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Some of the largest multifamily operators in the country are raising billions in distressed asset funds to acquire properties they previously owned – properties that lost significant value after interest rates tripled and underwriting assumptions collapsed. According to Steven Libman, founder of Investing With Purpose™, this dynamic reflects a systemic failure in how the industry defines conservative underwriting.
Libman says the past 36 months have exposed a gap between what operators called conservative and what conservative actually required. The result is widespread pain across the multifamily market and a set of hard lessons about stress testing that the industry is still absorbing.
When Conservative Underwriting Met a Market Nobody Modeled
Between 2020 and 2023, multifamily acquisitions were underwritten at historically low interest rates. Deals penciled at 2%, 3%, and 3.5% financing. Cap rates were compressed. Values were high. Operators who described their underwriting as conservative were, in many cases, modeling modest rate increases – not a tripling.
When rates moved from roughly 3% to closer to 6%, the math broke. Cap rates expanded. Values fell. Properties acquired at aggressive prices with floating-rate debt became distressed. Operators who had raised capital on the strength of those underwriting models found themselves managing assets worth significantly less than what was paid.
“In the last 36 months, nobody could underwrite to what happened in the market,” Libman says. “Interest rates tripled.”
Libman points to at least one major firm that reported a $900 million loss in a single quarter and subsequently raised $10.2 billion in a distressed asset fund – in part to acquire its own depreciated properties and reset its basis. He calls this a rational tactical response, but also a stark illustration of what happens when stress testing stops at the edge of plausible scenarios.
The Geopolitical Variables That Now Drive Cap Rates
Libman’s argument extends beyond interest rate modeling. He contends that conservative underwriting in 2026 must account for variables most real estate models ignore – among them, the trajectory of the Iran conflict and its effect on oil prices.
His reasoning traces a direct chain: oil prices affect inflation. Inflation affects Federal Reserve policy. Federal Reserve policy affects interest rates. Interest rates affect cap rates. Cap rates determine property values. A ceasefire in the Middle East moved oil prices down 35% in a matter of days, opening the door to rate cuts. A resumption of hostilities reversed that movement within the same week.
“Literally, even commercial real estate is affected by this war because if inflation continues to climb, they’re going to raise rates,” Libman says. “If they raise rates, it lowers commercial real estate values.”
Libman is not arguing that operators should forecast geopolitical outcomes. He is arguing that the range of plausible scenarios is wider than most underwriting models acknowledge, and that stress tests should reflect that width. The question for any acquisition is not whether a ceasefire holds – it is whether the investment survives if it doesn’t.
What Stress Testing Actually Requires
Libman defines conservative underwriting more narrowly than the industry’s common usage. The standard should not be modeling a base case with a mild downside scenario. It should be asking whether the investment survives if the market stays exactly where it is – no rate cuts, no cap rate compression, no exit at the projected price.
“Conservative underwriting means just that,” Libman says. “You need to stress test what happens if the market stays the same.”
He also flags a specific underwriting error he sees repeatedly: operators building exit assumptions that depend on rates declining and values recovering. When those assumptions don’t materialize on schedule, operators face extended hold periods and forced sales at losses. The operators who have navigated the current cycle most successfully, in his view, modeled scenarios in which they were wrong about the future – and built portfolios that could absorb that outcome.
“We’re not in the room making those decisions,” Libman says of rate and geopolitical outcomes. “So we just have to be sensitive to the fact that that can happen.”
How Investing With Purpose Approaches Acquisition Underwriting
At Investing With Purpose, Libman says the firm underwrites each property as a standalone asset, stress testing for cap rate expansion and interest rate increases rather than assuming a favorable exit environment. Tax benefits, including depreciation from cost segregation studies, are treated as a layer on top of the property’s standalone case – never as a component of the base return projection.
“We underwrite the property as a standalone, and then the tax benefit is kind of the cherry on top,” Libman says. “We never make it part of our underwriting assumptions.”
This separation is deliberate. Libman argues that operators who blend tax benefits into projected returns obscure the property’s actual performance and create return expectations that depend on tax outcomes rather than asset fundamentals. In a market where the last 36 months have demonstrated how quickly fundamentals can shift, that distinction carries more weight than it did when rates were low and values were rising.
For operators evaluating acquisitions in this environment, Libman’s framework suggests a specific question: does the underwriting survive if the operator is wrong about rates, wrong about timing, and wrong about the exit? The firms that can answer yes without relying on tax benefits or favorable macro conditions are the ones whose “conservative” label means what it claims to.
About Investing With Purpose: Investing With Purpose is a faith-driven multifamily real estate firm based in Bluffton, SC. The firm invests in multifamily assets nationally, combining institutional-caliber investment management with an intentional values framework where capital meets calling. Learn more at iwpurpose.com
Disclaimer: This article is based on information provided by the expert source cited above. It is intended for general informational purposes only and does not constitute legal, financial, or real estate advice. Readers should conduct their own research and consult qualified professionals before making any real estate or financial decisions.
Disclosure: Individuals or companies mentioned may have a commercial relationship with KeyCrew.