Real Estate
Sponsored by

Lowest Cap Rate You've Seen in Texas?

2,688 Views | 11 Replies | Last: 7 yr ago by Scott Sterlings Face
davido
How long do you want to ignore this user?
AG
For you real estate professionals across Texas, I'm curious what the lowest cap rate is that you've seen on a sale. Both public and private sal s. If public, I would appreciate any details you can provide.
Jevertson
How long do you want to ignore this user?
AG
What class of RE are you asking about? Any?
DallasAggie0
How long do you want to ignore this user?
Lowest cap rates I see are on those free standing single tenant buildings with high credit tenants. Starbucks, fast food restaurants, cell phone retailers etc... lowest I think I've seen was in the 4's I think. Apartments also have really low cap rates right now.
AgAE
How long do you want to ignore this user?
AG
Ranch properties in the Hill Country or Cross Timbers. 0.05%+/- Probably the same or lower in parts of East Texas or the Gulf Coast.
Bitter Old Man
How long do you want to ignore this user?
AG
Are you talking Stabilized Cap? Going-in Cap? Proforma Cap? DCF Reversion Cap? Historical Cap? Those are very different answers. Unless you are talking Self Storage or Multifamily, the Cap Rate is a pretty useless metric, other than for brokers who don't know better or for dick measuring purposes...
1939
How long do you want to ignore this user?
AG
First off, I'm going to assume that he's talking about the cap rate that is used in 98% of commercial valuations, so going in cap rate, or Cap=NOI/Sale Price. Income producing properties, especially those with quality tenants are very dependent on cap rates, as are self storage and multi-family, in fact its one of the most influencing factors of value. The difference between a property capped at 7% vs. 9% makes a big difference. The lowest that I have seen has been in the 4's for ground leases and 5's for other high quality properties with high quality tenants, the lower the risk, the lower the cap rate. Farm and ranch properties are not valued via the income approach so cap rates are irrelevant.
Bitter Old Man
How long do you want to ignore this user?
AG
That's nice, but how do you define NOI? Actual T-12? Current Rent Roll and T-12 Expenses? Fiscal Year End? Seller's expenses? Buyer's Fully Loaded Proforma Expenses? Actual Vacancy? Proforma Vacancy/Credit Loss?

I've either acquired, financed, or invested in well over a billion dollars of commercial real estate (not counting the billions that I've passed on) in all of the food groups, so I'm well aware of how the cap rate is used, but any reliance on an implied cap rate is inherently flawed in most cases because you have no idea what the details of the buyer's NOI underwriting are, other than what some broker put out in a marketing package. I'm also aware that most single tenant buyers use cap rate to value their purchases, because more math than that hurts their heads.

In my opinion, any property that has leases over 1 year or is not stabilized, should be valued using a DCF model. The cap rate theoretically has a built in inflation component that is irrelevant to properties that have fixed income on longterm leases with changing payment streams. Cap Rate is the formula for valuing a perpetuity, which income producing real estate is not. It certainly doesn't capture future re-tenanting costs associated with Office/Industrial/Retail properties.

I believe the OP is talking about implied market cap rates, which are only useful for dick measuring.

Just a bitter old real estate guy's opinion....
HTownAg98
How long do you want to ignore this user?
The cap rate isn't supposed to capture re-leasing; that is what the vacancy rate is for. Hopefully it is based on solid market research. Also, lease-up costs get taken out as a line-item off of the "as stabilized" value. At least they are supposed to be done that way.

We do dcf and cap rates for income producing properties all the time. The one flaw in the dcf model is that you can monkey with all the numbers just a little bit, making what would be reasonable changes, and end up with wildly different values. You have to "stress test" the dcf to check it for reasonableness. Plus there is typically a reversion value at the end of the dcf. That last year's noi gets capitalized at a going out cap rate. If you think trying figure out what the cap rate should be for the first year noi, try doing it on the last year.
Most people don't understand cap rates and what all they capture (I like to say they are Ragu, it's in there). It's bad enough trying to explain them to savvy real estate people; try explaining it to a jury.
DallasAggie0
How long do you want to ignore this user?
"I'm also aware that most single tenant buyers use cap rate to value their purchases, because more math than that hurts their heads. "

.... probably because using a DCF on a single-tenant building makes no sense. How else are you supposed to value it I'm wondering?
mazag08
How long do you want to ignore this user?
AG
Bitter Old Man, perhaps you should be going the IRR route. It's nice and mathy.

When I'm valuing a single tenant income producing property, I'm going to estimate it below, on par with, and above market rent. Each of those will be paired with multiple vacancy rates. Then, each will be capped at both market cap and reported caps from similar properties. It's normally pretty easy to see where the owner/seller will fall in the range after that. If I can get any figures from them, it helps shore up the process.

DCF is best for long term, multi tenant properties.
davido
How long do you want to ignore this user?
AG
I'm curious about an ultra low vacancy rate apartment complex with a lot of land lease potentIal.

Thanks 1939, very helpful.


I'll take "Dick measuring for 1000", Alex.
HTownAg98
How long do you want to ignore this user?
In your case, it almost sounds like the cap rate is meaningless to the property as improved. You're looking at some kind of interim hold, with a ground lease at a future date. That being said, depending on who you can get to lease it, something in the 4%-6% range would be fairly reasonable.
Scott Sterlings Face
How long do you want to ignore this user?
AG
The lowest I've seen lately have been high rise climate controlled storage facilities in metro areas that are at stabilized occupancy. Some of them are trading in the 3's and low 4's.
Refresh
Page 1 of 1
 
×
subscribe Verify your student status
See Subscription Benefits
Trial only available to users who have never subscribed or participated in a previous trial.