Apologies if there is a similar thread somewhere else, I have searched but can't seem to find anything comprehensive.
I was wondering if anyone would be able to provide insight into the main nuances of different asset classes when it comes to modelling? I come from a multifamily background so although I am comfortable with modelling, I am not necessarily familiar with the nuances within each asset class.
For example, in multifamily (In my market/experience anyways) costs are generally not recouped from the tenants so the leakage is always at x% - the only exception I have seen is where there is a lease nomination in place and the lease is an FRI lease. Whereas in office, service charge, for example, is only paid by the landlord if the unit is empty. While in retail, a field I have no experience in, I understand it can be a minefield. As for logistics, I've never discussed nor seen an actual model!
I appreciate my input isn't the strongest (and may even be wrong!), but coming from the broker side, I guess our approaches are going to be different from the guys on the investment side. Moreover, multifamily tends to be fairly straight forward to model, as a broker anyway, and we don't tend to focus on individual units so the rent roll is fairly simple to deal with.
I think this might be helpful for those preparing for interviews in asset classes they have not previously dealt with. Case in point, I had a modelling test for an office-focused role and in my model, I made the mistake of growing the rent every year, rather than waiting for a rent review/end of a lease. A simple mistake looking back, but I just went into multifamily auto-pilot mode.
Any insight would be much appreciated.
Can speak more on retail even though I've dealt with offices. Things to be cognizant of:
-Expense reimbursement methods. Is it NNN or modified gross? If it's modified gross, is the tenant reimbursing over a certainbase amount and paying pro-rata share amount after the threshold -Does the landlord receive a % of sales? -How was the base amount determined? i.e.-if year t-1 was 50% occupied, the reimbursable amount is going to be skewed -Probability of existing tenants exercising their options or ways to entice the current tenants to extend their current options -When the leases roll over, what are your marketing leasing assumptions? i.e.-Market rent, rent growth, rent abatement, TI, LC, etc. -Any value-add opportunities? If there is a lease rollover, can the landlord achiever higher rents than the in-place rents? Can the landlord restructure the gross/modified gross leases to NNN? -What kind of tenants can you replace the current tenants with in the future? i.e.-Can you backfill a big suite? And if it is a big suite, does it make sense to carve out the current suites into smaller suites and achieve higher rent psf
There are a lot more items that can be added to this list. I hope this helps.
Thanks Bankinghopeful123, retail definitely does sound like a minefield haha, but really appreciate the input. Hopefully this can be a helpful library :)
This is a good list. I'm a generalist so I've seen a decent amount of different nuances:
For retail, the % sales is definitely a big one. Additionally, the reimbursement structures/cost pools are usually more complex than other asset types since in a lot of cases they are NNN (reimburse after clauses, pad sites vs. in-site vs. anchor, etc.). Other things that come to mind are go-dark clauses and below-market fixed rate renewal/extension options for larger/anchor tenants.
For multifamily, a lot of cases I've seen large nuances on tax liability depending on the city/metro area. Whether or not there are any BMR/affordable units, the RUBs/utility reimb. programs, property-specific expenses (can fluctuate a lot given the region, size of project, and different factors like if there is ground-floor retail, parking structure, staffing expectations, etc.), turnover rates. Leases usually gross, w/ usual exception of RUBs mentioned above.
Office, this can vary greatly depending on whether suburban or CBD. Usually leases are quoted on FSG/base year basis so the reimbursements aren't always super tricky, but if building is multi-tenant and NNN then can be complicated. Parking income/expenses are usually a big factor, especially in CBD/downtown assets. Biggest pitfall I've seen here is capital - usually people don't budget enough for things like elevator, HVAC, lobbies, corridors, bathrooms, etc. Seismic/PCA/BOMA reports/findings can be critical on these.
Industrial usually the underwriting is fairly straightforward - NNN leases with a low tenant count (many times just one). Big pitfall I've seen here is zoning restrictions, environmental issues or stuff that comes up in the PCA (usually with the parking lots or roof).
Excellent summary. I would also add that multifamily underwriting will often include unit renovation assumptions (per unit renovation cost, downtime, rent premium, etc). This can get complicated depending on the unit mix and past ownership... For example, sometimes non-institutional owner types may have done ad hoc repairs/upgrades and have a mix of flooring/cabinets/appliances among the units.... sometimes only certain floor plans have space for in-unit W/D... sometimes only ground floor units can get a hardwood floor upgrade.... etc.
I've built models for projects in student accommodation, private rented sector (multifamily housing I guess), care homes, retirement housing and social housing.
A model is always a reflection of the underlying commercial and contractual arrangements and these will always be specific to the project. The things you're describing are more to do with general knowledge of the sector than actual modelling points. Writing a formula is easy once you know what you're trying to show.
I see where you are coming from. But they do affect the model especially with the assumptions you put into Argus (MLA-why you put certain things in MLA).
Before coming onto this forum I had never even heard of Argus, only ever modeled in Excel. Maybe it's used in some areas/industries but in my line of work (work at a debt boutique, before at a Big Four modelling team) it's only ever been Excel.
I’m not going to be much help but I want to clear something up. Real estate is an asset class. Private equity is an asset class. Corporate debt is an asset class. Multifamily, retail, and hotels are property types. Don’t go into an interview saying you want to work on a variety of asset classes when you mean property types, because they’re two different things. I know it sounds nit picky but it’s an important distinction
It's not only nit-picky, it isn't even right. At worst, this is a random distinction that will mean different things to different people. More probably, this is your specific interpretation of synonymous terms.
Multifamily, office, etc... those are all assets. The physical plant of the building is the asset (well, plus leases, etc). If you want to use the term "class" to define them against one another, that's a legitimate phrase, no less accurate than "property type", especially when you consider that "property type", as it relates to use, is specific to current use, whereas referring to the asset classes you invest in can equally mean future use (conversions, etc).
No need to be hostile now. Just trying to help out. For anyone interested, google “asset class” and see what pops up
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