Why Apartments Suck
This tidbit was buried in a Wall Street Journal article about hotels last week:

On the recent $15.2 billion buyout of Archstone-Smith Trust, an apartment REIT based in Englewood, Colo., buyers Tishman Speyer Properties and Lehman Brothers Holdings Inc. will have a capitalization rate in the low-to-mid-4% range, well below the cost of capital, expected to be about 6%, according to analysts. Tishman Speyer Properties and Lehman Brothers declined to confirm those numbers, but the estimates have been widely accepted by Mr. Marks and other analysts.

Why do a deal with such a low return? Tishman and Lehman are betting that rents and underlying asset values will increase rapidly enough that its return will eventually rise.

A low- to mid-4% cap rate. Nice. What kind of debt do you put on a deal like this? And will the property have rents increase enough so that the leverage ever becomes positive? And how low does the cap rate go when acquisition costs are added to the price? In a TIC deal the cap rate would have to drop to the low-3% range. Thanks but no thanks.