Hello!
Interest rate hikes have substantially impacted the overall market and the real estate market, but I'm seeing minimal impact here in the Inland Northwest. Why? And what does this mean for you? Keep reading for a breakdown.
I've diverged from my typical newsletter format (overall market, multifamily, development, and local news), given how much the interest rate environment impacts all categories.
Rate Recap
- The cost of debt has doubled since January, changing returns and removing buyers from the market.
- Prior to June, the Fed had raised its key interest rate by +75bps. In response, the 10-Year Treasury had risen roughly +125bps (1.25%) since January.
- The Fed just announced a +75bp increase, the largest rate hike since 1994, and the 10-Year Treasury rose to 3.48% at its peak and is now at 3.19%, a +156bps (1.56%) increase from January.
Overall Market
The real estate market is changing rapidly, driven almost entirely by the Fed's rate increases. The most impacted sectors are as follows:
- Residential Real Estate, with high-end and vacation homes most impacted. A $400k home mortgage is up roughly +40% since January, pricing many first-time homebuyers back into renters (a positive for multifamily).
- Primary markets and institutional-size assets have been impacted. Some major market brokers are reporting pricing is down 5-10% with bid volume down 75% from January.
- The Inland Northwest Middle Market ($2-30M) has been largely unaffected so far. Pricing is flat to January with no negative pricing impact, but bid volume is down 25-50% from January.
I anticipate pricing will continue to be flat or begin to trend down from January here in the Inland Northwest.
- If you're a buyer and have been waiting for two years to buy a deal while only competing against one or two other bidders, instead of ten, now is your chance.
- By this time next year, the market will have recalibrated, priced risk accordingly, and you'll be a market buyer like the other 15 bidders. Don't miss this opportunity.
Why is the Inland Northwest Middle Market unaffected?
- We have never seen sub-4% stabilized cap rates, which means most buyers can still find strong debt yield on most assets, even as rates have doubled.
- Our population growth, migration from primary markets, and rent growth is unmatched in the Western US, providing continued strong returns to prospective buyers.
- Overall, the middle market ($2-30M) is less sensitive to rate movement since the total loan size and payments aren't as large on an absolute basis. It's reasonable for middle market buyers to come to the table with additional cash since many investors have cash reserves on the sidelines and are willing to deploy into the right deals.
- Lastly, many investors have come to appreciate the Inland Northwest markets for their stable cashflow and outsized appreciation, even through the Great Recession, where other markets faltered. Those investors see the long-term potential in our markets and are projecting strong returns the next 10 years driven by fundamentals that are largely unchanged by rising interest rates.
What are savvy investors doing?
- They anticipate buying opportunities in the next 6-12 months, so they're finding ways to build cash reserves to capitalize on those opportunities
- Many owners are selling 1-2 properties, typically their least favorable or “headache” properties, at what could be the top of the market
- They're storing the cash from those sales to acquire properties if prices fall or if prices hold flat but rent continues to grow as it has so far in 2022
Do you want to make sure you have cash to capitalize on upcoming opportunities? Reach out and we can put a portfolio plan together, so you're in the best position moving forward. If you wait to make portfolio moves once the market has changed, it will be too late, and your competitors will have cash to deploy while you sit on the sidelines.
Even though it's been an uncertain week in the rate environment, deals are still available. Speaking of opportunities, do you want to see deals from our team before they hit the market? Let me know what interests you from the below and I'll make sure you receive the details soon.
- New Construction in Pendleton, OR
- Value-Add in Clarkston, WA
- Development Sites in Spokane, WA
- Development Site in West Richland, WA
If you want to discuss the overall market and local impact in more detail, please give me a ring, I look forward to the conversation. You can reach me on my cell any time - (509) 221-9354
Best,
Mason Fiascone
.jpg)
.jpg)
.jpg)