These days at our development company Y Street Capital, it seems like we spend every day in underwriting. We are analyzing potential new projects, re-analyzing existing projects, and then analyzing them again. Bond yields are changing, which means interest rates are changing again. Some lenders who had paused their lending programs in Q3 and Q4 have re-entered the market and are being more aggressive about getting deals done. Construction costs continue to fall, and we are constantly value engineering the designs to pull cost out of the projects without compromising the finished product. We are performing sensitivity analysis on half a dozen variables.

On today’s show we’re answering a simple question, “Does the real estate industry have a short attention span?”

So much of the market is guided by playing the comparison game. What did the exact same model of home sell for down the street? What are rents in the same building, or in similar properties in the same neighborhood? What cap rate are Class A apartment buildings selling for in the local market? There are so many comparisons to make.

When it comes to market conditions, we are programmed to think of comparison data as guiding fair market value.

But that raises the obvious question of “What is a fair comparison?”

Can you compare a three bedroom home and a five bedroom home? Not really.

Can you compare a 12 unit building and a 100 unit building? Not really.

Can you compare a 12 unit building and a 30 unit building? Well maybe. How far apart are they from one another. Are they of similar vintages? Assuming they’re relatively nearby, now you’re starting to get to a closer point of comparison, but not in absolute terms. Maybe you’ll compare them on a cap rate basis, or perhaps on a per unit basis, or maybe a per square foot basis.

But even if you get all of that data and convince yourself that you have a valid point of comparison, you have another problem.

The market has gone through so much change in the past year that it’s hard to look at market data that is more than six months old. Data from early in 2022, while not that long ago, was in a different set of market circumstances. Interest rates were still low. We were in the tail end of the pandemic, or so it seemed. We were in a different world. It seems a lifetime ago.


Host: Victor Menasce