What are everyone's thoughts on where opex inflation is headed going forward? Do y'all think it will track the CPI or will labor costs throw things off? Does anyone have any recommendations on further research?
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This is always a tough one. To me, there is the endless argument of modelling what you think will actually happen, and modeling what a buyer will model. I can't tell you how many times I've done in-depth market analysis to arrive at yearly opex inflation, ultimately for a buyer to just slap 3% over 10 years and arrive at a price accordingly.
One method that I am eagerly looking into is MonteCristo simulations for Opex inflation (or any other inflation number, terminal cap rates, cap rate appreciation, etc). I know this doesn't answer your question specifically, but I suppose my stance is that other than using 3% regression to the mean number for a 10 year DCF, the only quantitatively realistic measure would be a MC model...
MonteCristo simulations???
Can we get a running number of the times MonteCristo simulation was said in this thread? Like a.... Count of MonteCristo simulations?
2....?
Someone didn't get the joke
http://ardent.mit.edu/real_options/Real_opts_papers/Leung_thesis.pdf
If you're ever bored and are intrigued by MC in real estate...
Simply, I think there are way too many variables to accurately hone in on an OpEx inflation number...or any input for that matter (GPR inflation, terminal cap rates, cap rate growth on a 10 yr DCF to arrive at a terminal cap, etc). Therefore, MC simulations attempt to run thousands of iterations within a certain "parameter" you set to arrive at a result.
I wont go into the detail here, but google it and you might be interested in it. I do think it has real applications especially on a 10 yr DCF model.
NOW, where the real issue lies in my opinion, is what will a buyer model out?. On the acquisitions side, sure these fine tune models can add applicable value to prevent the firm from over-paying. But when you are running a valuation/disposition analysis, you need to employ the metrics that the market/buyer will use. In this case, almost always you'll see a 3% across the board inflation on revenue and expenses...regardless of market or timing. Due to difficultly of modelling 10 yrs of assumptions, on any short-lease type of asset (such as MF, storage, etc), the industry norm is to take a F12 NOI and cap it. Determining market data metrics is much more realistic on a 0-1 yr window...
Hope this helps...
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