Market Rent vs. Organic Rent Growth

Market Rent Growth: The overall increase in rental rates for similar properties in a geographic area, driven by supply and demand. Market Rent Growth reflects broader economic forces.

Organic Rent Growth: A property-specific increase in rental income from lease-ups and renewals - driven by raising below-market rents to match market rates. This is controlled growth driven by internal improvements.

A series of questions to ask sponsors:
“Is the rent growth at this property anticipated to be market-driven, or organic?

If market-driven, how do you anticipate the 3,000-unit delivery pipeline to impact growth, as those new units are absorbed here?

If organic, what are you doing differently than the existing sponsor has tried to drive those rents? How have you validated your value-add plan? How are Nest thermostats going to increase rent by $100? How is new LVP flooring and changing the refrigerator/stove from black to stainless steel going to increase revenue here?”

As a final point, if the return on cost (monthly rent alpha X 12 months / total cost per unit) is lower than the projected property-level holding period’s IRR, the value-add plan is not accretive to the deal, and the sponsor is wasting money.

i.e. If the deal’s projected IRR is 20%, it does not make sense to spend $6,500/unit to anticipate $75/month rent increases, because a 13.8% return on cost ($75 x 12 / 6,500) is not accretive to the project and pulls the total returns down.