Archives
October 2020
Categories |
Back to Blog
What are Real Estate Concessions?7/21/2020 Introduction
This article will discuss concessions. Concessions are a critical line item in any real estate model. Concessions frequently show up in multifamily underwriting. If you work in a real estate private equity job focused on longer-lease buildings, the same concept is often referred to as free rent. Regardless, real estate private equity firms would certainly expect you to understand concessions before you walk into an interview. Concessions Concessions are free rent. Properties offer free rent to tenants to entice them into signing a lease. Ideally, concessions burn off over time until you offer no concessions. Concessions are often found at properties in lease up. Lease up is the phase between a property’s development completion where people slowly fill the building before it stabilizes at its full ~95% occupancy. Property lease up is a critical period that is impactful to returns. Given the time value of money, lease up is at the most impactful period at the front of the investment timeline. Thus, you want to minimize your losses. Concessions are one of many tools property managers use to cut down their lease up period. Stabilized properties also offer concessions, though it is very market driven. First, let’s say there are 10,000 luxury rental units in a major city. None of these properties are offering concessions and rents are rising. A few developers notice this hot market and decide to construct 5,000 more units of luxury rental apartments. Now those original 10,000 units are competing against a 50% increase of new supply that is taller, shinier, and sexier. In this scenario, the success of the market brings competition which forces the hands of those stabilized apartment units to offer concessions to maintain a competitive edge. Remember, most residential leases last one year and tenants are generally not hesitant to move. When a local economy is hit hard, stabilized properties also suffer. Jobs decline, less people are moving into the city, and supply is abundant. Houston and oil-rich Texas offer a case study in economically-driven concessions. Because oil dropped so low in 2014 and remained quite low, the local industry declined. I personally know some people who signed a two year lease in Houston with ten months free rent. Learn with Leveraged Breakdowns Recruiting for real estate private equity jobs can be difficult. But that’s why Leveraged Breakdowns is here to help! We work at megafund real estate private equity firms and share our knowledge with outsiders. Check out our various resources such as interview guides and case study lectures that help you break into this exclusive industry.
0 Comments
read more
Leave a Reply. |