Predicting the Future in CRE: Project Your Budget and Proformas for Clear Insights for 2024

The U.S. multifamily commercial real estate (CRE) market has witnessed significant changes in recent years, driven by economic fluctuations, evolving tenant preferences, and the impact of global events such as the COVID-19 pandemic. 

As we prepare for 2024, the industry continues to experience market uncertainty. CRE firms are on a quest to cut costs, maintain cashflow, and navigate today’s economic conditions. But, you need the right tools to understand and predict the future and keep a pulse on what’s happening. 

Our panel of experts, Rob Finlay, Founder and CEO of Thirty Capital, Webster Hughes, Ph.D., Managing Director from Thirty Capital, and Gleb Nechayev, Head of Research and Chief Economist from Berkshire Residential Investments, discussed this topic on a recent webinar. 


Read ahead for a recap of the conversation. Or, watch the webinar on-demand now!


Analyzing the Past to Inform the Future

The commercial real estate multifamily market is evolving. As we examine the past five years, these changes are apparent specifically in expenses (like utilities, insurance, and payroll) and revenue. If you study these trends over time, you can infer how they may impact your own properties and portfolio.  

Historical market trend analysis is important so that we can understand the past, the magnitudes of expense/revenue growth, individual line items, and how these variables differ across markets. In the current market, CRE owners/operators need to understand the past when they are making buy/sell decisions and analyzing property performance to most accurately project what’s to come.

Thirty Capital Performance Group recently released the  Multifamily Operating Performance Chartbook, which provides a clear picture of market trends across individual subtypes, different locales, and varying statement line items (like utilities and expenses).  During the webinar, we discuss this data and how to apply it to making strategic decisions about your own portfolio.


Breaking Down Multifamily Expense Growth Trends

Multifamily revenue, expenses, and net operating income (NOI) each had high growth in 2022. They grew by 9.26%, 9.20%, and 9.30% respectively. Chart 1, “US Multifamily: Revenue, Expense, NOI Per Unit Per Month”, and Chart 2, “US Multifamily: Revenue, Expense, NOI Annual % Growth”, below illustrate changes in US Multifamily revenue, expenses, and NOI over the last 5 years. 

Chart 2 shows that expense growth has accelerated especially during 2022. A key takeaway from these charts is that the CRE market is ever-changing. Because of this dynamic market, you can’t just assume consistent performance across revenue, expenses, and NOI. Instead, you should realistically project performance using past trends and then make educated decisions about your portfolio from there. 


Chart 1: US Multifamily: Revenue, Expense, NOI Per Unit Per Month

Chart 2: US Multifamily: Revenue, Expense, NOI Annual % Growth

Multifamily Chartbook Charts


Chart 3, “Same-Store Operational Benchmark Year/Year Change, %”, and Chart 4, “Same-Store Operational Benchmark Q2 2023 Year/Year Change, %” below show revenue, expenses, and NOI year-to-date for 2023. In comparison to Charts 1 and 2, you can see that revenue has somewhat moderated. However, expenses are still holding relatively steady, rising at about 8% or above year-over-year on the same-store basis. Chart 4, below, shows that revenue growth for garden apartments is still stronger than that of highrise apartments. However, garden apartments show higher expense inflation than highrises. As a result, highrise apartments have more favorable NOI growth than garden apartments. Said Gleb, “Understanding the interaction between revenue and expenses is key for making realistic assumptions about what will happen to NOI in any given period.”


Although traditionally the operations focus is on revenue, expenses should also be prioritized. Understanding the correlation between revenue and expenses is key for making realistic assumptions about what will happen to NOI in any given period. 


Chart 3: Same-Store Operational Benchmark Year/Year Change, %
Chart 4: Same-Store Operational Benchmark Q2 2023 Year/Year Change, %

Multifamily Chartbook Blog Charts


Preparing Now to Inform the Future

We’ve mentioned that income growth is slowing and that expense pressures have an increased impact on NOI (particularly on wages and payroll, insurance costs, and utility costs). Amidst all of the market changes happening over the last 5 years, “what do I do?” is constantly asked by  owners/operators and asset managers. 

In the past, acquisitions were the answer to this question. You could buy a property at low interest rates, fuel it, and expect revenue growth. Now, it’s not so simple. Asset managers must drill down into the data and, based on their portfolio’s performance, determine “is it me or the market?”. You can identify the root of your portfolio’s success and/or shortcomings by using peer-to-peer benchmarking. To benchmark your properties, you simply take your operating statement and compare it to the composite numbers in the Chartbook. Then, you would get an average across the whole CMSA. Or, you could use Thirty Capital Performance Group’s property-level compset to drill down deeper and receive individual comps for similar properties. 


Improving Cashflow: Align Proforma with Execution

Today, you must utilize everything in your wheelhouse to improve your property’s operations and efficiencies and create alpha. When it comes to improving cashflow, utility, insurance, tax, and debt management are all areas where firms can potentially cut costs. Said Rob, “It’s important for us to think beyond the black and white. [Instead], we should be innovative and think about [how we can] manage our properties and operations to create better efficiencies and find opportunities.”


Overall, historic data and trends should be analyzed to help you understand the past and make educated projections about your portfolio. Watch the on-demand webinar to learn about the insights shared in the Chartbook. Let’s predict the future together!

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