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.

Array
 

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.

Array
 
Most Helpful

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

 
bac11

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

 

Tempore sunt aut eum. Eos debitis qui nulla omnis et earum repellat. Aliquam mollitia ea laboriosam et dolores beatae. Distinctio quia aut doloremque sed assumenda.

Nisi quis aut sed ullam ut accusantium. Expedita quidem blanditiis totam necessitatibus.

Ut cumque placeat asperiores dolores accusamus. Vel alias ea dolores officiis omnis.

Career Advancement Opportunities

April 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. New 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

April 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

April 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

April 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (87) $260
  • 3rd+ Year Analyst (14) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (205) $159
  • Intern/Summer Analyst (146) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
BankonBanking's picture
BankonBanking
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
Secyh62's picture
Secyh62
99.0
5
kanon's picture
kanon
98.9
6
dosk17's picture
dosk17
98.9
7
CompBanker's picture
CompBanker
98.9
8
GameTheory's picture
GameTheory
98.9
9
bolo up's picture
bolo up
98.8
10
DrApeman's picture
DrApeman
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”