Multifamily Market Updates: July 2022

Hello!

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A combination of uncertain markets, summer vacations, and the word recession being used in conversation has slowed down the investment market substantially. Deals are still getting done, but they're moving about 1⁄4 the speed as before.

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Overall Market

• A combination of the following factors have changed the tune of investors and bottlenecked the market:

                 1. Investors taking weeks off for their first summer vacation since pre-COVID.

                 2. Interest rates continue to rise and more increases are anticipated due to continued inflation (9.1% in June, a new peak).

                 3. Rumors that we're already in a recession from the Atlanta Fed.

• If you're a buyer and have been waiting for opportunities in the market, you need to consider the following:

                 1. Should I be buying today while I’m only up against 1-2 other buyers, considering 6 months ago I was competing (and often losing) against 10-20 buyers on multiple deals?

                 2. Many investors are taking the summer off, leaving a window of opportunity for buyers willing to jump in, evaluate opportunities and risk, and negotiate a deal.

                 3. Those buyers waiting to see how the dust settles for the next 6 months will go back to competing with 10 other buyers once the market recalibrates, cost of debt increases, and the end-of-year push is in effect.

                 4. If you want to find a deal, now is the time to call your broker, underwrite more opportunities, and negotiate.

• While the sales environment has slowed, there are still abundant opportunities for both buyers and sellers in today’s market.

• If you’re a multifamily owner and have been considering simplifying your portfolio from older aging properties into newer multifamily assets, prices have slowed on newer construction in the last 3 months, presenting a unique opportunity for you to acquire new construction, increase your cashflow, and simplify your portfolio.

• Ready to review this transitional opportunity? Reply here or call me at (509) 221-9354 today.

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Multifamily

• While the sales environment is uncertain, the demand drivers behind apartments remain unchanged so far in 2022

                 1. Rent growth has continued through the summer after two record years of rent growth (June rents +13.5% in the Tri-Cities and +10.0% in Spokane)

                 2. Migration continues into smaller markets and has persisted as a permanent shift, not just a COVID trend

                 3. Employment remains largely unchanged in the Inland Northwest, especially given the concentration on distribution, manufacturing, agricultural, and public works, which have been largely unaffected by recent economic changes

• One question I continue to receive is, are wages keeping up with rent? Said another way, how can someone afford $1,900 for a 2-bed apartment?

                 1. RealPage's national survey of 7 million renter households shows that wage growth has tracked steadily alongside rent growth since January 2020. In fact, in-place rents grew slower than wages, indicating there is room for continued lease trade-outs at market rates.

                 2. My guess is that if you evaluate your current property manager's payroll, you'll find wages have grown even within your property operations, because it costs more to keep talent today.

                 3. Breaking down the numbers, if a tenant makes $20/hr, by the rule that your income should cover rent by 2.5x, then they can afford to rent a $1,300 apartment. If you live alone, you can rent a brand new studio unit in most markets, or even many 1-bedrooms. If you find a roommate who makes the same, you can afford a $2,600 2-bed apartment

• While it may feel like those rents are high, wages have grown to meet rent growth across markets, providing a sustainable path to achieving market rents, and potentially future growth.

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Development

• Given the uncertainty in the market, most developers have put new land acquisitions and new projects on hold.

• Developers are especially susceptible to interest rate risk, given that projects can take 1-3 years to stabilize, in which interest rates could double again.

• The projects moving forward typically have all or some of the following qualities:

                 1. Run by a developer whose business plan is to indefinitely hold onto the property

                  2. Is in a unique or irreplaceable location in a growing market

                  3. Has some form of subsidy, such as opportunity zone or tax abatement program

                 4. Funded with lower leverage

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Local News

• Vista Field, the redevelopment an airstrip in Kennewick, is officially underway, accepting early plans from their developer short-list this summer

• A Seattle-based developer just closed on a development site in Spokane's University district with a planned 160 multifamily units. This is one of those developments moving forward due to all 4 of the factors listed above.

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While the world is enjoying a summer of vacations, I'm still available, representing clients and tracking market trends. Please reach out any time to discuss this rapidly changing market, its impact on your investments, and all things in the inland northwest.

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I look forward to being a resource for you and your team.

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Best,

Mason Fiascone

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