Multifamily Development Stress Tests: Interest Rates &amp; Cap Rates
Curious on what levels others are stressing class multifam modeling for interest rates and and exit cap rates? 

Anyone in the process of a development that could share some of their thoughts/assumptions?
[{"id": "imgn9dv", "text": "From my western canadian perspective, It\u2019s a crap shoot between costs where they are at and interest rates heading upwards.\n\nFor me, Projects that are 1 year out from shovels in ground are difficult to pro forma currently as I hope costs will stabilize and interest rates don\u2019t increase too much more.\n\nIn the end, It is difficult to predict exit cap rates without knowing more where interest rates might be at end of development.  This being said rents in my markets keep increasing so that may save the day?\n\nSorry for lack of real numbers.  Development is challenging right now.", "replies": [{"id": "imhgah1", "text": "Agreed. And yea the rent growth assumptions I have used are 3% but the same market has seen much higher with extremely limited availability despite a lot of new supply.", "replies": [], "depth": 2}, {"id": "imwe2zh", "text": "At the end of the day an UW exit cap can often be irrelevant. It\u2019s not conservative to UW a 6% exit cap if you\u2019re trending rents at 5% YOY and not assuming a buyer tax reassessment. On the flip side a 4.5% exit with rents proven out today and full tax reassessment assumptions isn\u2019t necessarily aggressive. Focus on your costs and respective yield and solve for a exit basis that makes sense. Your biggest risk in putting shovels in the ground in this climate is knowing your costs can easily go 20% over.  Sensitize unleveraged yield on cost for that scenario with rents proven out today and move on if it\u2019s not at least 150 bps over in-place cap rates today. Don\u2019t try and guess what you can\u2019t control", "replies": [], "depth": 2}], "depth": 1}, {"id": "imgsnpd", "text": "6% terminal caps right now", "replies": [{"id": "imhg5mz", "text": "Really?? What type of markets for a 6 cap? Top 50 MSA seem to still be strong at sub 4%. A move to 6% would be significant.", "replies": [{"id": "imii1wa", "text": "Secondary and tertiary mainly.  If it cant underwrite to a 6% terminal cap on 3 year trended rents then I would pass\n\nKeep in mind the market is resisting the reality of current rate environments. Cap expansion is coming", "replies": [{"id": "imj3wo4", "text": "Just to clarify, is your 6% terminal cap the developers cap rate stabilized and it would sell for say 5% cap (just example) to get a margin or is 6% the selling cap rate? (And developers is higher)?", "replies": [{"id": "imk5amc", "text": "I not sure what you mean by developers cap.", "replies": [{"id": "imlln4p", "text": "Cap rate on your costs vs cap rate at selling price.\nIe:   build a building to 6.5% cap rate and and sell or refinance it for take out financing for a lower of 5.5% means profit for developer.\n(assuming market cap rate for sale transactions is lower than the developer\u2019s cap rate on costs otherwise no profit)", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "imwf4ry", "text": "But what are you trending rents at? We get a lot of lp equity requests that yes model a shit ton of cap rate expansion but just make back the returns with no tax adjustment on the buyers NOI, rents at exit that are not proven out, and light controllable expenses.", "replies": [{"id": "iv248xz", "text": "Just seeing this. But agreed that I see a ton of what you explained. Sometimes I feel like my modeling isnt as agressive as it should be sometimes. \n\n&amp;#x200B;\n\nBut also curious: if you are working on development projects now: how are those going? Feel free to DM me if you would like. I can share some of our current struggles as well.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]