Determining what something is worth sounds simple, but it isn’t. Value gets subjective fast, so when we want to buy an asset and must determine its value, we keep the process organized, data-driven, and as quantitative as possible. Once the numbers make sense, we start negotiations and build a flexible structure that will protect us and our assets.

Setting the Stage

Before underwriting, we run a quick feasibility check: are we sailing with the current or against it? We break it into two questions: What’s the long-term backdrop? Where are we in the short-term cycle?

Long term. We look for structural demand from things such as nearshoring, and changes in geopolitics. We also confirm that the necessary conditions to build and operate industrial assets exist. Things such as competitive labor, electrical power, water, roads, security, and available capital. If these necessary conditions can be met, then the current is moving our way.

Short term. We track metrics such are vacancy, absorption, and under-construction. These market KPIs can hint at tomorrow’s supply and demand dynamics. Additionally, we like to use tools such as the JLL Property Clock to predict a market’s short-term health (please look at figure below). For near-term predictions understanding market metrics and past cycles can help set expectations.

Determining Value: Three Lenses

Many valuation methods exist. We recommend never relying on just one method because the risk of overlooking something is too big. Instead, see things from multiple angles, stress test assumptions and then reconcile. The most common valuation methods for industrial assets are the following:

1) Market comparison method. Basically, we gather data on recent trades for similar assets and estimate the price of our asset based off our gathered market comparisons. The difficult part is figuring out closing prices, most people don’t like sharing them. Plus, even if you manage to get them, closing prices do not always tell the whole story and it can hide context. 

2) The cap rate method. This method is the industry’s workhorses: 

Value = Stabilized NOI ÷ Market Cap Rate

For example, if Monterrey’s cap rate is 8% and an assets annual net operating income is $100, the price of the asset is roughly $1,250 ($100/8%) . The simplicity of the formula is its strength and its weakness. Strength because it allows us to compare many properties across different markets fast. Weakness because it forces a snapshot of the asset, it assumes that NOI and other relevant metrics do not change over time, which of course is not reality.

3) Discounted cash flow method (DCF). This technique is the most precise one and the one we rely on the most but it’s only as good as the information you feed it. We start by modeling 10 years of cash flows, everything from rent steps, expirations, downtime, tenant improvements, leasing costs, soft costs, operating capex and finally at the end of year 10 we add a terminal value. Then we discount the cashflow back to today. 

When valuing an asset for the first time, we start by gathering market comps and running some cap-rate math for a quick understanding. If we still like what we are seeing, we build the DCF, and run sensitivities to see how value moves with plausible changes in rents, downtime, capex, etc. Finally, we reconcile by comparing all methods, decide on what an acceptable price for the asset could be and set a clear walk-away number, a line we won’t cross in the coming negotiations.

Negotiation

Everything up until now has been preparation. The numbers give us the map, but the negotiation is the hike. With an idea of what the price should be and a floor in place, we start looking for the ZOPA (Zone of Possible Agreement), the overlap between our acceptable outcomes and the seller’s. Finding it is a dance with the seller. And if we must give the first offer, it must be credible, tied to objective numbers and with clean terms. You should give yourself room to maneuver. If price alone doesn’t get it done, we can widen the ZOPA by being creative with terms, delivery, specs, and guarantees. In person conversations to understand the counterparty along with clear logic and creative thinking helps reach agreements.

Verify

Once negotiations are concluded, most deals move forward with a promise of purchase agreement that sets conditions, timelines, and remedies. It is meant to layout who does what, by when, and what happens if they don’t. The goal is to have a clear path to verify assumptions and a closing if they hold.

During this time, we conduct due diligence on the deal and swap stories for evidence. We must confirm everything we have been told. Many times, specialists and particular studies must be hired. During this phase it is important to keep an eye on all expenses since this is money at risk if the transaction falls through. And we must always be prepared to reprice or walk away if something material emerges.

Finding the Right Structure

When the due diligence supports the story, we finalize the purchase. This final step is all about having the correct structure and capital in place. A tried and tested vehicle that many partnerships of both buyers and sellers use in Mexico is the fideicomiso. A fideicomiso is a Mexican bank trust in which the owner transfers the asset to a trustee (typically a bank) under a written agreement with the rules. This structure clarifies governance, segregates the asset, and is widely accepted by lenders. Which is a group of people you should always consider since these assets are not cheap. However, when looking for debt be extra cautious and size the debt to resilient cash flows, so leveraging a build-to-suit (BTS) with a signed lease might be a smart business decision; but for speculative projects where the rent is not secured we recommend extreme caution. 

At the end of the day, real estate investment is about understanding the market and turning judgment into discipline.