Talk about short memories. Some investors appear to be already overpaying for real estate in markets only recently lurching off bottom. The “richly-priced” deals are few and far between, concentrating in the very best, most resilient markets: Washington DC, New York, and San Francisco. But buyers are placing bets again on tomorrow’s hopeful cashflow assumptions, ignoring current anemic revenues while stepping over the carcasses of yesterday’s overly optimistic players.
Now, if you’re going to overpay, market bottom is the time to do it, and many of these deals are modestly leveraged or even all cash. And since interest rates can’t go any lower and the stock market looks rocky, a six cap or under deal can be rationalized when you’re talking buying up prime real estate in the best markets.
Buyers have been mostly investors with cash burning holes in their pockets: the odd REIT needing to put IPO proceeds to work, German institutional funds eager to market time, and carefully disguised Middle East money. The targets are typically well-located office and recently beaten up prime hotels. The office investors assume core style single digit returns even if still falling rents suddenly spike in three or four years. The hotel players may hope for bigger pay days in this always volatile sector, but face a steep arc to increased revenues.
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