Mastering Year 1 Assumptions in Real Estate Underwriting

It’s no surprise that the inputs in your underwriting model have powerful effects on returns. The real art of underwriting comes down to how well you can use these inputs to make the most accurate analysis possible.

That’s why your Year 1 assumptions are so critical.

When I am underwriting a new deal, I take a look at how the trailing 12 months and trailing 3 months look on the profit and loss statement.

In combination with my own assumptions, market data, and feedback from our property management company, I then use the T12 and T3 to create my Year 1 pro forma. Your entire analysis then builds off of the Year 1 numbers.

Income Assumptions:

To make the most accurate Year 1 pro forma possible, have the T12 and T3 data next to your Year 1 assumptions.

Underwriting is all above identifying trends. By viewing the historical data, you can ask yourself questions like this:

• Is physical vacancy increasing or decreasing?
• Is bad debt increasing and do we think we will inherit the property with unqualified tenants?
• How much of the utilities is the current owner billing back for? How much do we think can be recaptured in Year 1?

I’m constantly comparing my total income numbers to the historical figures. Sometimes I see underwriting from other sponsors where their Year 1 pro forma income is extremely high compared to the T12.

Depending on the business plan, this may be unrealistic to model. When we acquire a property, it takes time to renovate units, add new forms of income, and implement our business plan. I like to see a very gradual increase in my underwriting to be conservative.

Expense Assumptions:

Same goes for the operating expenses. It’s best practice to identify any trends from the T12 and T3 data.

• What contracts are currently on the property?
• What is the current owner paying for repairs? Will your Year 1 numbers be higher or lower?
• How much is the current payroll expense? Is it possible your payroll will be more/less?
• Are utilities rapidly increasing in the last few months? Will this effect your Year 1 numbers?

This is where passive investors can verify assumptions in the sponsor’s underwriting. Here you can check if the sponsor is expecting a tax reassessment in the first year. You can also clearly see how the Year 1 assumptions stack up against the historical numbers.

Making the most accurate Year 1 pro forma is critical because your entire analysis builds off of that. Use the T12, T3, and feedback from your property management company build the most accurate pro forma. Sometimes, abnormally high income changes in the first year may be unrealistic.

Source: Year 1 Assumptions: How to correctly model this

https://www.creconsult.net/market-trends/mastering-year-1-assumptions-in-real-estate-underwriting/

Sequence 3

WHAT IS MY PROPERTY WORTH?
Be informed about the value of your property before you make a major decision!
Contact us to discuss:
Broker: Randolph Taylor
Multifamily Investment Sales Broker - Chicago
eXp Commercial | National Multifamily Division
(630) 474-6441 | rtaylor@creconsult.net
https://www.creconsult.net/home-chicago-multifamily-brokerage/request-valuation/

What to Watch in 2024: Multifamily Outlook Offers Demand the Chance To Match Supply

Slowing Completions Would Be a Welcome Relief, but Pipelines in Most Sun Belt Markets Could Be Elevated

After hitting a 40-year high for completed units in 2023, the U.S. multifamily market is expected to see a 25% pullback next year, which should help balance out the market.

Roughly 590,000 units were completed last year, according to CoStar data, though only 444,000 units are projected to come on line in 2024. While this easing of new builds would likely be well-received by owners and property managers, it is still more than the five-year, pre-pandemic annual average of 360,000 units.

The projected slowing in completions would come none too soon given that the past two years of construction outpaced demand by 607,000 units, pushing the national vacancy rate up from 4.8% to 7.6%. Yet if absorption—the difference in move-ins versus move-outs—continues to rise as it has throughout 2023, and with the 2024 delivery schedule slowing, the multifamily supply-demand imbalance could move toward equilibrium.

Dallas-Fort Worth will likely win the crown for most units completed in 2024 for the second year in a row. With more than 27,000 new units forecast to be finished, Dallas-Fort Worth is expected to see 6,000 more units than second-place New York.

However, the big takeaway from the list of the highest number of units completed this year remains the elevated supply coming on line in markets already awash in units. Atlanta, Georgia; Austin, Texas; Charlotte, North Carolina; and Phoenix, Arizona, are all projected to see between 14,000 and 16,000 new units open during 2024. While those numbers are down for these markets except for Charlotte, compared with last year’s totals, it makes for difficult conditions when all four markets are already experiencing double-digit vacancy rates.

Another noteworthy observation reveals that, despite having a population close to 10 million in both Los Angeles and Chicago, these two major markets are projected to introduce fewer than 8,000 units each in 2024. Los Angeles and Chicago also have vacancy rates under 6%, which is below the national rate of 7.6%.

As a percentage of inventory, markets in the Sun Belt have taken the lead in terms of new completions. Eight of the top 10 markets growing their inventories are in the Sun Belt.

Charlotte leads the pack, with North Carolina's biggest city expected to expand its inventory by 7% this year. That is three times the national rate of 2.3%.

Overall, 13 out of 14 major Sun Belt locations have completions-to-inventory ratios above the national average, with Houston, at 2.1%, being the lone exception.

Most of the markets below the 2.3% national average are in the Midwest or on the West Coast. These markets are likely to be the best positioned to take advantage of expected stronger multifamily demand, as their smaller construction pipelines could push rent growth higher than most in 2024.

After three years of the national multifamily supply rising each year, 2024 may offer the nation a chance to catch its breath. However, not all markets will be able to take advantage of slowing completions if their pipelines remain elevated, as that could limit any upward movement in rent growth.

Source: What to Watch in 2024: Multifamily Outlook Offers Demand the Chance To Match Supply

https://www.creconsult.net/market-trends/2024-multifamily-outlook/

Sequence 2

WHY SHOULD I SELL MY MULTIFAMILY PROPERTY?
There are Several Reasons Why People Do Sell:
Problems | Opportunities | Changes
I Don't Want to pay Capital Gains Tax!
There are a Number of Ways to Defer or Minimize
Contact us to discuss:
Randolph Taylor
Multifamily Investment Sales Broker - Chicago
eXp Commercial | National Multifamily Division
(630) 474-6441 | rtaylor@creconsult.net
https://www.creconsult.net/

U.S. Multifamily Market Faces Challenges Ahead

After two years of stellar growth, rents decelerated in 2023, despite demand still at strong levels thanks to a resilient economy. The 2024 Multifamily Outlook from Yardi® Matrix anticipates a year of challenges, including slowing national rent growth. National rent growth moderated to 0.4 percent year-over-year through November 2023, up from a combined 23.5 percent in 2021 and 2022. Absorption stabilized at 300,000 apartment units in 2023, compared to 600,000 in 2021 and 200,000 in 2022. Yardi Matrix expects that rent growth and occupancy will be heavily tested next year. Of the 1.2 million apartment units under construction at the start of 2024, 510,000 are expected to be delivered by the end of the year, the highest number in decades. We expect demand for multifamily to remain healthy in 2024, but headwinds that include slower job growth, increasing supply, and waning affordability in some markets will keep rent growth restrained again," state analysts, forecasting a tepid 1.5 percent rent growth nationally. The 2024 forecast calls for Midwest metros to lead rent growth and the Sunbelt and West markets to continue to experience in-migration from the coasts, both by residents and businesses. Sunbelt markets such as Austin, Nashville, Charlotte, and Orlando are already seeing stalling rent growth, and despite robust population and job growth, they boast high levels of new supply, which will further suppress rents. On the investment front, already down by 70 percent year-over-year, multifamily sales will likely remain sluggish in 2024 due to the impact of interest rates and pricing uncertainty. Gain more insights in the latest U.S. Multifamily Outlook from Yardi Matrix.

Source: U.S. Multifamily Market Faces Challenges Ahead

https://www.creconsult.net/market-trends/2024-multifamily-forecast/

Freddie Mac Outlook for 2024: Moderate Growth

Highlights of the forecast include an uptick in average rent and as much as $380 million in deal volume.

 

Top and Bottom 10 Metros by Gross Income Growth for 2024. Image courtesy of Freddie Mac

The overall long-term picture for multifamily remains positive, but Freddie Mac’s Multifamily 2024 Outlook notes that there are still some short-term headwinds to contend with in the coming year. These include high supply and pressure on rent growth in some parts of the country, like the Sun Belt and Mountain West regions. As the economy moves from an uncertain 2023 into 2024, Freddie Mac states there should be more stabilized cap rates and property values. This trend could help drive transaction volume. Freddie Mac Multifamily expects volume growth to return next year, up to the $370 billion to $380 billion range. While that is well below the post-pandemic years of 2021 and 2022, it would be similar to the 2019 volume. The outlook projects an expected gross income growth of 2.1 percent for the year ahead. While demand is expected to remain positive, it will likely be weaker than pre-pandemic rates. Rent is expected to increase by 2.5 percent, slightly below the annual average from 2000 to 2002. However, in some regions and markets where supply is higher, rents dropped in 2023. The Sun Belt and Mountain West areas had some of the nation’s highest levels of new supply at 3 percent and 4 percent, respectively, causing rents to decline 1.4 percent and 0.5 percent, respectively.

Construction and supply

The construction pipeline is expected to be robust in 2024, with just under 1 million units being built and most of them delivered in the new year. However, some timelines will extend into 2025 due to construction delays, which is likely to prolong the impact elevated supply has had on multifamily performance. Despite a busy year for deliveries, vacancy rates are expected to remain relatively stable, resulting in stabilized cap rates and property values, according to the report. The vacancy rate for 2024 is forecast at 5.7 percent, 40 basis points higher than the 2000–2022 average.

Annual Supply as a percentage of Current Inventory and YoY Rent Growth. Image courtesy of Freddie Mac and The RealPage

Markets with the highest supply ratio are Salt Lake City; Nashville, Tenn.; Austin, Texas; Charlotte, N.C.; and Colorado Springs, Colo. They are all expected to have a new supply ratio of 5.5 percent or higher. Markets with the lowest new supply ratio are projected to be Tulsa, Okla.; Rochester, N.Y.; Long Island, N.Y.; Syracuse, N.Y.; and New Orleans, which will have a new supply ratio of 0.4 percent or less. The outlook notes that overall market performance will feel slow, especially when compared to the pandemic boom years and even the years prior to the pandemic beginning in 2020. In general, though, slower-moving secondary or tertiary markets are generally expected to perform better in 2024.

Interest rates are unchanged but high

As the year ends, economic conditions appear to be moderating, and there may be a soft landing after all. The outlook expects job, wage, and GDP growth to slow but remain positive and inflation to continue to decrease. However, Sara Hoffmann, director of multifamily research at Freddie Mac, said in a prepared statement that there may still be a bit of a bumpy road throughout the next year, including continued higher interest rates. While it appears the Federal Reserve has finished raising interest rates this cycle, many economists expect the higher-for-longer interest rate environment to continue throughout 2024. When the Federal Open Market Committee held its final meeting of 2023 last week, the Federal Reserve left interest rates unchanged for the third consecutive meeting after a year of steep increases. It’s unclear when rate cuts may come. Also cause for concern for investors, the 10-year Treasury rate changes have been volatile in recent months. The report notes it moved between 3.5 percent and 4 percent for the first half of 2023, then increased and peaked at nearly 5 percent in October. The rate has been just under 4 percent so far this week. The report notes that any additional cap rate increases will put downward pressure on property values. While the rate of property value decline slowed in the second and third quarters of 2023, valuations have declined 13.3 percent since the peak in valuations in the second quarter of 2022.

Source: Freddie Mac Outlook for 2024: Moderate Growth

https://www.creconsult.net/market-trends/2024-multifamily-market-forecast/

Chicago's Suburban Multifamily Market: Investor Insights

Chicago's Suburban Rental Market: A Hidden Gem for Investors

The State of Suburban Rentals in the Windy City

Amid a nationwide trend of cooling rents, Chicago's suburban multifamily market stands as a testament to stability and growth. While the national median rent has seen a slight decrease, Chicago's suburbs offer a unique allure to both renters and investors.

Market Insights from Industry Experts

Danielle Hale, chief economist at Realtor.com, acknowledges a multifamily building boom in select regions, which has kept rents in check. However, the robust demand in Chicago's suburbs defies this trend because more people are choosing suburban living because of its convenience and affordability.

Chicago's Suburban Appeal

Contrary to the national narrative, rents in Chicago's suburbs have maintained their upward trajectory, appealing to a diverse demographic of renters and positioning investors for success in a market characterized by its resilience.

The Investment Advantage in Chicago's Suburbs

The unique market conditions of the Chicago suburbs, including lower unemployment rates and a consistent demand for rental properties, provide fertile ground for multifamily property investments, outshining the volatile urban rental landscapes.

Contact Us:

"Discover the advantages of investing in Chicago's thriving suburban multifamily market. With steady demand and favorable economic conditions, now is the time to diversify your real estate portfolio. Contact us to learn how you can capitalize on these suburban investment opportunities."

Source: Here’s where the price of rent is dropping in the US

https://www.creconsult.net/market-trends/chicago-suburban-multifamily-investor/