Cap Rates: They Have Their Place

Cap Rates: They Have Their Place

3 years ago 0 0 1235

Here’s the scenario. You have money you want to invest, and you do not want to manage real estate, but you want an income stream. When considering your options, you find the following: U.S. Treasury bond—2.3 percent return with virtually no risk; Municipal bond—4.5 percent return (with some tax benefits), still with minimal risk; and McDonald’s ground lease—5 to 5.5 percent return, with a slightly higher risk and illiquidity. These examples demonstrate very low risk situations, but make a comparison between similar investment options. So, where do Cap Rates (short for capitalization rates) come in? Cap rates are the benchmark that enable investors to compare various investments. Here’s a straight forward definition: “A cap rate measures a property’s natural rate of return for a single year without taking into account debt on the asset, making it easy to compare the relative value of one property to another.” In most basic

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The Pro Forma: Garbage In, Garbage Out

3 years ago 0 0 1240

I clearly remember one speaker’s comments from a 1985 NAIOP conference. His claim was this: One of the worst things that ever happened to the real estate business was the personal computer. How Can This Be?  For those who can remember prior to 1980—before the personal computer and in the early days of the financial calculator—real estate pro formas were done by hand. Income-producing properties were evaluated based on current income, and development pro formas rarely went beyond three years. With the onset of high inflation in the early 80s, pro formas showing annual increases in income became common to achieve high future evaluations, so real estate could compete with high bond rates. Even then you had to get the numbers (rents, expenses, cap ex, etc.) right on the first try because changing them after the initial projection was cumbersome and time-consuming. Enter the Financial Calculator and the Personal Computer. With

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2017: A Mature Market

4 years ago 0 0 1995

Entering 2017, the investment community finds itself in a Mature Market. Gone are the days of distressed sellers, foreclosures and properties which could be purchased at steep discounts. Today, properties are cash-flowing, occupancies are high and rents have recovered to peak levels. Combined with cheap debt and investors flush with yield-driven capital, the result is fewer opportunities coupled with property values at pre-recession levels (or, in some instances, even higher). So, what happens when investment opportunities diminish and the market tightens?  Development becomes an increasingly attractive option for value-added investing. Historically, seven years into a recovery, speculative development has already begun, but that has not been the case. This cycle is unique for several reasons: The depth of the recession The impact of  new regulations on financial institutions The headwinds to demand created by online retailing and office-sharing concepts To be sure, infill, mixed-use urban retail concepts; mega, mixed-use projects

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When Will Rising Interest Rates Impact Investment Decisions?

4 years ago 0 0 1630

Here’s my response to the recent Globe St. article, “When Will Rising Interest Rates Impact Investment Decisions?” based on an interview with Real Capital Markets’ COO Tina Lichens. Interest rates are still low by historical standards. With so much capital continuing to search for opportunities, I see little impact on investment decisions for the short term. I do agree that good opportunities will outweigh a higher cost for debt in the long run. That being said, rising rates will have a greater impact on the small private investor (syndicator) who is organizing his capital for every deal and is more return-sensitive.

Why You Need a Real Estate Advisor on Your Wealth Management Team

4 years ago 0 0 1892

As the end of 2016 quickly approaches and you ponder year-end donations and 2017 financial objectives, you should consider if you need someone to help you reach your goals—or to advise you on what those goals should be. Let’s take a look at your team. The Coach The Coach develops a game plan based on circumstances. Do you become your own coach, or do you consult with a wealth manager or financial planner to mold your circumstances and financial objectives into an effective financial plan? This is the first big call. The Roster Then, you must ask yourself: Who should be my team players? A typical team consists of a financial advisor, an investment manager, a CPA, an insurance advisor and an estate attorney. Now, the water becomes somewhat murky here because some of these players wear multiple hats. In certain cases, they work for a fee on your behalf.

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How Do You Get Started in Private Real Estate Investing?

4 years ago 0 0 1742

As young adults start to accumulate wealth, very few consider investing in real estate. But why? As stated in my previous blog, Private Real Estate Investing: A Game of Risk, real estate presents a unique set of challenges, including illiquidity, higher risk and the amount of required capital. In addition, most people enter the investing world through a friend who is an investment advisor (i.e. stock broker), and he or she sells stocks, bonds, mutual funds and other similar investment vehicles. When I started thinking about a career in real estate investments, a very successful private real estate promoter gave me a piece of advice: Start early with a small stake, and grow it. So, how do you start? Pool Capital Even if you do not have much cash, a smart way to get started is to organize a group of friends who are each willing and able to make

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Mentoring Benefits? It Keeps You Relevant

4 years ago 0 1 1665

We all know the older you get, the harder it is to adapt to the market. It’s not easy to change what you have learned for your whole career. But to continue to thrive, you absolutely must adapt and see your business as it has changed. As discussed in previous blogs, new technology plus the impact of Millennials has accelerated real estate industry changes. This creates new opportunities, but causes some existing properties to become obsolete and some previous practices to become unprofitable. Of course, there will always be industry constants. Deal fundamentals, you have to know. And you still need money; tenants still need to pay rent; and stable tenants are still desirable. What shifts is this: you have to apply these fundamentals to a different set of parameters. Enter the new recruit, The Bridge between past and present. How Does This Benefit You? Let’s be frank: some of

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Atlanta’s Edge Cities Develop New City Centers

5 years ago 0 2 4101

I recently heard famed urbanist Richard Florida speak about the rise of the creative class. He claims creative people want to be around other creative people—to live closer together, to spend less time in their cars and to partake in convenient amenities. This trend is manifesting itself in urban areas in the form of high-density, mixed-use developments. It is also happening in the suburbs of metropolitan areas, which have grown up around what were once fairly rural downtowns. In the Atlanta metropolitan area, several edge cities are working hard to create an attractive “sense of place”. Also, several suburban communities have incorporated to take advantage of this trend. Let’s look at a few examples in Atlanta. Living on the Edge You probably already know their names. Dunwoody, Sandy Springs, Roswell and Alpharetta all rank as Atlanta’s edge cities. Let’s start with Sandy Springs as I have been a resident there

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More Questions Than Answers: A 2016 Forecast for Atlanta Commercial Real Estate

5 years ago 0 0 1844

Trouble in China. Falling oil prices. Unsteady stock market. Slow employment growth. Stagnant incomes. That’s a heck of a way to start a new year, isn’t it? In the real estate universe, an abundance of capital and cheap financing have once again pushed prices up to record levels. My friends in the capital markets tell me that investment activity flattened toward the end of last year, as both investors and lenders became more cautious. Do these macro events portend the end of the slow—if resilient—economic recovery? How will Atlanta be affected? So far, Atlanta’s commercial real estate market has performed well during this recovery. Led by multi-family development, occupancy and rental rates have both been ticking up. In 2015, new construction has increased in all sectors. Will this continue in 2016? For my part, I have a few questions (and a few predictions) about how things will shake out over

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A Tale of Two Restaurants

5 years ago 0 0 2155

I had the opportunity this fall to travel with my wife to South Africa for a couple of weeks. Between enjoying Cape Town and going out into the Savannah to see exotic animals, it was everything you’d imagine it to be. The only downside was the jet lag. Part of the experience was, of course, eating. South Africa is renowned for its vineyards, and it has a few high-concept restaurants that offer tasting menus of chef-selected pairings of dishes with wines. I was excited for one of these, in particular. It was the “bucket list” spot, the one everyone said I needed to go to. It was always booked, requiring reservations long in advance. Food critics around the world were raving. When the night finally came, everything about this place was…just OK. The atmosphere was a little stuffy, but OK. The food and wine were OK. And the price—well, let’s

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