Real Estate Forum - April 2012

In short, savvy investors now use more than one metric, Lyons says. “Calculating the IRR and price per square foot of a stabilized asset is not only prudent but also gives the buyer a better sense of what this asset can return over time, if there’s hidden upside potential, how much additional money might be required to bring out that potential and what is the overall risk,” he explains.

Lyons says he has seen investors pencil
in likely IRRs for trophy assets in gateway
cities just to reconfirm their decision to
buy and better arrive at a price. Savills
never uses one valuation tool for that rea-
son, he adds. “When we’re looking to
guide our overseas clientele or purchasers
or when valuing it for sellers, we want to
make sure we’ve analyzed the asset from
every different angle.”
It’s no secret that cap rates can be decep-
tive. “For example,” Brookfield’s McNamara
says, “the majority of a building’s current
in-place rent might be $10 per square foot
below market rate, and that’ll depress a cap
rate.” How the cap rate is defined is also
A cap rate by itself doesn’t provide
much in terms of feedback, Alan Pontius,
national director of special assets for
Encino, CA-based Marcus & Millichap,
agrees—even in the best, most stable of
times. “If you look at an office with a
7.5% cap and another at a 3%, you might
say the latter building was overpriced,”
he says. “But what if the 3% had been
calculated at existing income and repre-
sented only 40% of the occupancy of the
building? Now that 3% becomes an
attractive going-in cap rate.”
So in the overall scheme of things, a
cap rate is what you make of it; that is,
only one in a series of vital tools in the
decision-making process. “Yes, it is a
benchmark and something to react to,
but by itself it has never been that good
of an indicator,” says Pontius. “Now,
more than ever before, that’s become
apparent.” ◆

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In cities
like Seattle
and San
Francisco,
cap rates
have been
pushed down, resulting
in some prices higher
than replacement costs.”

When real estate developers pursue remarkable goals, it’s important to listen closely and provide seamless execution.

Closing on New York’s tallest residential building required finely tuned advisory expertise and the capital strength to match our

MIKE MCNAMARA

Brookfield Properties Corp.

important. “Are you looking at first-year
NOI over price, or are you looking at stabi-
lized cap rates two years out?”
That’s why, McNamara says, when
Brookfield looks at an opportunity to buy
an asset, there are a number of different
measures it considers—and cap rate is
just one of them. “It’s still an important
metric, but it’s just a building’s value at a
moment in time.”

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