Navigating Shifting Returns Projections in Commercial Real Estate Syndications 

Investment returns projections in the current market have shifted somewhat from the highs a few years ago. However, commercial real estate returns are still advantageous compared to historical stock market returns. Keeping a close eye on projected returns is essential for investors involved in commercial real estate syndications. Two key metrics that drive investment decisions are internal rate of return (IRR) and cash-on-cash returns. However, in today’s ever-evolving market conditions, projections for these returns have seen significant shifts, especially for syndications targeting multifamily and storage facility assets. 

In consideration of current events and to provide reliable numbers for our investors, we focus on conservative underwriting and acquisitions. It is important to include a variety of less risky assumptions when deciding whether a property meets our investment strategy, always with the goal of exceeding projections where possible. 

Multifamily Projections: Rent Growth Momentum Persists  

The multifamily sector has experienced a remarkable run in recent years, fueled by robust demand and limited supply in many markets. Syndicators pursuing value-add strategies by acquiring and renovating 100+ unit properties have benefited from this dynamic, often exceeding initial IRR and cash-on-cash return projections. 

While some moderation in rent growth is occurring, the multifamily market remains fundamentally strong. Well-executed renovations and strategic operations can still yield an attractive projected IRR of 12-15%, and it still may be possible to exceed 13-15%with some properties. Cash-on-cash returns in the 6-10% range are attainable for investors, though some markets may trend toward the lower end of that spectrum. 

The RV/Boat Storage Boom: High Projections Amid Rising Demand 

An emerging asset class gaining traction is luxury enclosed RV/boat storage facilities. With features like power hookups and roll-top doors, these facilities cater to a growing demographic of RV and boat enthusiasts seeking secure, high-end storage solutions. 

Syndicators like us, who are developing this type of ground-up facilities are projecting IRRs north of 17% in many markets. The cash-on-cash return projections are equally compelling, often forecasted in the 7-10%+ range upon stabilization. The combination of strong demand drivers, limited existing supply, and the recurring revenue model underpins these robust projected returns. 

It is essential to note that ground-up developments carry inherent risks, and return projections hinge on factors like construction timelines, lease-up periods, and operating expenses. The RV/boat storage development that we offered as a syndicated real estate investment, is well underway and beginning leasing up. The design, acquisition, funding and construction phases have taken less than a year. When compared to residential construction, the timeline for building this type of storage facility is a fraction of that needed for single or multifamily homes. This reduction in time between investment close to the development beginning to earn income, represents reduced risk, as well. 

Factors Impacting Return Projections 

While asset type and market fundamentals are primary drivers, several macro factors influence return projections across commercial real estate syndications: 

1. Interest Rate Environment: Rising rates can impact both acquisition costs and refinancing proceeds, affecting levered returns like IRR. 

2. Construction Costs: Supply chain constraints and labor shortages have elevated construction costs, potentially compressing returns for ground-up developments and value-add renovation projects. 

3. Exit Capitalization Rates: Projections rely on assumptions about exit cap rates, which can fluctuate based on market conditions and impact asset disposition proceeds. 

4. Macro Headwinds: Economic factors like inflation, consumer sentiment, and job growth can influence demand drivers and operating fundamentals. 

Ultimately, return projections in commercial real estate syndications are dynamic, requiring active monitoring and recalibration as market forces evolve. Experienced syndicators, like us, employ robust underwriting practices, stress-testing projections against various scenarios to safeguard investor interests and deliver attractive risk-adjusted returns. 

Additional Resources: 

The CRE Acquisition Due Diligence Playbook  » CREI Partners 

Beyond the Deal: Lessons Learned from (Almost) Investing in Commercial Real Estate » CREI Partners 

Where Do Investment Funds Go in a Real Estate Syndication?