We do not generally answer a question with a question however this is one on the mind of everyone recently.
Answer this? Are you a yield or per square foot buyer?
Case Study -Class A Industrial Building
-756,000 sf, Inland Empire, CA, 50% leased
-Purchase Price $35 or Replacement Cost of $55 a foot
-Ingoing yield 4% “As Is”
-100% Leased Yield 8.6%
If you are a price per square foot buyer this building would be cheaper to purchase than to build.
If you are a yield buyer, you would be able to acquire a existing class A building 50% occupied with a current 4% yield. Taking into consideration that you might find a new tenant to occupy the remaining 50% in 6-9 months and then offer 9-12 months of rent abatement. After the fact, you own and operate a 100% leased building that now yields you 8.6%. Using current available debt of LIBOR plus 275 bps for 3-5 years, full recourse, you effectively yield 1%, 50% occupied or 5.6% fully occupied.
Depending on your strategy, this building might vary in attractiveness. If you are going long on the investment and can purchase the asset for $35 a foot, this might be great. Conversely, if you are a yield buyer and “as is” nets you 1% and 100% leased only gets you 5.6% after almost two years of lost rent, this is not the time to buy
We feel that the market is in the 3rd inning of the game and with unemployment at 12% (more like 20%) and $1.5 trillion of debt maturing over the next 3 years, we do not feel we have hit bottom. We ask you this? Why buy today when you can pay less tomorrow?
It is a very challenging time right now and it is only going to get more challenging until it gets better.