How Much Have Your Projected IRRs Dropped Due To Rate Increases?
Curious to see if you guys would be willing to share how much your underwritten returns for - new acquisitions / developments - have dropped; if any, due to increasing rates over the last 2-3 months. Multi family, industrial, development vs. acquisition, etc.. obviously blind/anon your username if needed.
Cost of debt goes up but are lenders still giving the same amount of leverage? Lower LTVs and higher cost of debt? Assuming no other changes in assumptions (rent growth, exit cap, etc). Is “negative leverage” coming into play yet for acquisitions in the 3 cap range?
IRR hasnt necessarily dropped due to rate increases. In some cases, it may be higher. We always factor in a 150-200 bps higher exit cap rate. However, it looks like the Fed will exceed this, but we will still exceed our IRR estimates. For one, we underwrote annual rental increases in certain markets at 3-4%. In one of the markets we're in, our rent is up 22% annually for the last two years (FL market). We're likely to see a slight drop off in rent growth but this year we're still likely going to be at 15%+. So yes the Fed made it difficult with rate increases, but we factored in a good chunk of that plus our rent growth is higher than our own proforma.
Whoever underwrote realistically will be fine, unfortunately, I know several shops that did not and artificially inflated proformas to make their LPs happy. Will be interesting for sure.
In what world are you winning competitively marketed deals underwriting a 200bps premium on your terminal exit? I imagine your U/W IRR is 0% if you buy at a 4.0% and sell at a 6.0% cap rate unless you're modeling ridiculous rent growth. Math doesn't make sense.
Also a 150bps increase in the index is a 60%+ increase in whole dollar debt service. Your 22% rent growth doesn't even keep close to the DS % increases.
are you actually banking on a 15% rent growth after a massive run up in rent the past year?
is that just the 1st year with a reversion back to 3% after that?
having a 15% in a model as rent growth seems kind of peak insanity.
I never said we underwrote 15%. Please read my post. We underwrote 3-4% in a market that has historically been in that range. We're seeing 15% increases based on recent lease turnover and renewals. In my opinion, we will eventually revert back to 3%, but honestly the market is insane and just too much demand for a finite amount of supply.
teddythebearIRR hasnt necessarily dropped due to rate increases. In some cases, it may be higher. We always factor in a 150-200 bps higher exit cap rate. However, it looks like the Fed will exceed this, but we will still exceed our IRR estimates. For one, we underwrote annual rental increases in certain markets at 3-4%. In one of the markets we're in, our rent is up 22% annually for the last two years (FL market). We're likely to see a slight drop off in rent growth but this year we're still likely going to be at 15%+. So yes the Fed made it difficult with rate increases, but we factored in a good chunk of that plus our rent growth is higher than our own proforma.Whoever underwrote realistically will be fine, unfortunately, I know several shops that did not and artificially inflated proformas to make their LPs happy. Will be interesting for sure.Sorry but, what kind of answer is this? It's pretty clear OP was asking how as underwriting changed post updating your forward projections with respect to debt service…you replied "it's increasing" because in some markets you fell ass backwards into 22% rent growth? And then follow this up with the fact that you guys don't even have floating rate debt? This has got to be most random, out of left field response to OP's question. What's next, is someone come in and say it's working great for them too because they buy all cash…
EDIT: Didn’t even catch your last sentence. “Whoever underwrote realistically will be fine but you know several operators who projected unrealistic assumptions” - dude, what are you even saying? You realize directly before that you just said your firm underwrote 3-4% rent growth and was shocked to see it hit 22%.
Literally I have no idea what I’m reading
Comment about exit cap expansion told me all I need to know — your firm hasn’t bought jack shit in the past 18 months
Are you replying to me? Can’t tell on mobile
Not sure why he you have to be rude about it. Was just giving where our firm stands. Geez this board is getting crazy
Ignore them Teddy. Most of these kids are recent grads that ask the same stupid question hoping everyone on the acq/dev side is going to tell them the world is going to end. This forum has gone to complete shit from kids who lack basic social skills on how to talk to people.
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