When underwriting a new acquisition (or updating projections for an existing deal) that has a decent amount of vacancy, how do you guys go about thoughtfully setting dates for the lease-up of vacant suites? Brokers always tend to be pretty aggressive, but other than arbitrarily pushing their dates back 6-18 months I always feel like I'm at a loss here.
Even worse is finding the balance between having the dates too close together (so you don't have super lumpy TI/LC cash flow events, and so when you miss projections you're not totally fucked and have to push every single suite back again) vs staggering them out (which may result in some suites being so far back that you're hardly seeing the benefit of the cash flow during your hold period, effectively giving yourself an additional vacancy factor which could lose to you losing a deal during the bid process).
look up/find out absorption rate for the market to see how long is it taking for units to fill & how long they are sitting vacant. Look at concessions too. Too much can indicate desperation. In a primary market I would liek to think leasing up a tenant/box every 3 months is a safe assumption.
Unfortunately, there is not one standard measure to predict leasing velocity. As you expressed, you can employ static vacancies that expire at different points of time in order to gradually stabilize the asset.
Moreover, you can try to amortize the TI and LCs over a duration of time, but that might be getting too creative.....
In reality, the TIs/LCs are costs that arent 100% incurred when a speculative lease starts. You could model 1/3 of the TI costs being spent over a 3 month period prior to the lease commencement. As for LCs, half is paid when the lease is signed and the remainder paid out when the lease commences (usually 6 months between signed & commencement).
No one can predict the future. You aren't going to lose your job if you just keep arbitrarily pushing out aggressive broker assumptions...
Well duh, no shit to both of your observations.
I'm just wondering if anybody has come up with a more academic approach to something that can have such a massive impact to the returns you u/w to. It can literally be the deciding factor as to whether your bid wins you the deal.
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