{"id":1004100614,"date":"2014-07-16T10:33:22","date_gmt":"2014-07-16T18:33:22","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004100614"},"modified":"2020-04-15T23:48:15","modified_gmt":"2020-04-16T07:48:15","slug":"cre-investors-still-crazy-after-all-these-years","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/cre-investors-still-crazy-after-all-these-years\/","title":{"rendered":"CRE Investors: Still Crazy After All These Years"},"content":{"rendered":"<p><em>By Andrew McCulloch, Managing Director, Real Estate Analytics, Green Street Advisors<\/em><\/p>\n<p><a href=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2014\/07\/McCulloch_Andy_MGP_215.jpg\"><img loading=\"lazy\" decoding=\"async\" data-attachment-id=\"1004100618\" data-permalink=\"https:\/\/www.commercialsearch.com\/news\/cre-investors-still-crazy-after-all-these-years\/mcculloch_andy_mgp_215\/\" data-orig-file=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2014\/07\/McCulloch_Andy_MGP_215.jpg\" data-orig-size=\"3920,2225\" data-comments-opened=\"1\" data-image-meta=\"{&quot;aperture&quot;:&quot;6.3&quot;,&quot;credit&quot;:&quot;michael Grecco Productions&quot;,&quot;camera&quot;:&quot;Canon EOS 5D Mark II&quot;,&quot;caption&quot;:&quot;&quot;,&quot;created_timestamp&quot;:&quot;1212960309&quot;,&quot;copyright&quot;:&quot;2013&quot;,&quot;focal_length&quot;:&quot;90&quot;,&quot;iso&quot;:&quot;200&quot;,&quot;shutter_speed&quot;:&quot;0.005&quot;,&quot;title&quot;:&quot;&quot;}\" data-image-title=\"McCulloch_Andy_MGP_215\" data-image-description=\"\" data-image-caption=\"\" data-large-file=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2014\/07\/McCulloch_Andy_MGP_215.jpg?w=1024\" class=\"alignleft size-thumbnail wp-image-1004100618\" alt=\"McCulloch_Andy_MGP_215\" src=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2014\/07\/McCulloch_Andy_MGP_215.jpg\" width=\"150\" height=\"150\" \/><\/a>The commercial real estate industry has long been in denial about the true long-term costs of owning real estate.\u00a0 Despite the accumulation of overwhelming evidence that cap-ex reserves in the low- to mid-double digits as a percentage of NOI are appropriate across most property types, we have never come across a property-market practitioner that employs a cap-ex reserve as large as what we use.\u00a0 Green Street first labeled cap-ex as the industry\u2019s \u201ccrazy aunt in the basement\u201d nearly 20 years ago, a label that remains as appropriate as ever.<\/p>\n<p>The ubiquity of 7- or 10-year IRR analyses effectively causes buyers and sellers to treat cap ex as a minor issue; the rehab done on acquisition is an \u201cacquisition cost,\u201d and the next rehab is a problem for a future owner.\u00a0 Short-term thinking allows everyone to pretend that the aunt isn\u2019t there.<\/p>\n<p>If the industry is indeed guilty of systematically undercounting cap-ex, then opportunities for investors to exploit this mispricing are plentiful.\u00a0 Cap-ex is a relatively minor issue in some property types (e.g., net lease and self storage), but it is a major cost in others (e.g., hotels and low-barrier office).\u00a0 Cap rates across property sectors don\u2019t accurately reflect these differences in ongoing maintenance costs.\u00a0 This is readily apparent in REIT returns.\u00a0 <a href=\" https:\/\/www.greenstreetadvisors.com\/pdf\/APervasivePhenomenon.pdf\" target=\"_blank\" rel=\"nofollow\">REITs in the lowest cap-ex sectors have delivered far better returns than REITs in the sectors at the high end of the cap-ex spectrum<\/a>.\u00a0Cap-ex differences exist even within certain property types, as a commodity-like an office building in a suburban market with no barriers-to-entry requires at least twice as big a reserve as a prime office building in a gateway market.<\/p>\n<p>As a result of our 29 year history, Green Street has accumulated a vast store of proprietary data relating to the drivers of sector, market, and individual asset performance.\u00a0 Cap-ex is an example of how information from the public markets can be enormously valuable to the private market.\u00a0 <a href=\"https:\/\/www.greenstreetadvisors.com\/pdf\/ProperUnderwritingMatters.pdf\" target=\"_blank\" rel=\"nofollow\">The decades of information and insights from public REIT disclosure provides a treasure-trove of information that makes its way not only into Green Street\u2019s REIT research, but also into our private market research product &#8211; <i>Real Estate Analytics<\/i>.<\/a>\u00a0 This intelligence is essential to forming reliable conclusions about real estate values and when assessing investment opportunities.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>By Andrew McCulloch, Managing Director, Real Estate Analytics, Green Street Advisors: The commercial real estate industry has long been in denial about the true long-term costs of owning real estate.  <\/p>\n","protected":false},"author":945,"featured_media":1004100618,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[37301],"tags":[],"class_list":["post-1004100614","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v23.4 (Yoast SEO v24.6) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>CRE Investors: Still Crazy After All These Years - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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