Multifamily Market Updates: January 2022

Hello!

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“What impact will inflation have on my property?”  This is the question I’m hearing from property owners as we kick off the year.

And the least discussed element of inflation is its impact on your property expenses.  Inflation often refers to consumer goods, rent, or wages, but I believe the #1 impact on your portfolio will be to your property expenses.

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To that end, I’m conducting a survey of Inland Northwest investors and owners.  Please reply to this email with an answer to this question:

At what growth rate do you anticipate your property expenses will increase in 2022?

For example, “We expect expenses to increase 9% year-over-year across our portfolio.”

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Now, let’s dive into the market, what’s changing in the Inland Northwest, and take a deeper look at inflation’s impact.

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Overall Market

• Inflation (n).  A general increase in prices and fall in the purchasing value of money.
• Since May 2021, consumer inflation has been above 5%, and since October, inflation has been at the highest rate witnessed since 1981.
  In addition, many economists believe inflation will get worse before it gets better.
  While the Fed signals rate increases, there is no sign of inflation slowing just yet, since inflation measures only the past, but does anticipate future prices.
• So, what does this macroeconomic trend have to do with your multifamily property investing?
• Inflation will continue to impact your portfolio in several ways:

• 1)  Wages will rise across the market as employers seek to be competitive in a labor crunch, increasing the wages of your tenants (wages grew 4% nationally in 2021)
• 2)  Rising wages will allow for market rents to increase, but to benefit from this trend, you must implement rent increases on your portfolio
• 3)  Property expenses are increasing, especially on properties built before 1995, to the tune of 13%+ in total expenses year-over-year

• When expenses rise 13% across your portfolio, significant rent growth is needed just to break even, let alone grow your property’s net income
• It’s critical you explore creative opportunities to decrease expenses custom built to your portfolio and have a plan in place for rent increases this year
• Want to make sure you’re in the best position for 2022?  Reach out for a custom-build portfolio inflation audit that will provide you at least three ways to combat inflation’s impact on your bottom line.
  Sneak preview:  rent sensitivity analysis, deferred maintenance, replacement reserves, utility reductions, and portfolio planning – there’s plenty to discuss, let’s set a time to review!
• If you don’t mitigate inflation’s impact on your portfolio, it’s likely you will see a 1) decrease in cashflow in 2022 and 2) dramatic drop in property value driven by this cashflow decline

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Multifamily

• Rent growth set records in 2021 (nationally, rents are up 14.1%), but rents slowed since October, which appears to follow a historical fourth quarter trendline.  Many owners are anticipating rent growth across the market, but as I mentioned above regarding inflation, the key question is, will owners execute enough rent growth to experience NOI growth?
• A new Yardi report estimates rent will grow just 4.8% nationally in 2022.
  The Inland Northwest has more tailwinds than the national average driven by significant population and employment growth across markets.  We should experience stronger rent growth this year, make sure you take advantage of this trend.
• Coming into 2022, I’m seeing an uptick in new development projects announced across the Inland Northwest. 
  2021’s record rent growth has inspired developers to enter our tertiary markets, planning supply delivery late this year and into 2023.

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Local News

• Spokane continues to shine through the winter season, ranking as the second fastest metro for growth in job postings, signaling strong employment, which continues to fuel migration to the market.  Ranked just ahead of Spokane?  Boise, continuing to blow away investors across the Inland Northwest.
• One of the downside impacts of population, employment, and rent growth is that the cost of living continues to go up.  Across markets, the cost of living from 2010 to 2020 increased anywhere from 22.8% in the Tri-Cities to 18.2% in Spokane.  That said, when comparing the absolute cost of living to major metros like Seattle or Portland, the Inland Northwest is still a steep discount.

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Development

• This report from NAIOP highlights some of the key differentiators between development in major metros compared to smaller markets like the Inland Northwest.  This article crystalized much of what I’ve witnessed personally:

• Most developers are building for the long-term, developing an asset they expect to hold for 10-20 years, and enjoy the cashflow benefits
• Local and regional developers have a unique competitive advantage – they know more about the market than large, national players, because information is scarce in smaller markets
• Local relationships make a difference. Having the right engineer, contractor, designer, and property manager can be the difference between a good project and a great one.

• Construction prices continue to rise, with input prices up +23.2% in December 2021.  This makes projects harder to pencil for developers but has not managed to slow the development pipeline just yet.  
• Construction prices also impact existing owners when it comes to deferred maintenance, capital improvement projects, and replacement reserves.
  For many older vintage properties, repairs & maintenance represents one of the largest expense line items, and with prices rising +23.2% compared to last year, this will have an extreme impact on NOI.

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I recently reviewed an owners 124-unit portfolio and after sharing with him the impact of inflation along with his property’s current valuation, he told me, “I am shocked at how much my properties are worth. You’ve handed me a problem here, because now I need to consider ways to make our equity work harder for us in this inflationary environment.”

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I guarantee you that by reviewing my team’s portfolio inflation audit, you will feel better prepared to maximize your return on equity and be in the best position for 2022. 

If you’re interested in this tool, let’s find time to review by replying to this email.

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As always, if I can be a resource to you or anyone in your network, please forward this email or encourage them to sign up for this monthly newsletter!

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Best,

Mason Fiascone