Migration, Underwriting, and Imperfect Science

Flooded street

The past several years have, without a doubt, seen some of the strangest behavior in human history.  The confluence of the pandemic, greater information availability than at any time in history, and subsequent political discord, have people making bigger changes than they ever have before.  When investing in real estate, our underwriting team has always assembled complex models to account for changes in rent growth, marketing cost, building costs, and many other variables that make up the economic picture for multifamily properties. 

Of course, these variables have changed over the years to account for new realities associated with interest rates and insurance costs as these inputs have been more volatile than ever before.  One of the things that we have always prided ourselves on is that the deals that we have participated in have been underwritten with conservative expectations, and that our returns have been outsized because we help our clients find the best prices. 

We do that in two very important ways:  1.  We generally participate in off-market deals.  This allows us to find better pricing and situations that better fit our strengths as investors and operators.  2.  We anticipate change better than most because our models are flexible to new information.  

As part of the current political discord, the definition of science seems to have morphed as well.  Whether we’re talking about vaccine science or climate change, people on opposite sides of the political divide seem to come to different conclusions as to what “the science” says and how it should be interpreted.  Often, the conclusions made politically determine where jobs will be funded, or where a family will decide to migrate for other reasons.  The media, meanwhile, often compounds the confusion by conflating cause and effect.    

As we underwrite properties with the potential for outsized rent growth, our attention has obviously been drawn to the sunbelt over the years.  At the same time, there has been a building concern about wildfires, hurricanes, and the effect of climate change in those regions as well.  We see this most clearly as the insurance costs in our models have exploded over the last several years.  Many will blame climate change for the losses that the insurance companies have absorbed, but population density has also had a hand in these losses and that in itself has a non-linear result on catastrophic losses.  

We’re not climate scientists, we don’t claim to know whether or not the globe is, in fact warming, or if those who are measuring are using the right starting point.  What we do know is when we build in areas that are prone to natural disasters, the costs go up materially for insurance companies because the likelihood of being in the way goes WAY up.  That does not imply climate change, it’s just pure statistics.  The pandemic, together with tax laws, has made many places that are prone to natural disasters more appealing to a lot of people (have you heard the phrase 6 months and a day more this year than any in your life?  Us too.).  

We bring this up because we believe that better underwriting results in better investment returns.  Our process is as robust as it is because we care and because we invest along with you. 

Sources: BisNow


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