5.5% in tier 2 markets. We're using that range for our UW now.
How do you back into a 5.5% exit when that is what debt costs today? As a reference point, my firm is doing the same thing and assuming 5.25% to 5.5% for multi and 100 bps spread on office exit caps - so 6.25-6.5%. But my acquisition folks still can't explain any good logic for 5.25-5.5% on exit in multi. What does your firm use to explain it when that is the cost of debt ?
Where are you guys underwriting vertical construction cost PSF?
It's obviously not ideal. The best argument I've got is debt is where it's at because of inflation risk . Multi rents/ operating income are able to track inflation, so the inflation risk is lower and moderate exit cap rate compression is warranted in tier 1 markets.
Probably saying to yourself that your buyer can lock in 5.5% fixed rate debt with decent I/O duration, which gets you to an average CoC of 6-7% over a five-year hold. Not saying that's right, but not a bad assumption. Most core/core-plus buyers are looking to hit a current yield in that range.
Well exit caps are a function of the next buyer's capital costs, not yours. So if you believe the fed can achieve their long term target rate of 2.5%, then exit caps should be something like this:
2.5% risk free rate
+ / - market premium based on historical spreads
+ execution risk
+ hold period risk (typically 5-10bps / yr)
5-5.25 seems defendable for a tier 1 market on a 5yr+ hold
Depends on the asset and the market and the tenant base and what is going on with the operating expenses and how the local municipality feels about taxation etc etc etc
Minimum 125 bps cap rate expansion based on peak 2021 comps , slightly more for sunbelt / vast land supply markets
We are seeing value-add deals in growth markets in the SE, Texas, and FL get awarded at in-place 4.2-4.5 cap rates (assumes tax reassessment and insurance). No idea how these buyers make it work unless they are aggressive on rent growth and sub-5 exit caps.
Right I literally saw a deal near Austin being marketed at 4.25% cap rate. I asked to let me know when it sells and what cap rate it actually goes for lol.
My sense is that the deals coming out in the institutional space (call it $80M +) are likely going to trade since you would assume those groups don't have their heads in the sand and understand where things stand in today's environment, and also probably need some form of liquidity if they are active across more beaten up asset classes (Office, retail, etc). The more sub-institutional stuff likely gets hung up until sellers have to face reality once the pain hits via cracks in unsustainable fundamentals.
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