Sensitivity analysis stress-tests an underwriting model against unfavorable scenarios. The discipline forces a clear answer to "what happens if the rent growth I assumed doesn't materialize, the cap rate widens, or interest rates rise?" For NYC commercial real estate where deals are large and holds are long, sensitivity analysis is the difference between a real understanding of the deal and a fragile pro forma.
Scenario Framework
Build three scenarios: base case (your most-likely outcome), downside (probable bad scenario, perhaps 25-30% probability), and severe downside (1-in-20 outcome, perhaps 5% probability). Each scenario changes the underlying assumptions — rent growth, vacancy, OpEx growth, exit cap rate, and (for levered deals) the interest rate on the take-out refinancing. The base case should hit your target return; the downside should still produce acceptable return; the severe downside defines the worst case.
Two-Variable Sensitivity Tables
A common analysis tool is the two-variable sensitivity table — typically exit cap rate (rows) × rent growth (columns), with each cell showing the resulting levered IRR or equity multiple. The table reveals how steep or shallow the return curve is across the most impactful variables. For NYC value-add multifamily, exit cap and rent growth dominate; for ground-up development, construction cost overrun and lease-up speed matter more.
Rent + Cap Rate + Interest Rate
The three variables that most drive NYC commercial real estate returns: forward rent growth, exit cap rate, and take-out interest rate. Each should be stressed independently and jointly. A typical stress: 50 bp cap rate widening, 100 bp interest rate increase, 200 bps slower rent growth (vs. base). The combined effect frequently turns a 14% base IRR into a 4% stressed IRR — a meaningful return haircut that should factor into bid discipline.
Specialty Stress Tests
Different deal types warrant different stresses. Office: vacancy duration, tenant default risk, LL97 retrofit cost overrun. Multifamily (free market): rent growth, vacancy. Multifamily (rent-stabilized): MCI/IAI rule changes, Rent Guidelines Board decisions. Conversion: construction cost, conversion timeline, lease-up speed, 467-m abatement schedule. Ground lease: reset mechanics, fee owner credit. Each asset class has its specific risks.
- Always run base / downside / severe-downside; don't evaluate single-point estimates.
- For levered deals, stress the take-out refinance rate, not just acquisition rate.
- Build the sensitivity table during diligence — the table is what informs the bid discipline.
- Skyline's broker opinion of value reports include sensitivity analysis on every NYC commercial asset.
Robert Khodadadian and Skyline Properties run sensitivity analysis on every NYC commercial real estate acquisition opportunity. The firm has closed $976M+ in NYC commercial real estate across $976M+ of stress-tested deals. Email info@skylineprp.com for confidential underwriting advisory.