- Best Ever CRE
- Posts
- 🤫 The secret life of cap rates
🤫 The secret life of cap rates
Plus: Ash Patel makes sense of interest-rate hikes and John Casmon helps you find off-market deals.
Best Ever CRE Team
September 28, 2023
Hello, Best Ever Community!
In today’s newsletter, Ash Patel makes sense of interest-rate hikes, we get real about cap rates, and John Casmon helps you find off-market deals.
First time here? Make sure to subscribe to stay up to date on all the latest CRE news!
Off we go!
🎙 ICYMI
ON THE BEST EVER SHOW
🏚 Bruce Fraser — Mastering Distressed Property Acquisitions: Whether you're new to commercial real estate or a seasoned professional, Bruce's expertise provides clarity on navigating the current landscape and capitalizing on emerging opportunities. Listen here.
💻 David Toupin — The Benefits of Staying Asset Agnostic: David shares his vast experiences, challenges, and the software solution he developed for the industry. Listen here.
📈 Fed Predicts More Rate Hikes to Come in 2023 and 2024 — What This Means for Investors | Beyond Multifamily ft. Ash Patel: Ash shares his thoughts on how this will impact lending, real estate deals, and consumer habits, and why this is not an excuse for investors to stay on the sidelines. Listen here.
🗞 NO-FLUFF NEWS
THE SECRET LIFE OF CAP RATES
Last week, a cast of CRE experts across different markets and asset classes came together for the Best Ever Conference Virtual Economic Summit. They took on various topics, including making sense of inflation and projecting what the Fed will do next with interest rates. They also shed light on the state of cap rates, detailing what they’ve seen over the last 12 months in their respective asset classes compared to what’s been reported.
Ryan Smith is a co-founder and principal at Elevation Capital Group, which focuses on manufactured housing communities and self-storage. He suggests that, in those asset classes, cap rates have not changed significantly for higher-quality, higher-tier, well-located real estate.
📣 “What I’m noticing,” says Smith, “is that there’s been less decompression — or a lower rise to a degree — in cap rates in the higher-quality, well-located properties as compared with the lower-quality, secondary, and tertiary market properties.”
🧐 “Generally speaking,” he continued, “we've seen about a 50 to 100 basis-point move in cap rates [for Class-A properties] over the last year.”
Bob Fraser, co-founder and CFO of Aspen Funds, deals in multiple asset classes, from multifamily to self-storage, energy real estate, and industrial. Fraser highlighted a recent Newmark report that says cap rates have adjusted 90 basis points, but he agreed with Smith’s experience that the shift hasn’t been as significant in Class-A assets.
📣 “It really hasn’t happened for Class-A storage, energy real estate, or industrial real estate,” Fraser said. “We haven’t seen a change. The biggest change we’ve seen is probably about 90 basis points in multifamily.”
😤 “Industrial hasn’t budged,” he added. “It’s still tight as a drum.”
Neal Bawa — the Mad Scientist of Multifamily and founder and CEO of Grocapitus Investments — challenges the assessment of a 90 basis-point move in multifamily, citing a recent CBRE report showing a number closer to 136 basis points and saying he’s seeing a swing closer to 125 basis points today. One of his properties, he says — a well-located multifamily property with high occupancy in a good market — is currently seeing a 150-basis-point difference.
📣 “I’m not suggesting [150 basis points] is the norm, but in the multifamily industry — especially in the last eight weeks because treasuries have gone up so much — I believe that the number today is closer to 125–130 basis points.”
🔮 “I think in two months it’s going to be at 150 basis points — only in multifamily, because that was the asset class that was the most compressed for cap rates, so it had a greater chance to decompress than, let’s say, self-storage.”
🎥 To hear more insights from the Best Ever Conference Virtual Economic Summit — including the state and possible future of inflation, interest rates, lending, and more — register to see the full webinar here.
📰 Other CRE News
Making Amend(ment)s: A U.S. House bill proposes tax code changes to aid commercial real estate borrowers in deferring taxes during loan adjustments, addressing concerns over looming loan maturities.
Goin’ Old School: Older multifamily buildings constructed before 2010 are posting stronger rent growth and may become the new sought-after asset for investors.
Insurance Costs vs. Everybody: Surging insurance costs are now affecting office landlords, who face declining building values and rental income even as expenses continue to rise.
SF Is On Sale: In the wake of the city’s CRE demise, investors are buying up the city’s devalued downtown properties.
It is (or at Least May Be) Coming: Fannie Mae now forecasts a downturn in the first half of 2024, leading to a decline in consumer spending and a diminished demand for housing, along with other goods and services.
🌎 BEST EVER CONFERENCE 2024
LAST CHANCE TO SAVE $800
🪺 The Early Bird is flying the nest! Secure your ticket to BEC2024 by this Saturday, September 30 to save up to $800.
💡 If you’re looking for the best CRE event to network and share ideas with like-minded investors, operators, and syndicators, this is it. Created by Joe Fairless and Ben Lapidus, it’s an elite experience where you’ll have countless opportunities to meet partners who share your values and goals.
🎉 Bonus: It’s also an incredible party in beautiful Salt Lake City!
So don’t delay: Snag your ticket at the best price of the year.
✍️ BEST EVER BLOG
FROM JOHN CASMON
🏠 Why do some property owners choose to list off-market? As real estate investors always on the lookout for great deals, we understand that off-market opportunities often offer more profit potential than properties listed with an agent on the MLS. There are various reasons a seller might choose to list their property off-market:
Declined Listing: Some property owners may choose to list their property off-market if it doesn't meet the standards of brokerages, avoiding the need for costly improvements before selling.
Owner Does Not Want a Broker: Owners may opt for off-market sales to save on agent commissions, particularly when they question the value added by brokers, especially in deals marketed widely on platforms like the MLS.
Owner Wants Discretion: Some property owners prefer off-market transactions to maintain privacy, especially if they are well-known in their community or have sensitive personal or business reasons for selling.
Owner Needs a Quick Close: Off-market deals become attractive when owners face urgent financial needs, such as unexpected burdens or life events, and cannot afford to go through a traditional listing process.
🔎 Assessing physical property condition, financial health, and the owner's alternatives can you help gauge their motivation to sell and tailor offers accordingly.
💬 “Sophisticated owners are less likely to tell you how desperately they need to sell their property and want to remain in a position of leverage for negotiations. This is why it’s important to establish the owner’s level of motivation before making an offer.” — John Casmon
🎓 EXPERT RESOURCES
FREE DOCUMENT DOWNLOAD
💸 Understanding Fixed-Rate vs. Floating-Rate Apartment Loans
We took an in-depth look at the differences between fixed-rate and floating-rate apartment loans so you can choose the perfect loan program for your next deal.
📚 BEST EVER BOOK CLUB
WHAT WE’RE READING
Join Joe Fairless on Tuesday, October 31 at Noon EST for the Best Ever Book Club, and keep an eye on your inbox for details about next month’s pick!
What did you think of this week's newsletter? |
🙏 Thanks for reading!
Stay in the loop! If you happened to receive this newsletter from another source, feel free to subscribe here. You can also find us on LinkedIn, Instagram, and YouTube.
Wishing you a Best Ever day!
—Joe Fairless