Investment committee: "Office cap rates are 10% but you want to build to an 8% YOC?"
Developer: "Yes because..."
...we have a great site.
...we can can deliver a trophy building.
...we will attract high-quality tenants with 10+ year leases.
...and someone will pay you a mid-6% cap rate on stabilized cash flow.
Sound crazy?
It just happened.
---- Quick background ----
Shortly before Covid, Derrick Evers at Kaizen Development Partners, LLC kicked off the biggest project of his career.
In hindsight, it was possibly the worst time in 50 years to build office, but he pressed forward.
He brought on Blake Shipley at JLL and Sarah Hinkley Kennington at Thirty-Four Commercial to lease it, and they delivered.
Then he hired Newmark to sell it, which brought out some naysayers...
“Why sell now?”
[Because real buyers are still out there.]
“The office market is dead.”
[High-quality office? Reasonably strong.]
“No one will pay $700/SF+.”
[They just did. Again.]
The Link in Uptown Dallas just sold for $745/SF or a 6.7% cap rate.
---- Here’s the kicker ----
The deal makes sense for Cousins Properties (the buyer).
They trade at about an 8% implied cap. But with a 5.5% AFFO yield, a sub-5% dividend, and a strong balance sheet, buying a 2021-built tower at a 6.7% cap is accretive on day one and gets better by the day thanks to embedded rent growth.
This is what winning looks like:
-- Trophy asset
-- Embedded rent growth
-- 9.3-year WALT
-- Credit tenants
-- Cap rate spread over public yield
-- Accretive use of capital
Takeaways:
-- Staying the course often pays off
-- Good teams matter
-- Real estate follows capital
-- Balance sheet wins in the long run
-- Naysayers rarely write the checks
PS: Want to learn how deals like this actually come together? Many of the people involved with this deal are CRE Analyst guest speakers, mentors, and/or alumni. They don't share secrets, but they do share perspective, which brings our curriculum to life. DM us to join our next FastTrack cohort.
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