In commercial real estate, especially in today’s market, underwriting is no longer just about plugging numbers into a model — it’s a dynamic exercise in balancing risk, reward, and reality. I’ve always thought of it as a system of pulleys and levers. Each assumption we make — whether about rents, expenses, debt, or deal structure — acts as a lever. Pull one too hard, and the others shift. Tug just right, and you might bridge the bid-ask gap between buyer and seller expectations.

This analogy becomes especially useful when deals don’t pencil at first glance. In these situations, success often comes down to how well you understand which levers can move and which are fixed in place.

Understanding the Levers

A handful of key drivers are at the core of every multifamily deal. These levers not only shape returns but also must flex to accommodate changes in the broader business cycle, including rising interest rates, tighter lending standards, and evolving investor sentiment.

• Revenue Assumptions: This includes everything from current rents to potential rent growth, lease trade-outs, and ancillary income. If rents are under market, that lever might hold untapped potential — but only if the path to achieving it is realistic. Value-add strategies are often a critical piece here. Interior upgrades like new flooring, appliances, lighting, and fixtures can justify higher rents when market comps support the repositioning. Likewise, exterior improvements — such as refreshed curb appeal, upgraded amenities, or added community features — can drive both revenue and retention. The key is backing every assumption with evidence and aligning it with the local market’s demand and price tolerance.
• Operating Expenses: Are expenses bloated due to mismanagement, or are they already optimized? Sometimes, a simple shift in property management, utilities structure, or staffing model can change the trajectory of a deal. Even modest adjustments to insurance, payroll, or admin expenses can have outsized effects on net operating income and yield.
• Capital Structure: This is where underwriting must be especially nimble in today’s environment. With interest rates rising and lenders pulling back, traditional financing assumptions may no longer apply. Loan-to-value ratios are compressing, debt service coverage ratios are tightening, and many deals that worked at 4% debt are struggling at 6%. That means pulling levers elsewhere — lower basis, higher equity, or more creative structuring — just to make a deal pencil.
• CapEx and Renovation Strategy: The scope, timing, and cost of capital improvements have a direct impact on both the business plan and underwriting performance. A phased approach to unit renovations aligned with natural turnover can help mitigate vacancy loss. Strategic investments in amenity upgrades, parking lots, signage, or utility infrastructure can elevate tenant satisfaction and support higher rent ceilings. Especially in a capital-constrained environment, prioritizing ROI-driven improvements over aesthetic-only upgrades becomes a critical underwriting decision.
• Exit Strategy: Are you modeling to a conservative exit cap? Is there a compelling value-add story that justifies compression? In a volatile cycle, exit assumptions can make or break the model. Building in margin for error, understanding buyer sentiment, and staying honest about future capital market conditions are essential for a defendable underwriting story.

These levers don’t operate in isolation. They move together — and they move differently depending on where we are in the cycle. What worked in 2021 might not work today. Successful underwriting today means modeling returns, diagnosing risk, and adapting quickly.

Tailoring the System to the Buyer

Not every buyer is looking for the same outcome, and that’s where underwriting becomes both an art and a strategy. Understanding what a particular buyer values most allows you to pull the right combination of levers to craft a deal that fits their objectives.

• Stabilized Buyers: Some investors are focused on durable, day-one cash flow. They’re less concerned with IRR, cap rate, or even long-term upside. For them, the underwriting effort centers on validating in-place income, ensuring expense efficiency, and evaluating risk on a hold-and-collect basis. These deals require pulling levers that stabilize operations, limit volatility, and create predictable returns.
• Value-Add and IRR-Driven Buyers: On the other end of the spectrum, some buyers chase returns through short-term value creation. They may be willing to take on weaker in-place cash flow if the business plan leads to a stronger IRR or higher equity multiple. In these cases, the model focuses more on renovation cost, lease-up assumptions, exit pricing, and hold period timing.
• Institutional vs. Entrepreneurial Capital: Institutional buyers may underwrite with a focus on risk mitigation and long-term asset management, while entrepreneurial sponsors may be looking for upside they can unlock through aggressive repositioning or operational creativity.

The key takeaway? The system of pulleys and levers doesn’t exist in a vacuum. It should be calibrated to the buyer’s investment goals, and if you’re on the sell side, it should be flexible enough to appeal to different profiles through alternative structures or scenario modeling.

Bridging the Gap

Buyers and sellers often feel like they’re worlds apart. But with the right levers, the gap can be narrowed. A seller focused on price might respond positively to creative structuring, like a two-phase close, earn-out, or seller carry. A buyer unsure about risk may adjust their underwriting to reflect more conservative rent growth while identifying overlooked operating efficiencies.

The beauty of this system is that it’s both technical and creative. As analysts, we use financial models, but the real value is in interpreting them and having the market knowledge to know which assumptions can be defended.