Multifamily Market Updates: August 2021

Hello!

‍

Owning apartments has become more complex through the years and this trend has accelerated in the last 3 months.  Rents are rising faster than owners can raise them, plus the national eviction moratorium expired for 2 days, then was reinstated, then was just struck down in Supreme Court.  There are also major changes in statewide legislation and labor shortages that have put significant pressure on landlords.

‍

One consolation for landlords:  Apartment values have increased at record levels in the last 3 months.  I have personally seen owners sign contracts for multifamily property sales at prices far beyond what they could have imagined when they first acquired the property.  If you are looking at historical sales as a benchmark of value, you are likely significantly underestimating the value of your apartments in today’s market.

‍

Overall Market

• The Supreme Court struck down the CDC’s eviction moratorium last week, noting the “irreparable harm by depriving them of rent payments”.  What does this mean for landlords?  If you’re in Washington state, not much.  Other states in the Inland Northwest vary, but you are now likely bound by permanent legislation, not the federal moratorium.  Either way, the future is unclear as managers and landlords interpret what this ruling means in practical terms.
• Investor demand for multifamily is through the roof and the national market has seen an increase in property sales, with sights on a record sales volume-year in 2021.
• Home prices continue to rise and housing affordability is plummeting, turning first-time home buyers and retirees into renters, especially in the Inland Northwest.  For example, the Average home price grew +53% in Boise and +38% in Spokane since 2019, the two fastest growing markets in the Mountain West.
• Close behind home prices is rent growth. Boise rents grew +45% and Spokane +38% since July 2017.
• In speaking with a regional property manager this week, they told me, “If you don’t have plans to raise your rents +15% in the next 2 months you will find yourself too far behind the market to catch up over the next 2 years.”  Do you have plans for rent increases? If not, email or call me and we can put a plan together to make sure you’re not left behind the market by $300 per unit like some owners.
• If this feels overwhelming or you’re simply tired of the increase in management required from owning apartments in the last 10 years, know that you can realize close to 75% of the increase in rents just by selling the building and letting the next investor navigate these changes.

‍

Multifamily

• If you have not received an estimate of your multifamily values in the last 2 months, reach out so we can walk through what your property is worth in today’s market.  Values and investor interest are changing monthly, and you need to work with someone who is in touch with local dynamics and investor interest, not just historical sales.
• For a few months I’ve been talking about rent growth, rent growth, rent growth.  But why?  Why are rents rising so rapidly?  This article from GlobeSt outlines the following drivers:
  1) Demand for rentals exploded in 2021, especially for new renters with higher incomes
  2) Renewals increased as many people decided to stay put during the pandemic, decreasing apartment availability for new renters
  3) Legislation (eviction bans, just cause termination) added costs that get passed on to renters
• In addition to these national factors, migration to the Inland Northwest has surged because:
  1) People left major cities and suburbs
  2) Employers allowed more work-from-home
  3) Millennials have started families and desire more space to roam
• These national and regional factors combined is a tidal wave for rent increases in the Inland Northwest.

‍

Local News

• Rural population growth in the Inland Northwest significantly exceeded the national average in the last 10 years.  Washington, Idaho, and Montana exceeded national growth by +9.3%.  This interactive map shows clear migration to the Inland Northwest.
• This migration trend will continue to change our markets in the next 10 years.  Some investors are already shifting their focus from Boise and Eastern Washington to Montana, hoping to be early to this trend.
• In the labor market there are 1.4 million more jobs available than there are people looking for work.  This is hurting builders the most, but also presents challenges to property managers, value-add investors, and multifamily service businesses (HVAC, landscaping, etc.)
• At the same time, Washington State increased the weekly unemployment benefit by 50%.  The state’s new weekly benefits range from $595 to $1,229.  That translates to a $31,000 to $64,000 annual salary.  What’s this mean for property owners?  Increase in operating expenses, particularly payroll and service contracts.
• Last month Pasco, WA made waves announcing new food processing and distribution facilities, totaling 5,000+ new jobs in the next 2 years.  This month Moscow, ID received attention when Schweitzer Engineering Laboratories (SEL) announced a 162,000 SF manufacturing facility opening in 2023.

‍

Development

• Even among labor shortages, supply costs, and uncertain legislation, developers are moving forward with new projects and exciting opportunities to create value, especially in multifamily development in the Inland Northwest.
• For example, I’ve helped two developers source 17+ acres for multifamily development, one of which is in an affordable housing zone. Combined these will bring 300+ new apartments to the Tri-Cities over the next 2 years.
• In addition, I personally know of at least 65 acres of multifamily sites coming to the Tri-Cities market in the coming year. Want to make sure you’re one of the first to see these opportunities? Reach out and let’s connect on your buying criteria.

‍

With all the headwinds facing long-term owners and the influx of new capital into multifamily, my summary is this:

1. If you are going to hold your multifamily longer than 7 more years, make sure you have great management in place who is going to keep rents in line with the market to balance out increases in expenses, particularly labor
2. If you think you might sell in the next 7 years, there is a good chance now is the perfect time to sell and you won’t see this high of relative value in the next 7 years.

‍

Make sure you know exactly what your property is worth in today’s market before deciding which path forward.  If you want a complete analysis from a local multifamily expert, send me your current rent roll and a recent operating statement and I’ll get to work to make sure you’re equipped to make the best decision regarding your holdings over coming years.

‍

Best,

Mason Fiascone