Not Just “Price Per Pound”

By Hook Harmeling, Senior Director

A lot of groups, both equity and sponsors, are chasing down property on a price per-pound basis. While I agree that is a reasonable strategy, sometimes that is all the property has to offer. Just because someone built it does not mean it is a worthwhile project. We see Class C Multifamily all the time below $10,000 a unit and while some of this can be a good buy, most of it should not even be occupied.

The smart money is chasing well-located property, where there is potential for increased rents as well as a potential good buy on a price-per-pound basis. “Pigs get fat and hogs get slaughtered” comes to mind when speaking to some buyers. Some ambitious groups run a pro forma to a 30 percent Internal Rate of Return on a low price-per-pound deal in an effort to lure the equity, but at the end of the day, that is all they have to sell, a pro forma. There is a good chance, either the buildings themselves or the area, have passed their economic prime if you can realistically get above a 30 percent return.

The real estate world in Texas, and for that matter the United States, is really not that big. Everyone has heard the same story of that “needle in a haystack” deal where a group bought a Class A Industrial Project for $10 per square foot, but that is indeed the exception to the rule (and was probably bought in 2009). It is a rare find to get a quality location, a quality project and a great price per pound.

Let’s face it, we all have a little of the “grass is greener” syndrome, but don’t let that prevent you from buying a good piece of real estate. What is wrong with a seller actually making money for creating value? Who is going to be upset with a true 15 percent return on their money?

The remainder of 2011 and 2012 should prove to still be a good buyer’s market. Not all good deals are distressed deals, though, and banks are not the only sellers. With most bank purchases, you have to look through a lot of bad deals to get to the one decent deal. They may look good on a price-per-pound basis, but let the buyer beware. There is usually a reason they are discounted and it is not always because the bank lent too much.

Rather than focusing just on the price per pound, look at the market fundamentals and the potential for future growth, and don’t be afraid to pay a little more for a solid and predictable return. You may be surprised how many good opportunities are out there.

Want to learn more, contact Hook Harmeling, Senior Director

Posted on by Scott Lynn in CREF 1 Comment