Valuing CRE - WACO


The most straightforward way to evaluate deals

In the world of CRE valuations, many investors get hung up on cap rates - a seemingly mystic, ambiguous tool - when used inappropriately. In reality, cap rates are a highly useful temperature gauge to weigh in on the market's sentiment for an asset class. In lieu of other CRE investment opportunities to compare cap rates against, they mean nothing. Also, in lieu of other investment opportunities like equities, annuities, and fixed income products, cap rates again, mean nothing.


Investing in general is only relevant from a relative value perspective. Investors are aiming to achieve a return that is warranted given their perception of the risk in light of an analysis of objective historical data, and future assumptions as to how the deal will operate.


Cap rates are one useful tool used to value CRE, but they are not perfect (nothing is). I wrote in a previous article how cap rates are derived from subtracting an annual growth rate assumption from a computed discount rate. While that is good and all, it doesn't capture the full picture.


Weighted average cashflow obligations can help fill the void the cap rates leave us... mainly because they are detached from future assumptions. They focus on the math today, and the achievable return on equity through cashflow. Cashflow matters more than anything because ultimately, without growth, that is all that is left in your return. Growth certainly doesn't always occur... cue the last few years.


So, what is the buzz about WACO?


Weighted average cashflow obligations (WACO) are the most cut-throat way to value stabilized real estate deals AND green light exit assumptions by computing your prospective buyer's math.

WACO calculates the yield (NOI) required to meet financing obligations to various equity and debt providers.

First questions to ask: how much debt does this property support?

Secondly, does the asset generate enough cashflow to cover debt service and hit my minimum equity cashflow hurdle?

Investors are all paying for cashflow streams, chasing after mis-priced streams to generate outsized returns.

After quickly sizing for an asset's permanent debt capacity based on trailing financials, you simply determine what your stabilized CF requirement is on your equity based on your risk tolerance. Then you blend the two together to determine the price a property's NOI can truly support.

In the example illustrations below, you can see a sample class C multifamily asset. On the left hand side, you will see WACOs based on amortizing debt. Column is your interest rate, and row is your equity CF hurdle. On the right hand side, you will see WACOs based on interest only debt. In multifamily and especially institutional multifamily assets, you can get programmatic interest only, and in some cases, full term IO. Therefore, it isn't quite accurate to value the property based on its amortizing debt obligations. Bidders with longer debt terms will likely get more IO quoted, so they will be able to solve for a higher price since they need less NOI to cover annual obligations on each dollar.

Each dollar of a project's total cost will have an obligation tied to it. NOI will be allocated towards paying debt service or paying equity partners.

In this case, at a hypothetical 6.5% rate, and an 8% stabilized equity CF yield requirement, a buyer with interest only debt is able to pay 8% more than a buyer levering up with no interest only, all other things equal. Yes, this is overly simplified, but it also makes a lot of sense.

I am leaving out growth assumptions, of course, which can't be understated. Properties end up trading for more in sellers' markets because bidders will stomach underwriting higher growth through the hold period to meet their returns. For example, they may price the deal by solving for an 8% equity CF hurdle, but they may accept 4-5% day 1 if they buy into the assumption of rental growth. As we have seen these past few years, you certainly cannot always do that.

Building to Hold vs Building to Sell

By Christian O'Neal • July 31, 2025
Why Building and Holding Real Estate for the Long- Term Delivers Superior, Tax-Efficient Yield 

Rent Control - Does it Work?

By Christian O'Neal • July 31, 2025
Rent Control: A Well-Intentioned Policy That Misses the Mark In the debate over affordable housing, few policies stir as much emotion—or controversy—as rent control. Advocates see it as a way to shield tenants from rising rents. Critics argue it does more harm than good. When you examine the economic evidence and real- world outcomes, the conclusion becomes clear: rent control is a deeply flawed solution to a real problem. What Is Rent Control? Rent control is a policy that limits how much landlords can increase rent, either through caps tied to inflation or fixed annual percentages. On paper, it sounds compassionate: protect renters from displacement and make cities more affordable. But in practice, rent control reduces the supply of available housing, discourages new development, and often hurts the very people it's meant to help. Why Rent Control Backfires 1. It Discourages New Construction Developers are less likely to build in markets where future rent growth—and thus returns—are capped. Why take the risk of developing multifamily housing in a city where your upside is limited and your operating environment is politicized? 2. It Drives Property Owners Out of the Market Faced with strict rent regulations, landlords may convert rental units to condos or remove them from the market altogether. Fewer units mean more scarcity, which ultimately drives prices higher for everyone else. 3. It Distorts Housing Allocation Rent control encourages long-term tenants to stay in apartments they might otherwise outgrow or vacate. This locks up valuable housing stock and prevents more dynamic turnover, often freezing lower-cost units in place for higher-income tenants. 4. It Creates a Two-Tiered Market Markets with rent control often develop into two separate ecosystems: regulated apartments that are underpriced and hard to find, and unregulated units with inflated prices to compensate for suppressed supply. The California–New York Split: A Tale of Two Approaches Historically, California and New York have been peers in over-regulating rental housing. But recently, they’ve taken different paths: California's Recent Steps Forward:  Voters rejected rent control expansion (Prop 21 and earlier Prop 10)  Streamlined approvals and reduced CEQA abuse to promote new development New York's Recent Moves Backward:  Passed “Good Cause Eviction” law—effectively rent control in disguise  Political calls for rent freezes and demonization of landlords If you’re an open-minded apartment developer evaluating both markets today, California’s message is increasingly: We need you. New York’s? Not so much. To be fair, both are still difficult places to build housing, and cities like Los Angeles and Berkeley remain deeply anti-development. But California has shown progress by recognizing that you can’t claim to be pro-housing while simultaneously vilifying those who create and operate it. A Misalignment of Incentives A core problem with rent control is that it treats housing supply as fixed and ignores the private sector's role in expanding it. If developers and operators are stripped of potential upside—and burdened with unpredictable political risk—they simply stop building. Even well-intentioned pro-development plans (like NYC’s "City oare undermined when operators believe they’ll be punished after delivery through hostile regulation or public scorn. You can't be truly pro-development unless you're also pro-operator. Policies that foster collaboration, not scapegoating, create the conditions for long-term affordability. The Real Way Forward Instead of imposing artificial caps, cities should focus on increasing housing supply through zoning reform, expedited approvals, and public-private partnerships. The more units that come online, the more pricing power shifts away from landlords and toward tenants—naturally. Rent control is seductive in its simplicity but devastating in its consequences. It’s a policy that tries to solve a supply problem with demand-side restrictions—and in doing so, it often makes things worse. At Alpha Equity Group, we believe that smart, sustainable development is the key to housing affordability. And that requires sound economics, not political theater.

Into the Future – Making Sense of Rates in a World That Doesn’t

By Christian O'Neal • June 24, 2025
In the world of capital markets, clarity is often fleeting — and today, it feels downright elusive. The Federal Reserve’s latest June dot plot offered little in the way of certainty. While the median projection sees the Federal Funds Rate in the mid-3% range by the end of 2026 , the dispersion among voting members is striking. Seven members predict no rate cuts in 2024 , reflecting just how divided the committee remains in the face of conflicting data. This latest update marks a 25-50 basis point shift downward from May , but the overarching theme is one of caution, not conviction. That sentiment is mirrored in the economic projections. Core PCE inflation , the Fed’s preferred inflation measure, is now expected to end 2025 at 3.0% , 30 basis points higher than earlier forecasts. Meanwhile, real GDP is forecast to slow from 2.3% in Q4 2024 to just 1.7% in 2025 — another sign that the lagged effects of monetary policy are expected to begin to show. At the same time, the Fed’s balance sheet has shrunk dramatically, from a peak of $9 trillion in April 2022 to just $2.3 trillion today . That quantitative tightening, coupled with a lack of consistent inflation suppression, leaves both equity and bond markets vulnerable to further volatility. This all feeds into an uncomfortable truth: rates are likely to remain higher for longer , and the market is struggling to price that reality. The VIX index , a 30-day forward-looking gauge of volatility in equities, is trending higher. When volatility rises even as indices fall, credit spreads widen , liquidity tightens, and financing risk surges. For commercial real estate investors , this has enormous implications. As we explored in our recent article on CRE Price Discovery , the market remains in flux. The bid-ask spread in real estate is still somewhat wide, and most transaction activity today is being driven by maturing debt — not opportunistic investments banking on future growth. This means valuations are being forced downward, especially for assets that were purchased or refinanced at ultra-low rates in 2021–2022. Consumer behavior is also in transition. Household formation is slowing, and personal savings rates are slowly ticking up although they are significantly down from longer term averages – which could reflect folks bracing for economic turbulence. U.S. household formation currently stands at 1.058 million, down 7.68% from last month’s 1.146 million and down 47.73% from 2.024 million a year ago. Looking globally, demand for U.S. Treasuries remains a critical economic indicator that has trickling effects on the economy . A strong bid-to-cover ratio — like the 2.67x seen at the June 11th 10-Year Treasury auction , with nearly 88% of bids from foreign banks — is encouraging. It suggests continued faith in U.S. fiscal credibility and currency strength despite market apprehensions in our strength, such as the US credit rating being downgraded by Moody’s. This equilibrium is rather fragile. Should the U.S. continue to run massive budget deficits with a debt-to-GDP ratio north of 120% , investors may begin to demand higher yields — or worse, seek refuge in alternative stores of value. Gold is one such store. The World Gold Council recently reported that 76% of central banks expect to increase their gold holdings over the next five years , up from 69% in 2023. This flight to real assets reflects growing concern about the long-term value of fiat currencies — and a desire to hedge against systemic risk. The Bottom Line  Rates are likely to remain high through 2025 and into 2026 Inflation remains persistent but progress has been unclear Growth is slowing, and volatility is rising Real estate is repricing around debt maturity events Global capital is shifting cautiously, looking for safety At Alpha Equity Group, we believe this is a time for discipline, not risk-taking. We’re staying patient, watching the data, and investing defensively — focusing on secured debt positions and capital preservation. While others chase uncertain upside, we’re building long-term value through downside protection while we wait out the convergence of dozens of factors completely outside our control.
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