Curious to hear how other’s firms underwrite expenses growth. The first firm I ever worked for underwrote expenses growing at 3% no matter what. Firm two would underwrite 3% for utility growth and 1%-2% for every other expense number. Total yearly expense growth was between 2%-3%. Rent growth could be 3%. So it was mismatched in a sense. These were also opportunistic deals where we had large rent premiums modeled as well.
Curious to hear what everyone underwrites and how their firm looks at expenses?
Interested as well
Edit: Didn't meant to reply here.
Currently an intern, but do a ton of our firm's underwriting.
2% for rent and expense growth.
Mainly retail-focused family office in Canada about to launch its first PE fund, for context.
I am too using 2%
Generally we're underwriting 3% for most categories that involve human labor (payroll, contracts, etc.), and 2% for others, with taxes based on geography. I'd say most acquisitions guys are underwriting 3% rent growth and 2% expenses in a stabilized market (currently u/w higher rent growth on deals we like due to COVID recovery), in multifamily at least.
2.5-3% rent growth depending on how hard we’re trying to exhaust all options to make a deal pencil.
we always underwrite a tax resent during the first 1-2 years post acq, then the standard expense growth thereafter.
We're all lying to ourselves.
Truth. A proforma is never right. That's part of why I have always felt the reliance on fancy models is overblown. The real question, in my mind, is where is the asset today, and where can it get to. Based on where it can get to, how long will it realistically take me to get there (if I can get it there at all). In my mind, we don't need these fancy models to know if a deal is strong or not.
Agreed. Pro formas are great until the deal closes. Then it's about active management. If it takes more than an hour or two to build and polish up a model, it's too complicated.
2%-3% rent growth, 2%-3% expense growth.
Depends on the market. I'd say 50/50 between whether we underwrite revenues and expenses at the same inflation or higher rent inflation.
All interesting. Thanks everyone!
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