Underwriting Changes In A Recession

May 4, 2020 | Wildhorn Insights

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COVID-19 has brought about many uncertainties in life.  How long until we find a vaccine? What social customs and ways of life might be forever changed?  When might schools and businesses reopen, and when is that even safe?  What does a new “normal” look like?   

At Wildhorn, we’re asking ourselves all of these same questions.  We’re also (obviously) focused on the impact the pandemic is having on the economy, and specifically the multifamily industry.  In the first month that we have data multifamily has fared better than most industries, and beaten projections, as our collections came in over 95% and much of the industry has reported similar numbers.  Our immediate focus has been on asset management and making sure our 1800+ units portfolio are prepared and well cared for.  

While we aren’t sure when the pandemic ends or when the world starts to reopen, we are committed to this industry and believe it provides the best investment vehicle around.  In our next article, we’ll talk about why we believe so strongly in the resilience of our native Central Texas markets.  However in today’s article we want to focus on finding new deals, and our approach to underwriting in uncertain times. 

As of today, the acquisitions pipeline has nearly dried up.  Most regional groups have been focused on operations and everyone realizes it may not be the best time to try and sell a deal.  All our broker friends are advising clients not to launch a new deal right now.  Many institutional groups have paused activities also, travel bans make it difficult to tour markets and assets. With the general uncertainty of the global economy’s future we think the caution shown in these actions are well placed.  On the lending side, the market has been extremely volatile–with many lenders stopping lending completely, while Fannie Mae and Freddie Mac have had wild swings in their spreads and reserve requirements.  All in all, a challenging environment to try and sell a deal. 

That, however, is not stopping everyone, and there remains a very small number of prospective properties that are out in the market.  Most of them are on an off-market basis, but they are out there.  And we’re making sure we take a long hard look at each and everyone we hear about.  

Here are four reasons why we’re looking at deals, in a time when many people aren’t: 

  1. Our very first question about every deal right now is “why are they selling now”.  We are always interested in the story of an asset and want to know the background on it; today that story is even more important.  Who is the seller and why are they moving forward with a sale? Sellers right now have a strong motivation or reason to sell, and we want to understand the dynamics and how that impacts the process.  Maybe we can negotiate a better price, or find a creative solution, but it’s imperative to know why a seller is bringing a new deal to market so we can work through that. 
  2. The second reason we are looking at deals:  being opportunistic.  We recently wrote about how we’re planning to be opportunistic and there is no better time than a recession to capitalize.  There are fewer groups out playing right now which eliminates a lot of competition and noise.  And the market dynamic has shifted in the favor of buyers. Gone are the demands for hard money, short due diligence periods, etc.  As a buyer we can now have more control with less risk and perhaps pick up a deal that would have been too competitive a short few months ago. 
  3. Third, this is a great time to strengthen broker relationships (it’s always about relationships for Wildhorn). We recognize this is a challenging time for everyone in the industry–buyers, sellers and brokers.  If they have a seller wanting to push forward, the brokers have a smaller buyer pool to speak with.  There are more questions to be answered.  In short, their job is tougher today than it was two months ago.  But it provides us a great opportunity to give them some feedback, help understand our thinking and take stock of the market.  It also gives us a lot of phone time talking with those brokers as we work through a deal.  Anytime we have the chance to build better relationships, we’re all in. 
  4. Finally, we’re underwriting deals to keep a pulse on the market.  How do we size up things right now?  What are seller’s expectations and how far is the gap compared to what we are prepared to pay? What did “pre-Corona” pricing look like and where do things stand today?  How is this asset and submarket doing on collections?  There is no better way to stay in touch with a market than to underwrite deals.  So even if it’s not a deal we’d normally look hard at, there is value in us underwriting it–and so we will.

Changes to Our Underwriting

So now you know why we’re looking at deals.  The big questions we’re wrestling with is how do you underwrite them? We certainly recognize that we will exit the pandemic straight into a recession, and that the assumptions we had two or three months ago may no longer be valid. But which assumptions do you change, and by how much?  Our general thinking is that it may take 2-3 years for Central Texas to fully recover from the recession.  While it will likely bounce back faster than many places, the number of jobs that were lost will take time to be replaced and we want to take the conservative approach.  With that thinking, here are the major things we’re adjusting as we look at deals in a post-Corona environment. 

Rent Growth

In Austin and San Antonio, the multifamily market has been very strong.  Over the last several years, it’s not been uncommon to see certain submarkets with 5%, 6% and even 7% organic rent growth year over year.  While we would never underwrite that much rent growth even pre-Corona, you certainly have to change your attitude towards rent growth today. 

We’ve adjusted our models to account for 0% rent growth over the next year, and then very slowly start to recover.  We’re talking 1%-1.5% the following year, and then 2.5%-3.0% the next.  Of course, it could bounce back quicker than that (and many people think it will given the lack of supply that will be delivered), but it’s our job to stay conservative.  We feel quite certain rent growth will be almost non-existent this year. 


Austin and San Antonio have averaged occupancies in the mid- to upper-ninety percent for the last several years.  Seeing a deal that has sustained 96% (while having 6% rent growth) has not been uncommon.  But with the recession settling in, and the possibility of residents moving out, moving away or getting a roommate, it’s logical to plan for a higher vacancy rate.  In the good times pre-Corona, we were underwriting to a 93%-94% occupancy rate.  Today, we’ve lowered that to 89%-91% for Year 1, before a slight improvement next year. While we believe population growth will continue, and supply will take a hit as new deals struggle for financing, it’s still prudent to predict an uptick in vacancy. 


For the first time in several years, we’ve underwritten concessions into our models on these new potential deals.  If vacancy does start to spike, the market will offer incentives for people to move in.  We’re already seeing this in a very small way in a couple of our submarkets where competitors are offering $299 move-in specials or waiving application and administrative fees. We’ve added concessions for Year 1, halved them in Year 2 and then burned them off completely–again subscribing to the theory Central Texas recovers in 2-3 years. 

Exit Cap Rates

The single biggest factor in determining returns is the exit cap rate.  In this metric, you’re trying to determine where the market will be trading on deals when it comes time to sell.  Cap rate compression over the last decade has made every single investor look like a genius, and made investors a lot of money.  Now, for the first time you can’t just assume cap rates will be lower when you sell.  

For the record we always have expansion in our model, expecting cap rates to be higher when we sell than when we buy.  But today, you have to be even more conservative.  And this has been the trickiest metric to ascertain. There is so much to cover on this topic, that we’re going to devote a whole blog to it.  For now, just know we are underwriting at least 50bps more expansion than we were pre-Corona, and in general we’re now 100bps+ higher than the market was trading two months ago. 

Are we right?  Are we wrong?  As always, probably a little bit of both. 

What we do know is we must continue to look at new deals to stay abreast of what’s happening.  This pandemic has changed a lot of people’s thinking about a lot of topics. For Wildhorn, we’re steadfast in our belief that Central Texas Multifamily remains a solid investment over the long-term, and we’re spending all of our time working to uncover the next great opportunity.  

Andrew Campbell

Written by Andrew Campbell

Andrew Campbell is a native Austinite and Managing Partner at Wildhorn. He is a real estate entrepreneur who first broke into the business in 2008 as a passive investor. In 2010 he transitioned into active investing and management of a personal portfolio that grew to 76 units across Austin and San Antonio. He earned his stripes building and managing his personal portfolio before founding Wildhorn Capital and focusing on larger multifamily buildings. At Wildhorn, he is focused on Acquisitions and maintaining Investor Relations, utilizing his marketing and communications background to build long-term relationships.

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