How many of your are still purchasing MF using proforma numbers?

[Victor Zeytin]

For the past few years, due to the very strong demand and competition for MF RE, most buyers have had to purchase based on proforma numbers. The numbers based on current financials don't pencil out in other words but only after year 1 or so at a point in time in the future. This was sort of reasonable based on rents that were screaming higher every year.

The current climate has changed quite a bit Rent growth seems to have plateaued in many markets. Some have even had a very slight drop in rents. The economic situation is starting to worsen and rents are at an all time high in many markets. Consumers are already paying 25%-33% of their income on housing in hot markets. It seems to me that depending on proforma numbers now making assumptions of rent growth don't make a whole lot of sense at this point in time.

My question to buyers in the market currently is whether you're still using proforma numbers to acquire properties? If so, are you still making assumptions of rent growth in the near to mid term? I'd love to hear your thinking and input.

TYIA

[Arn Cenedella]

@Victor Zeytin

It depends…….

If one is looking to purchase a value add property - by definition, you are buying off proforma numbers. You are buying to inject capital into the property to hopefully increase rents and therefore value. An investor needs to estimate rents after renovation at stabilization to determine acquisition price. One does not buy a value add off current performance numbers per se.

That being said, the current economic environment requires a more conservative projection of rent growth - so they are still “proforma” projections but more conservative ones.

And of course it all comes down to one’s knowledge of the local market and sub,Arlen when estimating future rents.