Multifamily Market Updates: August 2023

We're jumping right into the data this week highlighting asset values and recent sales, then zooming out to review the overall market.

THE MULTIFAMILY MARKET
Multifamily values are recalibrating amidst continued volatility and a 10-Year sitting well above 4%.

WHAT IT MEANS FOR YOU:

As advisors, we track closely where the market is heading through buyer sentiment and active listings, but it takes time before appraisers, lenders, and property owners know where the market stands in a market shift like today.
Once new market values have moved through the systems, it impacts everyone in the investing ecosystem.

• Banks will recalibrate their existing portfolio, pushing them to hold more reserves and underwrite conservatively on new deals.
• Appraisers will leverage recent closings to arrive at updated values for refinances, acquisitions, or prospective client evaluations.
• Buyers will begin to search for even better deals than those that have closed, pushing values down further.

Even as a long-term owner, any improvements to operations (rent growth, expense reduction, or capital projects) create less equity than before:

• $1 in NOI improvement = $20.00 in asset value at a 5% cap rate
• $1 in NOI improvement = $16.50 in asset value at a 6% cap rate
• $1 in NOI improvement = $14.30 in asset value at a 7% cap rate

Understanding where market values stand as the market shifts should impact how you look at everything as it relates to your portfolio including:

1. Capital Improvements. What capital projects are you focusing on today and how will they impact both cash flow and equity growth?
2. Sell or Hold. Repositioning your portfolio in today's market requires more precision and consideration than before.
3. Acquisitions. Which deal should you acquire and at what price point is always a moving target, but especially today.

We're committed to providing you the information you need to evaluate opportunities in today's market, so keep reading for more details, or reply via email to dig deeper into your specific portfolio and investing objectives.

BY THE NUMBERS:

We can see the impact to values most clearly in multiple closing this year, a few of which we've highlighted here.
Crossings at Chapel Hill, a 300-unit property in Pasco closed for $65M. This is the largest sale of the year in the Inland Northwest in both units and dollar amount.

• This is $217k/unit, $185/SF, a 6.08% in-place, and 6.45% proforma cap rate.
• For a core-plus 2006-vintage well-located deal this represents a reset in market values.
• Similar deals were trading between 4.60% and 5.35% proforma cap rate the last three years.

Regal Ridge, a 97-unit property in Spokane South Hill closed for $21.5M.

• This is $222k/unit, $199/SF, a 5.35% in-place, and a 6.5%+ proforma cap rate.
• The asset is 1997-construction with room for value-add improvements to the tune of $15k/unit.
• Again, similar deals on the South Hill were trading at 3% in-place cap rates and up to $231/SF last year.

All Seasons, a 43-unit property in Spokane South Hill closed for $6.5M.

• This is $151k/unit, $150/SF, a 6.12% in-place, and 8.15% proforma cap rate.
• The asset is 1972-construction with a heavy value-add business plan resulting in an all-in 7% unlevered yield on cost.
• With a phenomenal submarket location, this is one of the better deals at this size and scale that our team has worked on in the past two years.

Lastly, we looked across all the on-market deals from our Inland Northwest Weekly Deal List, and we noticed a few trends:

• Since March 2023, 30 deals have closed and not a single deal was below a proforma cap rate of 6.0%.
• The prior 6 months (Sep-Feb) the average proforma cap rate was 5.48%.
• In addition, the 11 deals (of 52 total) that have been on-market for longer than 4+ months, the average proforma cap rate is 5.42%, meaning these owners are not catching up with falling values and are unlikely to sell in today's market.

All of these deals and metrics point to a reset in market values, and these new numbers are working through the investing ecosystem today.

ZOOM OUT:

Timing is everything and to highlight its impact let's look at a fictitious deal coming to market on different timelines.
For the sake of simplicity, let's assume the following:

• This fictitious deal is 2000+ construction in a well-located submarket, in Tri-Cities or Spokane.
• We'll start this fictitious journey back in early 2022, which if you recall, was peak market frenzy with bidding wars on every deal.

March 2022 Deal Launch

• This was peak frenzy, with deals getting done based on inexpensive debt, capital looking to find returns, market rent growth, and demographic and migration trends.
• Key Market Stats: 4.75% cap rate across the market. 8.5% CPI inflation. 2.13% 10-Year Treasury.

Q4 2022 Deal Launch

• This timing is peak uncertainty because regional banks were failing left and right, the Fed was pushing rates hard with +75bps rate increases, and investors had no line of sight to what was next, whether full-on recession or soft landing
• Buyers underwrote maximum uncertainty, pushing prices down and cap rates up
• Key Market Stats: 5.50% cap rate. 7.2% CPI Inflation. 3.80% 10-Year Treasury.

June 2023

• Uncertainty had settled down with bank failures seemingly in the rearview, the Fed paused on hiking rates for the first time in 10 consecutive meetings, andthe 10-Year had been consistently in the mid-3s for about four months, since its peak in November 2022.
• Key Market Stats: 6.00% cap rate. 3.0% CPI Inflation. 3.75% 10-Year Treasury.

Today, August 2023

• Uncertainty is back across the board, right when many investors were starting to see signs of normal and even a soft landing
• Key Market Stats: 6.25% cap rate - this is a bit of a moving target, but most investors are targeting neutral leverage on Agency financing. 3.2% CPI Inflation - a slight increase in July after a steady downward trend the previous seven months. 4.34% 10-Year Treasury - the treasury market has gone on a tear, sitting above 4% for 21 days and at its highest level in 15 years.‍
• In addition, regional banks and credit unions have increased their spreads or put lending on pause as they revisit their balance sheet in terms of cash holdings, office exposure, and even multifamily concentration.

Clearly the market has shifted, from 4.75% to 6.25% cap rates in 18 months, a -31.5% decrease in values.

WHAT'S NEXT?

No one truly know what is next. The Fed is clearly signaling further rate hikes which many believe will break the system and derail any potential for a soft landing.

• All we can do is focus on the information we have today and share it with you.

Given the recent market movement and even if you’re a long-term-hold investor it can be helpful to get real-time feedback on the value of your assets as you evaluate your personal holdings.
Our team has evaluated 10,838 units across 186 properties in the Inland Northwest. In each analysis we:

• Take the insights we've gained from assessing 10k+ units and apply them to you and your properties in our valuation analysis
• Provide a Strengths/Weaknesses Assessment
• Deep dive into your financials and compare them with market standards
• Identify 1-2 opportunities to leverage a creative sales strategy in today's market.

We’ve yet to share our analysis with a client who didn’t get value from the time and effort our team puts into the review.
We're offering our team's Property Valuation to anyone who wants real-time feedback on what your property is worth in today’s market.

• Reply to this email for a complimentary valuation analysis.
• At a minimum, it will be valuable to look back on Summer 2023 values next year, the year after, or even 10 years from now.

We look forward to reviewing with you!

DEVELOPER'S CORNER

Each development deal is more challenging than before, but the silver lining is that it's a great time to source talent for your team.

WHAT WE'RE HEARING:

Developers continue to be more selective on the projects worth pursuing, as it's challenging to find deals that provide requisite returns for development risk.
While the day-to-day can feel chaotic, it's a valuable time to step back and evaluate direction of your firm.

• Many developers have pivoted from for-sale to for-rent the last few years, with some moving back to for-sale today.
• Having the right data to evaluate and the right team members in place is critical for establishing a path forward.
• Some emerging developers may consider shifting strategies entirely such as working in some capacity for long-term hold owners during this market standstill.

If you have the resources, it's a great time to be hiring for talent.

• The market for talent is changing rapidly, with some firms proactively scaling back while others invest for future growth.
• Our team has partnered with Bullpen, a CRE talent marketplace, in the past and highly recommend them for both employers and employees.
• We also know of a few developers looking to hire in today’s market, especially for mid-to-senior level roles within growing organizations.

Part of our informal role as advisors in the market place is as a dot-connector, so please reach out if we can help connect some employer-employee dots while the deal pipeline stalls.

WHAT IT MEANS FOR YOU:

Referring to the above Multifamily Market breakdown, want to dive into how this impacts your development project?

• A 6% exit cap rate might feel out of left field, but every deal looks different in today's market.
• The best locations, assets, and markets can still find ways to trade at a premium to the overall market.
• Reach out today for a stabilized asset or development site valuation, so that you have real-time data to input and share with investors and stakeholders.

And if your project is underway, focus on:

1. Construction execution
2. Achieving top-of-market rents
3. Boosting sustainable other income where possible (pet rent, storage rent, utility fees, etc.)
4. Dialing in operating expenses and ongoing management
5. And stabilize the asset as quickly as possible, with the goal of a flawless Trailing-1-month of operating to take to your lenders or prospective buyers.

Asset management (managing the property manager) is becoming an even more important skill for developers in today's market, as every dollar of NOI matters more than it did the past few years.

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LOCAL ROUND-UP

While cap rates are certainly impacted, the rest of the Inland Northwest - demographics, employment, rents - have remained steady and solid.

WHAT WE'RE HEARING:

Rents. July rents grew from June to July (MoM), but Year-over-Year (YoY) trends still vary by market.

• Richland +0.7% MoM and +2.1% YoY
• Kennewick +1.3% MoM and +8.3% YoY
• Spokane +0.2% MoM but -4.7% YoY
• Spokane Valley +0.1% MoM but -4.6% YoY
• Coeur d’Alene +0.1% MoM but -5.0% YoY

We often refer to growth in the Inland Northwest as a snowball effect

• A local business opens and goes from 5 to 100 employees over a few years
• Then regional or national employers identify opportunity in the market, make an entrance with a big splash (think Amazon, Darigold, Reser's, Local Bounti, etc.)
• This snowball effect is seen in the six INW companies featured on the Forbes Top 500 Fastest Growing Companies list.
• They are a testament to this snowball effect that continues to play out across markets signaling a thriving economy.

More regional bank news, but should be nothing new to our readers. Deposits have been leaving local and regional groups, impacting their ability to lend in today's market.
Statewide ADU laws should contribute to some new supply in Washington, so long as local municipalities embrace them with open arms.
If you read between the lines of a recent Journal of Business article regarding a small nuclear reactor coming to the Tri-Cities, you'll see that the economic backbone which allowed home prices to grow +2-3% per year from 2008-2012 continues to have a positive impact in the Tri-Cities.

Asset value declines are eroding investor returns, so don't get caught without the information you need to make informed investing decisions.
Reach out below and we will provide a up-to-date valuation of your assets or follow-up on any of the details shared this month.

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