Commercial Real Estate Finance

Posts Tagged ‘IRR’

Baron Hanson is the principal and lead consultant for RedBaron Consulting and Goal Line PR, a branding, strategy, and turnaround management firm based in Charleston, South Carolina. Hanson completed undergraduate and graduate studies at Harvard University, which included real estate finance and urban planning coursework. Goal Line PR recently launched OpenPop-UpShops.com, a global SSL website project linking CRE executives with Pop-Up Shop tenants and big-box retailers worldwide. He can be reached via Baron@OpenPop-UpShops.com, and @openpopupshops via Twitter and Facebook.

About a year ago, we wrote on the phenomenon of the Pop-Up Shop. We referred to it as a new phenomenon, when really it is anything but. Thanksgiving pumpkins and Christmas trees are sold via temporary roadside stands each year like clockwork. Concert memorabilia, event concessions, and even fireworks are sold via temporary tables, tents, or trailers. Vendors pop-up shop and close down according to event demand. In fact, The Super Bowl is one gigantic Pop-Up Shop. It lasts about three weeks all-in inside a different retail venue each year. The Masters Tournament is a seven-day Pop-Up Shop, only this store is held inside the same historic venue in perpetuity. Weddings are perhaps the second most profitable one-day-only Pop-Up Shops in history. Election Day precincts are of course number one. At this juncture in CRE history, it is time to apply the timeless idea of Pop-Up retail to appropriate empty spaces. Read the rest of this entry »

Sorry James Dolan, but while we wait to see if LeBron James will give hope to your New York Knickerbockers, the trade for the Knickerbocker Hotel has given great hope to the commercial real estate industry. Its not the fact that something of significance traded hands, but more so the pricing at which it traded hands.  The competitive bidding environment for this property, at this point in the cycle, may indicate a paradigm shift in investment strategy for those rich with capital to deploy.  Let’s examine further. Read the rest of this entry »

Much has been said regarding the economic downturn and its hard-hitting subsequent effects on the commercial real estate industry.  When economic forces such as unemployment, consumer spending, and housing all converge negatively on us, most sectors of income producing real estate were hit hard.  But why did we not see this coming?  Or maybe the better question is: Why were we not better prepared for this? After all, real estate is cyclical and the good times could not have lasted forever. While real estate metrics like cap rates, cash on cash return and price per pound are all very simple, yet static tools, why did the more diverse and complex metrics like internal rate of return, specifically designed to take time and market fluctuations into account, seem to fail us? Read the rest of this entry »

Regardless of where you live in the United States, one thing is likely true.  There is a highway, bridge, state road or some other modicum of vehicular transportation in disrepair.  After suffering through one of the worst (in terms of snowfall and damage) winters in the Mid-Atlantic’s history, those potholes, sinkholes, bathtubholes and entire-kitchen-holes are getting greater in number.  The bottom line is that the United States’ aging infrastructure is in need of massive repair.

So how do we go about fixing this problem? A private equity fund may have to buy our bridges and invest ongoing capex in them, lest they become Palin-esque and lead to nowhere. Read the rest of this entry »

Editor’s Note: Several of us at Llenrock Group have been teaching a course on the capital markets for commercial real estate broker’s continuing education requirements for the states of Pennsylvania and Delaware. As part of a three week blog series, Questionable Brokers will  posit questions we have received in such classes from various brokers from the Tri-State area regarding the capital markets. We felt it would be useful for other brokers to see the kinds of questions their peers are asking, and a useful tool to our other readers who may have some of the same basic questions on the capital markets. We will divulge names and companies for a fee. Just Kidding. On second thought…it depends on how much you offer. The first part of the series will examine questions regarding Real Estate Metrics.  Next week, we will feature questions regarding Types of Capital, and the following week, we will examine questions regarding Deal Structure. Enjoy!

Q: Does the IRR metric still carry the same weight as a measurement for property valuation given the state the market today?

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The typical approach to analyze potential real estate investment and development opportunities is the discounted cash flow model. In the most basic sense, the user makes input assumptions such as purchase price, LTV, NOI growth, terminal cap rate, and expense growth to get the outputs: Internal Rate of Return and Net Present Value. The standard decision rule is that if IRR is higher than the investors required rate of return and the NPV is positive, then the investment should proceed. To supplement this decisions making process, a sensitivity analysis is often conducted. To create a sensitivity analysis the user changes various inputs and records their effect on the output Ceteris paribus. There are several limitations with the DCF model, including that the value of the property is needed to compute the discount rate, the discount rate is assumed to be constant during the entire holding period, and uncertainty is not explicitly taken into account.

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Real Questions…

…. and Unintended Consequences

Question 1:

If you are a buyer of real estate (and actually have capital), what sort of IRR are you looking for? 20%? 30%?

Question 2:

If you are an owner of real estate, why on earth would you sell into this market unless you absolutely had to?

These questions succinctly sum up the entire commercial real estate market. Other statements examine facets of the problem, but they all revolve around this problem we’ll call, “The Bid/Offer Spread”.

Every day, the fund managers who still have jobs wake up, read the Wall Street Journal and say to themselves, “If I’m going to buy a property, I deserve a discount.” Any possible ‘green shoots’ notwithstanding, unemployment is high, the economy is in recession, global icons are getting destroyed (or taken over by the government), and the banking system as a whole is only viable because the Feds have stepped in with HUGE assistance programs. You can also throw in the fact that recent liquid market action (rally in gold, commodities and TIPS while the 10yr notes sells off ) is telling us we might even have an inflation problem in the not-so-distant future. Read the rest of this entry »