Cap Rates in Comps - Do they assume 100% occupancy?
Hello all,
When you read cap rates from recent transactions in a brokerage report or a IM/OM, are those NOI figures usually adjusted to 100% occupancy based on their in-place rents or are the numbers as is (i.e. current in-place rent / purchase price)
No, it’s not adjusted. They should show you the occupancy though. If they don’t, it’s somewhat okay, but not great. If you’re buying a stabilized asset, you should try to find stabilized comps.
The comps show as-is Year 1 NOI because that’s what they use to calculate the cap rate. It wouldn’t be grossed up to 100%, otherwise the cap rate would be wrong.
They should be showing actuals, they might show what it could be but it would probably be explicit. And as far as I'm aware, no one underwrites 100% occupancy (only exception I can think of is affordable), there is always a vacancy factor, usually 5%, included. Even if the building is 100% occupied you need to account for some churn and vacancies resulting from that.
Even affordable has vacancies. And when we don't, we usually have a higher-than-average bad debt allowance, so it evens out.
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