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Commercial Real Estate FAQ With Stephen Epstein On Real Estate Development & Investments

What Are The Returns That Commercial Real Estate Development Versus Cash Flowing Properties Typically In Terms Of Expected IRRs?

The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.

The returns in terms of expected IRRs for commercial real estate development can really range. Some development deals might get as high as 20% IRR annualized, while other more stabilized existing cash flowing deals would be expected to be much lower. When you’re purchasing for a lower cap rate yield, it’s difficult to drive out of that deal higher IRRs. 

What are the returns that commercial real estate development versus cash flowing properties typically in terms of expected IRRS? So, I can only speak for projects that CA South is doing in Nashville. Meaning industrial projects, multifamily projects, residential condo projects, office buildings – so that’s what our company does, so for us we target on development deals 16-22% IRR annualized. So if the money is out for 3 years, that’s earning call it 20% every year for 3 years at the end. Right? That’d be a 20% IRR. On stabilized existing cash flowing deals, the IRR is way way less. If you’re doing a value add deal, or you’re doing something in construction or repositioning you may get a better IRR. But if you’re just buying something that’s a good asset, it’s already relatively well managed, you know you might be looking at a 6 to 8 to 9% IRR, if you manage it well. I mean, when you buy something I just read a statistic that said that the national average for multi-family buildings was a going in cap rate of 5.2%, meaning they were purchasing the asset on multi-family buildings for 5.2% yield. That means if you just held it and then you sold it, you’d have a 5.2% IRR, right? If you didn’t have any appreciation. And so it’s tough when you’re buying something for a 5% yield to start driving out of that 7, 8, 9% IRRs. But that would be kind of the range that I would expect. 

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Richard Wilson