Hello!
Interest rates have increased 1-2% in the last 4 weeks, triggering mixed reactions from investors. This is a substantial rate movement on the first (potentially of many) rate increase from the Fed.
That said, I have not seen any negative impact to Inland Northwest investment activity (yet). Some buyers are hoping that values will drop as interest rates increase, but so far, the demand for multifamily investments has not slowed. Multifamily owners are even receiving unsolicited offers weekly, showing the continued appetite for investing in the Inland Northwest. I don’t think this activity will last forever, so let’s dig in deeper.
Overall Market
- Most multifamily owners in the Inland Northwest have received unsolicited offers regularly this year. Unsolicited meaning an offer they never asked for, that a buyer submits without access to property financials. This is a clear sign of multifamily demand and is potentially a signal of peak market activity and values.
- Due to this market activity, my clients have found success in stepping back to evaluate their full property portfolio, identify key strengths, weaknesses, and opportunities, and strategize for a few portfolio moves in 2022.
- For example, one client owned a portfolio of smaller, older properties, so we analyzed the value and quality of each property in their portfolio. We identified two properties where the return on equity was not on par with the rest of the portfolio.
- We carefully coordinated a sales process and 1031 exchange that allowed my client to acquire newer, larger property.
- This client was able to increase their cashflow, decrease the headaches that come with older properties, and simplify their portfolio – a win-win-win.
- Given this unique point in the market where values have grown to record levels, investor appetite is strong, but interest rate uncertainty is beginning to creep in, it’s the perfect time to step back from the frenzy of activity and re-evaluate options across your portfolio.
- Interested in reviewing your portfolio to identify 1-2 strategic moves you could make this year? Reach out via email or give me a call and we will put your portfolio in the best position to meet your goals over the next 10 years.
Multifamily
- Even with interest rate increases of 1-2%, buyers in today’s market are still active and in full force. There are three buyer profiles in today’s shifting environment:
1. Aggressive – these buyers are even more aggressive than they were a month ago. Their perspective is that rates are only going up, so it's better to buy at a lower rate today than a higher rate tomorrow.
2. Sidelines - these buyers are sitting on the sidelines until the market stabilizes and they don't perceive as much risk in the market. In most cases, these buyers were already sitting on the sidelines the past year as property values exponentially increased.
3. Creative - these buyers are still aggressive, but with a creative twist. They are looking for opportunities for creative financing such as assuming the existing debt and coming to the table with more equity.
- The biggest question multifamily owners should be asking is: Will values continue to rise as they have the last few years?
- I believe interest rate movement will slow down the increase in values that investors have enjoyed the last few years. I don’t think Inland Northwest values will experience a net decrease in value, but the relative value may decrease, and values will not climb at the same pace.
- Why don’t I think Inland Northwest properties will experience a net decrease in value? Because these demand drivers, both investor- and tenant-based, remain unchanged:
1. The attractiveness of the Inland Northwest markets hasn't changed. The same people that have wanted to move to the Inland Northwest still want to move here, driving home prices up and rental demand forward.
2. Households will continue to unbundle driven by demographic and generational shifts.
3. As interest rates increase, homebuyers are most affected, with mortgages increasing exponentially as interest rates rise. This will price many homebuyers back into the rental market.
4. Multifamily supply, especially in the Inland Northwest, lags far behind population growth, with not enough new construction planned to normalize our vacancy and rental rates.
- This demand points to continued strength of the multifamily asset class in the Inland Northwest, but relative values may not continue to grow, especially at the same level experienced the past few years.
- For this reason, it’s the perfect time to evaluate your portfolio and consider making 1-2 moves this year to capitalize on recent increases in value while also positioning your portfolio to meet your goals over the next 10 years.
- Interested in this portfolio evaluation? Reach out and we’ll get started today!
Development
- Coming Soon: Two multifamily development sites for sale in Spokane and Spokane Valley, one mid-rise, one garden-style site, perfect for expansion into the market or for entering the market with high-quality sites.
- Development in the Inland Northwest has reached a tipping point this year for two reasons:
1. Developers historically held onto assets they built, enjoying long-term cashflow and tax benefits. But cap rates have compressed close to Seattle/Portland, which means new construction values have skyrocketed in the Inland Northwest. This is causing many developers to consider selling their assets to capitalize on the full value of what they’ve built.
2. Rents in the Inland Northwest have reached a breaking point where new construction styles are viable on a cost-to-rent basis. Typically, we have seen 2-3-story exterior walkup (garden style) apartments, but now that some rents are above $2.50/SF and for studio units even above $3.50/SF, 4-over-1 podium construction with structured parking will meet developer returns for the first time.
- What does this mean for you?
1. As an investor, expect to see opportunities to acquire new construction this year. If you’re a developer and considering a sale, you’ll be shocked at the value of your property since you last evaluated its worth. Reach out for a valuation so that you’re equipped with the best market knowledge, even if there isn’t a next step for your property.
2. Expect to see urban infill development in the city core in lieu of rural sprawl. The top rents are commanded in prime locations with high-quality construction and amenities that attracts tenants, which urban infill locations offer.
3. New developers are looking to break into the market early, which will drive an increase in new supply. Most of the developers I’m working with are coming from Boise and Portland, looking to enter Inland Northwest markets ahead of competition. If a typical development cycle comes to life, this increase in housing supply will create an increase in vacancy and tapering in rents over the next 3-5 years.
- I’ll be keeping a close eye on new construction as I assist multiple new developers in identifying their next site, helping new entrants break into the Inland Northwest and deliver high-quality assets to the market.
Local News
- HUD awarded $4.3M to the Spokane area homeless housing and service programs, which many property owners in Spokane are hopeful will have a near- and long-term impact on fighting homelessness, especially in the downtown core.
- Spokane was featured in this article from SFGate, which highlighted the increase in cost of living and home prices driven by migration from coastal markets, making even Spokane pricing out of reach for many homebuyers.
- Affordable housing projects continue as Spokane received roughly $850k in funding from the WA Department of Commerce that will support the development of 104 affordable units. In addition, Catholic Charities broke ground on Pasco Haven, a 60-unit complex that will provide housing to the chronically homeless in the Tri-Cities.
- Washington State continues to work against landlords, working to add more burdens to apartment ownership. SHB 1904 proposes that statewide landlords offer tenants 6 months’ notice to increase rent more than 7.5%. With inflation impacting your expenses +13%, it will become increasingly challenging to remain profitable year-over-year without expert management.
All-in-all, the last month has been one of increased uncertainty, but that uncertainty has yet to materialize in local impact here in the Inland Northwest. The coming months may not reflect the same impact as rates continue to rise. Either way, my goal is to put you in the best position for investing success this year and years to come.
Want to chat through the impact to your portfolio and investing strategy? Give me a ring, I’d enjoy the conversation and know there are ways we can put you in the best position for success.
Best,
Mason Fiascone
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