Everybody Wants Value-Add. Nobody Wants the Vacancy.
Almost every capital conversation we have starts in the same place. Somebody tells us they're a value-add buyer. They want a business plan, not a finished product. They'd rather build something than buy something another operator already built.
Four or five minutes later, the real question shows up. It's always the same one. What does it pay in year one?
We've said the first sentence ourselves, in rooms where we were the ones raising the money. It's the version of this business where you sound like an operator instead of a bond buyer. But the second question is the honest one, and right now it's the only question this market is actually answering.
Where the money went
The Fed has held at three and a half to three and three-quarters since the spring. Coming out of June, half the committee's dots pointed at a hike rather than a cut. Ten-year near four and seven-tenths, thirty-year above five, and the futures market sitting close to a coin flip on a hike next month. Between oil and Hormuz, nothing about inflation has settled down. Nobody is promising cheaper money.
What surprises people who haven't looked lately is that the transaction market isn't frozen. It's busy. Volume ran roughly $293 billion in the first half — up about a third year over year, the strongest first half since 2022. Lending came right along with it, bank originations up sharply and debt funds up more than half.
So the capital is moving. The question is what it's moving into.
Data centers up something like 200 percent. Senior housing up nearly 100. Net lease up double digits, the industrial piece of it closer to 30. Three entity-level take-privates carried a good share of the second quarter on their own. And with all of that going on, the all-property price index moved less than a point while cap rates drifted higher.
Volume up a third. Price flat. Those two numbers don't sit together unless the market is buying one thing in bulk, and it is. Contracted income. A data center lease, a net-lease coupon, a public company's whole rent roll bought below its own stated value. None of those is a business plan. Every one of them is a bond with a roof on it.
The arithmetic
Prime industrial trades around a 5.2 cap, up thirty basis points or so on the year. Secondary and value-add product trades six to seven. The gap between prime and secondary has widened out to roughly 150 basis points in most markets.
Nobody hands out 150 basis points for being clever. That gap is a price quote on the work — on the vacancy, the rollover, the roof, the eighteen months when the building doesn't pay what the model said it would.
Then there's the debt. Permanent money is running five and three-quarters to six and a half depending on the asset. Transitional money, which is what you actually need if you intend to execute a business plan, is nine to eleven all-in, three to six hundred over SOFR, at sixty-five to seventy-five percent of as-is value.
Run that through. A stabilized building at a six cap with perm debt in the sixes is about flat on leverage. The same building at a six and a half with a bridge loan at ten is negatively levered for the entire life of the plan. You pay every month for the privilege of doing the work, right up until the work is finished.
Five years ago the debt was cheaper than the cap rate and the lender paid you to take the risk. That's over. The lender charges for it now, and the equity has done the math.
What the families are actually asking for
We buy multi-tenant light industrial at Rising Realty Partners, so we watch this from a particular seat, and a good deal of that seat is spent across the table from family offices. The instinct we're describing here isn't stupid. It's consistent.
Real estate allocations among families actively repositioning have come down from something like 11 percent toward 8 percent. J.P. Morgan's family office survey this year put real estate exposure well below where it was in 2024, with the money rotating into public equities. And a ten-year pays close to four and seven-tenths with no roof, no tenant, no property manager, and no capital call in year two.
So when a family says value-add, what's usually meant is: beat the bond, and pay us while you do it.
That's the risk premium, requested in cash, on day one. Premiums don't work that way. The premium pays for the years in the middle — the vacancy, the capital, the lease that gets signed a year after the model said it would. It arrives at the refinance, or at the sale, or it doesn't arrive at all. It isn't there in the first twelve months, because in the first twelve months nothing has happened yet.
And here's the part that would be funny if it weren't costing real deals. Value-add fundraising surged this year. The label is booming. The behavior is a coupon.
The meeting we keep having
A multi-tenant industrial building. Seventy-eight percent leased, eight tenants — a sheet metal shop, a tile importer, a small e-commerce operation packing returns, a cabinet maker. Six and a half going in. Two suites to lease, some deferred capital, rents fifteen percent under market on the near-term rollover. Year one cash-on-cash of four, year three of nine or ten, and a basis we'd be glad to own for a decade.
Everyone nods through the pages. Then: what's the current cash flow? Four. And the meeting is effectively over — not because anybody thinks it's a bad building, but because year one is the only year in the model anybody is really reading.
Which lands right back on the sentence that opened the meeting. They said value-add. They meant a higher cap rate on stabilized cash flow. Those are opposite things. The higher cap rate exists because the cash flow isn't stabilized. Take the vacancy away, and the yield goes with it.
We'll own our share of this. We've underwritten downtime at nine months and paid for it at eighteen. There's no line in anybody's model for the tenant who takes two more quarters to make up his mind, and after enough cycles we've stopped pretending otherwise. But the answer to that is a wider margin of safety at the buy. It isn't a demand to be made whole in year one for risk that resolves in year four.
What it does to the buildings
We'd take the other side of this, and the evidence is not subtle.
Shallow-bay industrial vacancy is running under five percent nationally against six and a half for the sector overall. Buildings under 50,000 square feet accounted for the large majority of lease transactions this year. Asking rents are up close to three percent nationally, and the gains have broadened out across most markets. The tenants are there. The demand is there.
What isn't there is the money to fix the buildings those tenants need.
When nobody will fund the distance between an empty suite and a leased one, the suite stays empty. The dock doesn't get cut in. The power doesn't get upgraded. The lot gets patched instead of paved, the roof gets patched instead of replaced, and four or five years from now somebody buys that building at a nine cap and calls it a bargain. It isn't one. Nobody did the work.
The work is the product. Buildings don't stabilize themselves. Somebody signs the leases, spends the capital, absorbs the downtime, and carries the negative leverage while all of that happens. It isn't an inefficiency to arbitrage around. It's the job.
Where that leaves us
None of this says families are wrong to want income. At four and seven-tenths on the ten-year, wanting income is rational, and we'd take a partner who says plainly that she needs a check every quarter over one who says value-add and means Treasury.
What we'd push on is the language, because it's costing everybody time. If what you want is a coupon, go buy a coupon. There are plenty of them, and the market bought about $293 billion worth in six months. If what you want is a value-add return, you're buying an eighteen-month problem with a five-year answer, and the payment comes at the end of it.
The higher cap rate is the price of the work. The coupon is the price of not doing it. This market has been very clear this summer about which one it would rather pay for.
The buildings still need the work. Somebody is going to do it, and it won't be whoever is waiting to be paid first.
— Christopher C. Rising