Exercising Capital Discipline in an Undisciplined Market

Every acquisition cycle brings the same pressure: close something, keep the pipeline moving, stay visible. For a lot of firms in this business, that pressure is structural. They’ve raised a fund with a deployment clock running. They’ve got overhead, salaries, fund fees, and reporting obligations that don’t care whether the market is pricing deals sensibly. When the calendar says it’s time to buy and the numbers say prices are too high, something has to give. Usually it’s discipline.

Our firm is designed to avoid this problem.  Below we breakdown the issues, and how our firm is designed to overcome them.

Cap Rates Have Gotten Ahead of What the Math Supports

Look at strip centers and industrial right now (the sectors we know best) and you’ll see cap rates that have compressed well past what conservative leverage can support. Institutional money, 1031 exchange capital, and buyers with a lower cost of capital than most sponsors have pushed pricing on stabilized product to a place where, once you layer in debt at today’s rates, the return doesn’t come from the real estate itself. It comes from betting that rents keep climbing or that the exit cap rate is lower than the one you bought at.

Sometimes that bet works out. Plenty of times it doesn’t. We won’t make it with client capital just to keep a deal count up.

Our underwriting standard is simple: the deal has to work on its own terms, at today’s rents, today’s rates, today’s leverage. If it only works assuming the market does us a favor later, we pass.

We Don’t Need the Deal, and That Changes How We Behave

This is easy to write and harder to actually build a firm around. Proper CRE wasn’t started with a fund that has to deploy by a certain date. We’re two CPAs who spent our careers in finance and accounting before diving into public company work and executive roles, the kind of background where “the numbers didn’t work” is a complete sentence.

Because we’re not sitting on funded capital with a clock attached, walking away from a bad deal costs us nothing but time. When a seller won’t come off an unrealistic price, we don’t need that deal to hit a target, so we walk. When a lender’s terms leave no margin if the market softens, we don’t stretch assumptions to force it to pencil. Every deal that actually reaches our investors has already survived scrutiny that a firm under deployment pressure can’t afford to apply.

Saying No More Than We Say Yes

Saying “No” more than “Yes” is exhausting and requires extreme discipline.  Frankly, it can only be done when the thought of executing for our investors is by far the #1 priority. It doesn’t generate a busy closing calendar or a steady drumbeat of announcements. What it generates instead is a track record where deals our investors are in got there because the numbers earned it.

Part of that same discipline shows up in how we finance deals.  We hold ourselves to conservative leverage, well under what most lenders would offer us. We size it so a deal still holds up if the market doesn’t cooperate on the way out.

We’d rather tell an investor why we passed on fifty deals this year than explain why we closed the one we shouldn’t have. It’s just how we run the firm.