📈 How to Model a Lease-Up Analysis

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Author

Justin Goodin
March 11, 2023

This is how to model a new development or a property that is not stabilized - Lease-Up Analysis

'Lease-up' is the time period between pre-leasing (leasing before building delivery) and stabilization (when 90% or higher occupancy is reached).

Lease-up is the critical time when the property management company works on signing as many leases as possible as quickly as possible.

A lease-up analysis (pro forma) will clearly show how many tenants are moving into the property on a month-by-month basis until the project reaches stabilization.

When to Model a Lease-Up

🔹New Development:

If you are underwriting a new development property, a lease-up analysis will be critical to model. If leasing up a new construction community, that timeline is typically anywhere from 6 to 15 months, depending on the size of the community and market.

For example, if you are underwriting the acquisition of a new development that is at 0% occupancy, you will have to model month-by-month how many tenants you expect to move in until stabilization.

🔹Not Stabilized:

As an underwriter, you many need to model the acquisition of a heavy value-add property that is not stabilized. Example being the property being at 40% or 50% occupancy at the time of acquisition.

Instead of inputting an arbitrary X% vacancy for your Year 1 pro forma, I would highly recommend creating a lease up analysis on a monthly basis.

Your lender and investors will want to see this level of detail. 

Underwriting a Lease-Up

Month by month lease-up pro forma

Here's an example:

  • 100-unit property

  • 50% occupancy at closing

  • Leasing up 10 units a month

In the above example, we expect to lease-up 10 units a month which will allow us to reach stabilization at month 5.

This is key: How many tenants you expect to move in each month and when you expect to reach stabilization depends on many factors. The market, advertising budget, asking rent amount, and even the time of the year can greatly effect these numbers. For example, December and January are typically very slow leasing months.

This is where feedback from an experienced property management company will be critical to your analysis. As more and more tenants move in, this should directly feed into your gross potential income calculation, as shown below.

Gross Potential Income

Having your property management company involved when creating your lease-up analysis is a great idea!

Operating Expenses

A quick note on your operating expenses when creating a lease-up analysis on a property that is not stabilized.

Some operating expenses will have no fluctuation whether the property is 50% occupied or 100% occupied. Mainly real estate taxes, insurance, and any service contracts that have a set fee per month.

Other operating expenses such as utilities, advertising, general admin, or even repair costs could vary as the project occupancy changes.

Obviously as your occupancy increases each month, so will the utility expenses. Advertising costs and general admin will most likely be substantially higher if the project is not fully occupied as you will need to do things to attract new residents.

Don't hesitate to reply back with any questions!

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Loss to Lease is Plunging, Renewal Rent Growth Will Decrease

Renewal rent increases will almost certainly cool significantly going forward.

For real estate investors: Loss to lease is a measure of upside and helped justify low cap rates the past couple years. Cap rates will have to expand somewhat given both a) higher rates and b) lower loss to lease.

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