Why buy today when you will end up marking to market in 6 months for less? Even on the "distressed" assets, the markdowns do not accurately reflect what pricing needs to be for a transaction to exist.
In all of this, I have found many sales brokers seem, for lack of a better word, clueless as to what is really happening in the marketplace. I get calls all the time to give a broker my opinion of value on a specific deal. Free appraisals, I call them. In some cases, I almost feel badly for these guys, they want so desperately for someone, anyone, to submit an offer. Perhaps they blew their commissions and never saved for a rainy day.....pity for them.
What still amazes me, if you search via Loopnet for any property type, you will see cap rates being "advertised" at sub-6's, which in my view is totally ludicrous! Especially in the office and retail asset classes, who in their right mind would ever pay down to those caps given the risk....it's plastered on the front page of the WSJ everyday how some retailers is filing BK, or some office tenant downsizing.
When I first started out in the business 10 years ago, I worked for a high net worth investor/developer, the type of guy who obsessed over every detail of a deal, I would spend weeks drafting and editing books we sent to lenders for debt requests, or equity request books, or internal offering memorandums. So I was trained very early on to understand who you are marketing your asset to, what type of returns are required by that audience, etc. Never, in a billion years, would I have sent out a debt/equity request book showing cash yields in the 2-4% range, you might as well tell the bank/investor "Go buy T-Bills!". Just common sense.
Yet, I read offering memo's every week where it talks about how great an asset is, then you flip to the financial section and it shows a 5% going in cap, crazy rent growth assumptions, vacancy of 5% when the market is actually 10 or 15%, and the BS goes on and on.
And these are not small brokerage groups, this goes from CBRE all the way down the line. Regarding principal reduction being added back into a cash yield, the brokerage group based in Encino with the initials M&M (wink wink) are the kings of using that methodology to fluff their returns, I spent about 45 minutes on the phone once with one of their brokers explaining why that was a BS move to include that in their numbers....I still don't think he understood.
Jul 9, 2009