Where pricing is right now

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Want to give you a sense for where pricing is, right now.

We look at literally every deal that comes on the market in our target neighborhoods, and everything that looks close to working in other neighborhoods.

For us, the renovated stuff is an obvious pass. We’re value-add buyers, so we focus on the most beat-up properties, the ones where there ought to be embedded value waiting to be unlocked.

But, right now, except in extremely rare instances (almost always off-market), there is no embedded value. Every deal I see on the public market is priced way, way over where I see value.

By “way, way”, I mean 15-30% above the price I would pay… so not within the range where it makes sense to try to make a deal.

It’s hard to understand who, exactly, is buying this stuff. It certainly shouldn’t be buy-and-hold buyers… these deals are real-life 2-3% caps. Even with interest rates down somewhat over the past few months, buying 2-3% caps means little / no cashflow.

So it must be value-add buyers looking to do something like what we do. But we know the numbers, and there’s no way they work paying those prices. I suspect there are loads of sponsors sitting on busted pro formas, having uncomfortable conversations with their lenders and equity partners.

The problem, from our perspective, is that we can’t short projects (in other words, we can’t make money betting against stupid buyers). Instead, we have to wait for enough people to get burned such that demand for beat-up properties falls, allowing prices to re-set to reasonable levels.

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