The Right Way to Underwrite Rent Growth in Multifamily

Rent growth assumptions drive more deal outcomes than any other single variable in a multifamily underwriting model. A 50 basis point difference in annual rent growth, compounded over a five-year hold, can swing an IRR by 200-300 basis points. Despite this sensitivity, rent growth is often the least rigorously supported assumption in a sponsor's underwriting.

The most common mistake is anchoring to trailing performance. If a property achieved 5% rent growth last year, sponsors frequently project 4-5% going forward as a "conservative" estimate. But trailing performance reflects a specific moment in the supply-demand cycle. Without understanding what drove that growth — and whether those drivers will persist — the projection is speculation, not analysis.

Institutional underwriters approach rent growth differently. They start with submarket fundamentals: employment growth, population migration, household formation, and — critically — the construction pipeline. A submarket with 3% inventory growth and 1% demand growth will see rent pressure regardless of what rents did last year.

The construction pipeline is particularly important in the current cycle. Many Sun Belt markets that experienced explosive rent growth in 2021-2022 are now absorbing record levels of new supply. Markets like Austin, Phoenix, and Nashville have seen effective rent growth turn flat or negative as new deliveries outpace absorption. Sponsors who underwrote 3-4% annual growth in these markets based on historical trends are now facing realities that diverge significantly from their models.

A defensible rent growth assumption should be built from the bottom up. Start with the current effective rent per unit. Layer in loss-to-lease capture — the gap between in-place rents and market rents for comparable units. Then apply a market rent growth rate that is supported by third-party data: CoStar, REIS, or Yardi Matrix forecasts, triangulated against your own submarket knowledge.

Loss-to-lease capture is often conflated with market rent growth, but they are distinct. A property with 8% loss-to-lease can achieve significant revenue growth simply by turning units and marking to market — even if market rents are flat. This distinction matters because loss-to-lease capture is a one-time event (per unit), while market rent growth is recurring.

Lenders scrutinize rent growth assumptions closely. A deal that requires above-market rent growth to meet DSCR covenants will face pushback in underwriting, and it should. The strongest loan submissions present rent growth assumptions that are at or below third-party forecasts, with the upside coming from operational improvements, loss-to-lease capture, or value-add renovations — not from hoping the market will bail out aggressive projections.

When we place debt for our clients, the quality of the underwriting directly impacts the terms we can negotiate. A well-supported rent growth narrative gives lenders confidence, which translates to better pricing, higher proceeds, and fewer structural concessions. This is why we invest time upfront to make sure the story holds up.