Multifamily Market Updates: July 2023

Very few deals are getting done in today’s market. If they are moving, they share 3 specific criteria, which we believe point to a return to fundamentals.

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THE MARKET

Deals still closing today provide insight into how you can beat the market over the next few years.

BY THE NUMBERS:

This year, $193M in multifamily sold across the Inland Northwest.

• 5 deals represent 53% of the volume, at $15M+ each.
• 38 deals make up the rest with an average deal size of $2.4M and 20 units.

This YTD volume is on pace with last year, so what do we mean when we say very few deals are getting done?

1. The Inland Northwest lags primary markets and national headlines.
2. Looking backward (closed deals) is less helpful than looking forward (active deals).
3. While YTD volume is on pace, year-over-year numbers are skewed since ¾ of sales closed in H2 2022.

If we look deeper at deals active today, which is forward-looking:

• This year, only 1 in 5 deals are under contract.
• Last year, 2 in 3 deals were under contract at any given time.
• This is a -67% decrease in activity from last year, a substantial market shift that isn’t reflected in closings YTD.

We pull this data from our Exclusive Weekly Deal Update where we track every deal 5+ units in the Inland Northwest.
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WHAT THIS MEANS FOR YOU:

Today’s market represents a return to real estate fundamentals.

• The last 3 years, the real estate (the asset itself) hardly mattered.
• Deals were getting done with cheap debt, by capital looking for returns in an inflationary environment, based on record market rent growth.
• Today, the real estate itself matters again.
• And it matters whether you’re buying, selling, or just holding for the long-term.

The deals moving forward in today’s standstill provide insight into which assets will outperform over the next 10+ years. So…

...WHAT'S MOVING & WHY?

There are three specific criteria to a deal that moves today:

1. Asset is in a high-quality location with strong in-place asset management.
2. A creative exit strategy was utilized such as seller financing.
3. Seller took a major price discount compared to last year (25%+ discount).

GO DEEPER:

We don’t let our Seller clients take major discounts, so let’s go deeper on #1 and #2 from above.
The asset is in a high-quality location…

• Within each market there are distinct neighborhoods or submarkets.
• The best locations have sustained rent growth in an otherwise choppy rent environment.
• The best locations are supply constrained.

…with strong in-place asset management.

• This includes overall portfolio management, repositioning assets, or executing capital events.
• A proactive approach to deferred maintenance.
• Tracking and improving leasing, vacancy, delinquency.
• Implementing specific goals to manage operating expenses.

A creative exit strategy was utilized.

• Leveraging a creative exit strategy can be a win-win in today’s market.
• For buyers: Can help overcome uncertainty in a specific deal.
• For owners: Can help achieve your overall investing objectives.
• For example, if a buyer is uncertain or unwilling to invest due to rising interest rates, and an owner’s investment goal is cash flow income for retirement, then a deal made with seller financing provides a buyer with a compelling reason to buy a specific property and will lock in the owner’s cash flow, removing the variability of income and headaches of owning, all in a tax efficient way.  Truly a win-win!
• Our team has executed additional creative strategies including loan assumptions, forward 1031 exchanges, master leases, options to buy, JV partnerships, and so much more.

Ultimately, if you can position your portfolio to meet these criteria and exit the assets that don’t utilizing a creative strategy, then your portfolio will outperform the general market over time.

Contact Us below and we’ll share our exclusive What’s Moving and Why Report, which we customize to your portfolio and investing objectives.

MULTIFAMILY BREAKDOWN

Investors are stressed, but not distressed (yet). Vacancy and delinquency is rising, operating expenses continue to climb, but asking rents have continued to increase.

WHAT IT MEANS FOR YOU:

• Owners should budget for little-to-no net income growth over the next 12 months.
• Any rent growth captured is being offset by declines in occupancy and collections combined with rising operating costs.
• Properties will require renewed focus on asset management (sound familiar?) in order to breakeven on net income year-over-year.
• Reach out today to review a portfolio audit, where we will dive deep into each of your assets, identify capital improvement opportunities, and provide strategic input into achieving your investing objectives.

BY THE NUMBERS:

Rents. June rents grew from Q1 to Q2 2023 (QoQ), but Year-over-Year (YoY) trends vary by market.

• Richland +0.7% QoQ and +1.3% YoY
• Kennewick +1.4% QoQ and +6.2% YoY
• Spokane +5.3% QoQ but -1.2% YoY
• Spokane Valley +1.8% QoQ but -5.6% YoY
• Coeur d’Alene +3.6% QoQ but -10.1% YoY

Occupancy. Average occupancy has decreased ~3% YoY to ~93% occupancy depending on the market.

Expenses. Operating costs continue to increase +11-13% due primarily to taxes, insurance, and general repairs and maintenance costs.

• Especially for aging assets, repairs, maintenance, and unit turnover costs have nearly doubled, which continue to impact cash flow.

ZOOM OUT:

The last 2 years were detached from fundamentals.

• Capital flows and cheap credit drove prices up.
• COVID restrictions locked in occupancy to abnormal levels as evictions were halted and people stayed put.

Now, the market is reacting from the last 2 years of changes.

• Rent growth was “pulled forward” from 2023, which led to abnormal growth during COVID. (+34.9% from March 2020 to March 2022 on average across the Inland Northwest).
• Supply growth was a slingshot. Construction was delayed, then restarted in 2022, while new projects kicked off at the same time.
• Now, projects are being completed in a very different lease-up and debt environment, putting pressure on developers, lenders, and capital partners.

That said, most owners will weather the storm the next 12-24 months, but why?

• The Inland Northwest lags primary markets and historically experiences less volatility.
• We saw much less floating rate or short-term debt than in other markets.
• Most investors weren’t forecasting sustained 10%+ rent growth.
• We were never a consistent 3% cap rate market, meaning the move back to reality was less drastic than in markets like Dallas or Phoenix, who often dominate the headlines.

Investors are stressed, but not distressed. You may not increase your cash flow or see your equity grow the next few years, but you also won’t find any major distress either as an owner or a buyer.

DEVELOPER'S CORNER

Creativity continues to win the day for developers.

WHAT WE'RE HEARING:

The ground-up deal moving forward today are:

1. Projects that have been in the works since mid-2022. Developers are faced with the choice to lose their soft and pursuit costs, or move forward, so most are moving forward.
2. Developers that are getting creative, leveraging landowner JV partnerships, phasing projects to spread risk, or reconfiguring designs to meet the needs of the market today.

Overall, the supply pipeline remains robust for 2023, but long-term indicators show a drop-off in supply beyond 2023.

• Remember, the Inland Northwest market lags primary market indicators, and in primary markets, new construction starts have fallen off a cliff.
• In Spokane, the business journal detailed new supply and permitting of 1,000+ units, a sustained uptick over pre-pandemic levels.
• The caveat here is that we are working with many developers who have permit-ready projects that are being shelved, so not all permitted projects will necessarily break ground in 2023.

WHAT IT MEANS FOR YOU:

If you’re looking for opportunities as a developer, now is the time to jump in, work the deals, and get creative.

• Our team is working on 10 development sites totaling 775 units (3 on-market and 7 off-market) in the Inland Northwest.
• If you’re looking for new projects you can be selective and work on deal terms that will benefit you and your investors.
• Interested in seeing some of these deals? Reply to this email and we’ll send a few over.

If you’re an existing multifamily owner or investor, when new supply stalls, so long as migration and demand drivers continue, you should see the benefit in your existing assets over time.

• This might take until 2025, once existing supply delivers to the market and the dust settles, but if the 2024+ new construction pipeline diminishes as we expect, and migration and demand for apartments continues, then you should see increased rents and lower vacancy.
• In the interim, we are facing continued new supply delivery in a slow rental and demand market, which means pain in the short-term, but potential gain over the long-term.

LOCAL ROUND-UP

Regional and local lenders continue to pull back on multifamily projects.

WHAT WE'RE HEARING:

We’ve talked about local and regional lending before, and we’re seeing our predictions start to come to life.
Many local banks and credit unions are pulling back on their ability to lend in today’s market.

• For example, Umpqua Bank has significantly scaled back their lending on the West Coast, shutting down their multifamily division and only lending to relationship-based borrowers.
• Others are decreasing their loan sizes, with one local credit union only looking to lend up to $10M per project where historically they would lend up to $100M.
• This impact has yet to be felt widely as this pullback works its way through the market.

Spokane was featured in a great light in this article. A good starter for those unfamiliar with Spokane’s history and why people continue to move to Spokane.

Mentioned above, but Spokane’s new construction activity continues to look promising, with projects scattered throughout the County detailed here.

Ready to dive into your portfolio and stack your investments up against What’s Moving & Why today?

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