My 5 Underwriting Changes & The Renewal Cliff

release edition [063]

read time [8 minutes]

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Today at a Glance:

• Underwriting: My 5 Changes
• Renewals: The Cliff is Approaching
• Weekly Listen:

Underwriting

As I predicted in TMD 052, the yield curve has, in fact, been quite volatile over the past few weeks.

The result of this volatility is a "risk off" approach that is commensurate with the looming global uncertainty, and within the Multifamily sector.

With the Spring leasing season upon us, and a much-needed bounce-back Summer to follow, I'm hopeful that this volatility will normalize and bounce-back renter demand will absorb the abundant lingering supply across many markets nationally.

But, it may not, and that's why I've adjusted several underwriting assumptions recently as a result of the volatility in the Capital Markets and global macro economy.

The TL;DR is this: Conservative underwriting makes deals tougher to pencil, but acquiring properties on thin margins with aggressive assumptions is not advisable, especially as a fiduciary of outside investor capital.

Without further ado, let's jump into how I'm currently thinking about underwriting amid today's volatility.

1. Exit Cap Rate: Wider Spreads.

Before March, it was defensible to underwrite workforce, value-add Multifamily exit cap rates to 5.50-6.00% depending upon the asset quality, location, and individual market supply/demand/growth outlook.

But today, those exit cap rates are 0.25% - 0.50% wider.

While CBRE's Q2 2025 underwriting survey shows core exit caps at 4.96% and value-add exits at 5.38%, it seems challenging to justify those same cap rates today.

Why?

The March Fed decision projected only one cut in 2026, down from two in December, and seven of 19 FOMC members now see zero cuts this year.

And, the long end of the curve is not cooperating, as the Iran conflict has added a variable that makes forward rate assumptions less reliable (and far more challenging) than they were just 45 days ago.

If I can't confidently predict where the 10-Year Treasury will be at exit, then I need more cushion in my exit cap rate.

As I wrote in January 2025 inside of TMD 003, yield-on-cost ("YOC") is more meaningful than cap rate.

However, the YOC at stabilization must have a justifiable positive spread over the projected market cap rate at the time of exit, or else the profitability of the investment will inevitably be in jeopardy

As I like to say, "My crystal ball is in the shop", so I have no clue where forward market cap rates may settle, but today, I'm underwriting as if they're going to be higher in the future than I thought they would be 45 days ago.

2. Rent Growth: Lower Year 1 Assumptions.

It's challenging to defend positive organic rent growth for many markets in 2026, especially after the more recent market volatility.

As I've shared previously, Yardi Matrix's February report showed national advertised rents flat at $1,740, unchanged from January, with only 9 of the top 30 markets posting growth.

Yardi's full-year 2026 rent growth forecast is 1.2% nationally, and that was issued before the Iran conflict pushed gas above $4/gallon and Goldman Sachs raised recession odds to 30%.

To be clear, I am not predicting a recession.

But I am pricing in the possibility that renter demand softens further (rather than recovering) in the back half of the year if oil stays elevated and consumer confidence keeps falling.

Remember, Year 1 of a new business plan is where Multifamily investors can get hurt because it's hard to catch up after underwriting 3% rent growth in Year 1 and achieving 0%.

I'm underwriting reality, not optimism.

3. Insurance: Avoid Last Year's Number.

This one is interesting because there's a confluence of variables driving the insurance market currently.

After two years of relatively stable losses nationally, reinsurers have once again become comfortable with Property lines, and have flooded into the market as a result.

The impact is that Property insurance costs are coming down for many owners in many markets.

Conversely, Umbrella and General Liability ("GL") are climbing as reinsurers are realizing it's more challenging to model or predict losses in these categories since these losses can be, in the worst case, uncapped relative to the quantifiable nature of a Property.

Shopping for an insurance quote during an LOI negotiation or due diligence period is imperative, because the all-in insurance costs may surprise you in either direction.

For better or worse, insurance remains a wild card, so developing a holistic portfolio-level strategy is advisable.

Over the past few months I've been running an insurance RFP with several insurance groups, and the market feedback has been eye opening.

Please reach out if you'd like to compare notes, or ask me about what I've learned through the RFP process.

4. CapEx Costs: Added "Oil Contingency".

Brent crude is above $100 per barrel, and touched nearly $120 during the worst of the Strait of Hormuz disruption.

To measure the impact of elevated oil prices, Oxford Economics estimates that every $10 increase in sustained oil prices shaves 0.1% off GDP.

For operators running renovation programs, oil prices flow directly into material costs.

Petroleum-based products (paint, adhesives, roofing, PVC), transportation surcharges on deliveries, and subcontractor fuel costs all move with the price of a barrel of oil.

As a result, I have increased the contingency percentage for CapEx costs in my renovation budgets, just to be safe.

If oil prices normalize, I win. If oil remains elevated, I don't lose.

5. Demand Assumptions: Soft Labor Market.

The U.S. economy has lost jobs in five of the last nine months. Total job creation for all of 2025 was just 116,000, the lowest outside of a recession since 2002.

As I wrote a few weeks ago in TMD 060, February 2026 saw another 92,000 jobs lost, and Renter demand is ultimately a function of jobs and incomes.

If people are not getting hired, they are not forming new households, and instead they are doubling up, staying with family, or they are moving to cheaper housing options.

Adjusting and elongating any demand-side benefits (organic rent growth, achieving post-renovated rents, stabilizing occupancy, scaling in additional Other Income/RUBS, etc.) over a longer time horizon is the prudent thing to do in today's market.

Yes, this risk-off approach changes the Year 1 cash-on-cash return profile, but it is honest, and it's reality.

As I wrote for bullet number 10 inside of TMD 049, avoiding the bad deals is more important than buying the good ones.

Actionable Takeaway:

Please, adjust your underwriting to match the risk tolerance of today's market. There's no sense in tying up an acquisition, only to struggle raising equity to capitalize it because the underlying assumptions aren't defensible. It's better to work hard to find the right deal, than to cut corners just to find the next deal.

Summary:

To be clear, none of these adjustments has slowed down our team's desire in seeking new acquisitions, but they have made us more realistic in how we price them. The operators who will come out of 2026 in a strong position are the ones who adjusted their models in real time. If your underwriting still looks like it did in January then it's time to revisit it.

The Renewal Cliff

There is a metric that deserves more attention than it is getting right now:

Q2 lease expirations.

Here is the setup to watch:

In Spring and Summer 2025, Multifamily operators across the country signed a wave of new leases with concession-heavy terms amid a historically soft leasing environment.

According to RealPage, concession usage increased in January 2026 across all four national regions, with Austin, Denver, and San Antonio each posting discounts among roughly one-third of all stabilized units.

As I wrote in TMD 059, the national concession rate hit 16.6% in January of 2026, the highest since 2014.

Well, new leases signed in the Spring and Summer of 2025 are now 10 to 12 months old, and they will soon be hitting their renewal window.

The question that Multifamily operators (including myself) need to be asking is this:

What happens when a resident who signed at a net effective rent of, say, $1,350 (after a month free on a $1,475 gross) is asked to renew at $1,475 or higher?

Last August, I flagged this risk in TMD 033, and I coined it "Incentivized Demand."

The logic is straightforward in that concessions create occupancy that looks healthy on paper.

But, the residents who signed that lease may not be prepared to pay market rate today without also being offered another healthy concession.

When the renewal conversation happens, some portion of those residents will not absorb the step-up, causing retention to fall, vacancy to increase, R&M and turnover costs to rise, and NOI to drop after a negative lease trade out.

Either existing residents will negotiate a new renewal concession (maintaining downward pressure on the net effective rent yet again), or, they will move out, and Multifamily owners will be worse off than where they started 12 months prior.

This retention risk is especially acute in Class B and Class C product, where the renter profile skews toward the bottom half of the income distribution.

As I have written about extensively through the K-Economy framework (TMD 004), the bottom 50% of households hold roughly just 2.4% of total U.S. wealth.

These are the renters most sensitive to a step-up in monthly rent, and they are the same cohort being hit hardest by $4+ gas prices and a soft labor market.

My 2026 Prediction #3 in TMD 052 was that renewal rent change would outpace new lease rent growth.

That prediction was based on exactly this dynamic, that Multifamily operators would prioritize retention (and accept lower renewal bumps, or negative renewal growth) over turnover and negative lease trade outs.

Three months in, I think this prediction is tracking. But the real evidence is going to unfold over the next 90 days.

Actionable Takeaway:

Consider tracking your renewal conversion rate weekly through June.

If it decreases relative to years past then the concession strategy from last year is creating turnover, not retention.

Also, watch the spread between your new lease effective rent and your renewal offers.

It's a risk to negotiate renewals with gain-to-lease residents back towards current market rents, but, that's often a far better outcome than not negotiating, leading to elevated move outs, marking new leases to far lower current market rents (i.e. negative lease trade outs), higher vacancy costs, and increased R&M + Turnover costs.

Summary:

The Spring leasing season gets all the attention for new leases. But this year, the renewal activity is where the real story will unfold. Operators who understand the concession-to-renewal pipeline will protect their NOI. Those who do not will be surprised by move-outs they did not see coming.

Weekly Listen

This week's listen is the Walker Webcast: "Housing at a Crossroads" with Willy Walker, Kris Mikkelsen, Justin Nelson, and Ivy Zelman.

They discussed what's happening in the housing market currently, the impact of tariffs on single-family and multifamily, where capital is moving, and which asset classes are getting attention heading into the back half of 2026.

You can listen to the full episode here.

Wrap Up

That's it for today. I hope you found this edition of The Multifamily Download insightful.

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