How to underwrite core deals in this environment
Seeing the market in reading the big brokerages reports on the main metros I invest in, everyone estimate rent growth at 0% for at least a year or two. Expenses naturally rise with inflation - insurance, property tax, utilities...
Those two factors, by definition, result in lower NOI down the road than in-place/year 1 NOI. Meaning that even with cap rate expansion set to 0%, the sale price is lower than the going in purchase price. resulting in negative/low yields.
Am I missing something here? Do core deals not pencil in this environment at all?
First off - it depends on the asset class. Even if rent growth is 0%, if you have no lease turnover in retail/industrial/office and the leases have rent increases the next few years - you’ll have NOI growth. The question is - what’s the mark to market.
Lastly, your thought process is good. No they may not make sense but it is situation dependent (like everything).
Thanks for the reply. I was referring to multifamily. Also, when you say mark to market is that the same as loss to lease? (market rent vs in place rent)
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