Valuation Crystal Ball

+ Sam Zell Wins Again

Everything is expensive, but not on a relative basis.

This is especially true of real estate. But, it’s easy to look at pricing today and assume valuations have gone too far. It’s hard to pull the trigger on 4% cap rate deals when you remember buying those sweet 6% caps not that long ago.

Context is needed to avoid throwing up your hands.

So what are your options? Sure, you can choose to not play the game, sit in cash and pray for rain, but A) you might be waiting a long time and B) what will inflation do to the value of that cash if idle for long?

While I wish we could all anchor to absolute values, this market is about relative values. Not as easy, but we still like this game. Plus, we don’t try to time the market based on macro factors (future interest / cap rate predictions). Mostly because we can’t do it.

If you can with any consistency, don’t bother with sleepy real estate; start trading 30x leveraged foreign currencies immediately. Please invite us to your private island someday.

For Evergreen, we’ll stick to watching both sector and our portfolio holdings valuations like a hawk, tweaking as needed.

Below is a tool we use to help frame valuations compared to opportunity costs. While not a perfect indicator (wouldn’t that be nice), the spread between corporate bond yields and real estate cap rates is a rarely cited but useful gauge on RE valuations. This data point is a way to take a temperature check on pricing relative to other assets with similar income and risk profiles. In this case, investment grade corporate (Baa) bonds.


Historically, real estate cap rates average ~90 bps higher than corporate bond yields. As you can see from the chart - despite all-time high prices - most real estate sectors are fairly valued based on this barometer.

Evergreen Real Income Fund

To learn more about our Evergreen Real Income Fund, click below.


Market Highlights

Billionaire Battle - Sam Zell's fight against Barry Sternlicht to buy industrial REIT $MNR is an interesting case study on management incentives and tax strategy. Starwood's net all cash offer is ~6% higher than Zell's Equity Commonwealth ($EQC) all-stock offer. $MNR board is pushing for $EQC in a 721 exchange so they can mitigate their personal tax hit. Can’t say I blame them, but debatable if that’s also in the best interest of the shareholders. Also interesting that Zell, the “grave-dancer” is giving up and jumping in on the industrial real estate party at peak pricing. The demand tailwinds are that good.

PropTech News - Landis Technologies, a rent-to-own startup that purchases homes and rents them back to the client once they can qualify for a mortgage, has raised $165 million from investors including Jay-Z, Will Smith, and Sequoia Capital. I am not a world famous rapper. However, I have personally invested in a similar PropTech startup named Up&Up, in part because more affordable paths to housing are desperately needed in our country. We’ll see who has the superior strategy / team. Hopefully both firms are better at operations than they are at naming companies.

Pack Your Stuff, Apparently We’re All Moving to Austin - We hope you like hipster BBQ. Austin was 'the biggest winner' of  the COVID-19 tech migration, according to local businesses and economic data. The city has regained 97% of its lost jobs from spring 2020 and added 12,421 new jobs due to company relocations last year, a record high. Four (4) different coastal focused REITs announced first time acquisitions into Austin this quarter.

Bezos Is Turning Everything Into A Distribution Center a Datacenter… or a Rocket. Amazon Web Services (AWS), has announced plans to demolish a pair of Springfield office buildings it acquired in February and replace them with a two-story, 240,000-square-foot data center. More of these to come as the country is oversupplied on suburban, class B & C office buildings.

Brad Johnson


NAREIT and Green Street 7.1.21
The information contained herein is not personalized investment advice nor an investment recommendation on the part of the Investment Manager.  This material is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisers before engaging in any investment transaction.