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)
Laborum tenetur alias velit animi tempore voluptatum. Quaerat quibusdam porro modi beatae distinctio cumque. Dolor et accusantium vitae ut quidem dolores. A quos aut dolorem debitis vitae eos placeat.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...