Underwriting to the Right Age in Multifamily Real Estate
Underwriting multifamily properties often rests on stable or gradually rising assumptions for net operating income (NOI), but this perspective overlooks how operating performance tends to evolve as these buildings age. While NOI may be elevated in a property’s early years, that performance rarely holds over time and investors will do better when they price assets relative to their age.
NOI performance tends to deteriorate across both the garden and mid/high-rise segments of the U.S. apartment market, our analysis using the MSCI Income & Expense dataset showed. This decline reflects rising operating costs and the growing demands of maintaining older assets. While net-income durability may not be a concern for newer apartments, particularly during the stabilization period (when occupancy and rent revenue level off following lease-up), it becomes increasingly impactful as properties move past their first decade.
Cap rates, or yields, which reflect the income-based return investors expect from a property, follow the opposite trajectory to NOI. After compressing during lease-up and stabilization, they tend to gradually expand over time. When net income slows and yield expectations rise, models built on flat cash-flow projections and aggressive exit assumptions risk materially overstating value. Underwriting that fails to account for these trends can misprice risk and understate the capital required to sustain performance.
Each property’s performance is normalized to its local-market average to control for geographic variation. Data from the MSCI Property Income & Expense dataset, which captures property-level performance data derived from loans tied to commercial-mortgage-backed securities (CMBS).
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