Posted by: Scott BeggsInvestment Specialist
775 336 4644
sbeggs@naialliance.com
Scott joined NAI Alliance in March 2008 to assist the company with investment sales. Previously, Beggs spent over seven years with Dermody Properties as Vice President of Acquisitions and Port Management.
I fully acknowledge that prices have come down considerably from the 2005-2007 period. I would also contend that some very high quality assets with little risk continue to trade at what most would consider very low cap rates (on our market in the 7% to 8.0% range). The argument that I continue to try and counter is the one that I hear from folks who say ALL real estate will or should trade north of a 10% cap rate. Based on what? Buyers would like sellers to believe that, but this is just not reality. Will some deals get done at 10%, 11%, 12% or event 13% cap rates, absolutely. Will ALL deals get priced at that high of a cap rate. No.
And oh by the way, if buyers want to achieve excess returns (and I would argue that double digit initial yields should be considered “excess returns”), they had better be offering with ALL CASH, relatively short due diligence periods, and a demonstrated ability to close. Motivated sellers will in fact have to part with certain assets at very high cap rates (low prices) due to ill-conceived capital structures. But the winners of those deals will be the groups that can demonstrate their ability to close with little uncertainty to the seller. The seller will sacrifice pricing for execution, to the extent they can. But sellers are not going provide highly attractive pricing AND accept the risk that a buyer will be able to get a 70% LTV loan over and extended due diligence period.
And while it is definitely a buyer’s market, there are and will continue to be a lot of very well qualified and motivated buyers when the pricing get enticing. To think that there are not a lot of other well capitalized buyers out in the market looking for these same good deals is myopic. Regardless of the environment, buyers do not have an open playing field.
I fully acknowledge that prices have come down considerably from the 2005-2007 period. I would also contend that some very high quality assets with little risk continue to trade at what most would consider very low cap rates (on our market in the 7% to 8.0% range). The argument that I continue to try and counter is the one that I hear from folks who say ALL real estate will or should trade north of a 10% cap rate. Based on what? Buyers would like sellers to believe that, but this is just not reality. Will some deals get done at 10%, 11%, 12% or event 13% cap rates, absolutely. Will ALL deals get priced at that high of a cap rate. No.
And oh by the way, if buyers want to achieve excess returns (and I would argue that double digit initial yields should be considered “excess returns”), they had better be offering with ALL CASH, relatively short due diligence periods, and a demonstrated ability to close. Motivated sellers will in fact have to part with certain assets at very high cap rates (low prices) due to ill-conceived capital structures. But the winners of those deals will be the groups that can demonstrate their ability to close with little uncertainty to the seller. The seller will sacrifice pricing for execution, to the extent they can. But sellers are not going provide highly attractive pricing AND accept the risk that a buyer will be able to get a 70% LTV loan over and extended due diligence period.
And while it is definitely a buyer’s market, there are and will continue to be a lot of very well qualified and motivated buyers when the pricing get enticing. To think that there are not a lot of other well capitalized buyers out in the market looking for these same good deals is myopic. Regardless of the environment, buyers do not have an open playing field.
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