Quick Take: While stocks have outperformed real estate in recent years amid a challenging period for the asset class, every economic cycle offers opportunities to create value. Economic uncertainty, driven by interest rate swings, supply chain issues, and evolving rental trends, introduces risks to real estate investing. Multifamily has historically weathered storms, but recent conditions, including the rapid rise in interest rates, tested portfolios deeply, as seen in refinancing strains from post-2022 rate hikes and distress in certain loan vintages. We can’t control macroeconomic trends, but we can mitigate their effects through proactive strategies like hedging and rigorous stress testing.
Our Risk Management Philosophy
At Origin, risk management is a core focus throughout our investment process. We employ multiple strategies designed to help protect capital, including conservative underwriting, moderate leverage, and detailed stress testing of our financial models. These practices are intended to position our funds to pursue attractive risk-adjusted returns across market cycles.
Since our founding in 2007, our strategy has been informed by 19 years of experience managing thousands of units, combined with proprietary technology like Multilytics®, our AI-powered analytics platform. Multilytics® enables granular analysis of submarkets, rigorous due diligence, and property-level scenario forecasting. This data-centric approach helps us anticipate volatility rather than merely respond to it.
During this downturn, we responded by raising the firm’s investment standards significantly and only the highest-quality opportunities advanced. Notably, we did not acquire any new assets for several years because none met the rigorous criteria. There are now many loans from this vintage that are maturing amid softening property performance, stricter bank underwriting, and reduced lender appetite, resulting in troubled loans and operators, as shown in the Newmark 4Q 2025 US Multifamily Capital Markets Conditions and Trends report below. Risk management is integral to us, not optional. Through hedging and comprehensive stress testing, we seek to position portfolios to participate in potential recovery.
The Process
We don’t just run standard projections when evaluating potential investments. We test key inputs in the financial models to quantify the impact of underperformance on outcomes. Assumptions are never perfectly accurate, so understanding downside sensitivity is essential. This level of scrutiny is what we believe investors deserve.
For the base case, we collaborate closely with the investment management team, who track real-time rents, expenses, and market conditions. This allows us to set realistic assumptions, as we prioritize actual observed rents over optimistic data points (including those from Multilytics®), and we build in appropriate reserves for staffing, marketing/leasing, and achievable leasing velocity, which have all shifted in recent years. This conservative stance is especially critical for insurance costs and property taxes. We do not simply rely on historical property trends or winning a tax appeal; we emphasize real-time data.
Beyond the base case, we model alternative scenarios to evaluate effects on costs, cap rates, exit prices, equity multiples, return on cost, and IRR. Examples include:
- Zero rent growth.
- Rents 10% below projections (projects only proceed if they remain attractive even under conservative rent levels).
- Multilytics® recession-forecasted rent declines, paired with varying cap rate assumptions, to determine the rent drop level that causes us to break even.
- In recent analyses, we’ve incorporated elevated recession probabilities as indicated by Multilytics®.
When underwriting development deals, we hold projected rents at current observed market rates rather than layering in rent growth assumptions, ensuring our projections reflect what the market supports today rather than what we hope it will support at delivery. We also test what the deal looks like at 20% higher construction costs, or 5% lower vacancy rates at sale, and floating-rate debt scenarios, allowing us to model worst-case debt service coverage ratios (DSCR) and prepare accordingly.
Although these factors are typically uncorrelated, we stress test scenarios where multiple adverse conditions align. While economic theory suggests rents and construction costs move in opposite directions across the business cycle, recent years have shown these relationships are not absolute—both can move against investors simultaneously, as occurred in 2021-2023.
Evaluating Profitability
Beyond stress testing business plan inputs, we analyze the estimated equity multiple by examining exit cap rates and sale prices. We validate projected sale prices using both cap rate and price-per-square-foot methods. If the exit price exceeds replacement cost, we require justification for why a buyer would pay more for an existing property than building new—such as rising construction costs, zoning constraints, or location advantages that create lasting competitive differentiation.
Once we’ve determined the appropriate inputs, we evaluate gross margin—the spread between our projected return on cost and current market cap rates. In simpler terms, gross margin measures the cushion between what we expect a stabilized asset to be worth and what similar properties are trading for today. As cap rates expanded from sub-3.5% lows to the 4.75%-5.25% range in recent markets, maintaining our minimum 30% gross margin threshold became essential to our risk management discipline. This buffer helps protect against valuation compression and ensures meaningful upside potential even if market conditions soften further.
| Upside | Base Case | Downside | Stress Test | |
|---|---|---|---|---|
| Exit Cap Rate | 4.50% | 5.00% | 5.50% | 5.75% |
| Equity Multiple | 2.4x | 2.0x | 1.7x | 1.5x |
| Net IRR | 26.9% | 20.8% | 15.0% | 12.0% |
Example of sensitivity chart
This disciplined, forward-looking approach — rooted in experience, proprietary analytics, and rigorous testing — is designed to help navigate volatility and pursue long-term multifamily opportunities.
Beyond Macroeconomic Factors
Climate risk management remains a priority, with significant resources dedicated to cost-effective mitigation across our portfolio.
Rising insurance premiums have emerged as a key financial impact. Our master insurance policies diversify exposure across lower-risk markets (e.g., Phoenix, Denver, Atlanta), helping absorb premium increases in higher-risk coastal areas.
In higher-risk markets such as Florida and Southeast coastal regions, we benefit from a deep commercial property and casualty insurance market with multiple carriers. The state of Florida also provides a reinsurance fund that helps stabilize the insurance marketplace and maintain coverage availability.
In Arizona, water supply is a common concern. However, Arizona reclaims and reuses 93% of total water usage, and according to the Arizona Department of Water Resources, overall usage declined 3% from 1957 to 2021—despite a 555% population increase and 2,137% growth in gross domestic product. While partly driven by reduced water-intensive agriculture, this trend demonstrates effective long-term water management in support of continued growth.
Looking Ahead
At Origin, we seek to manage risk and pursue opportunities through decades of experience, Multilytics®-powered analytics, hedging, and rigorous multi-variable stress testing across investment stages. Entering 2026, the Marcus & Millichap 2026 Multifamily National Investment Forecast and Newmark’s 4Q 2025 US Multifamily Capital Markets Conditions and Trends reports point to stabilizing cap rates as new supply slows, absorption remains durable, and capital flows improve. In this environment, discipline prevails by requiring realistic assumptions, minimum gross margins, and sensible performance under conservative scenarios.
