Multifamily Market Updates: October 2022

Hello!

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Stocks, property values, and rents are all down. Do you have a plan in place to make sure your portfolio beats the market over the next 12-18 months?

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Overall Market

• It's common for smaller markets (like ours) to see a slower reaction to national headlines, so the Inland Northwest was insulated from the impact of rising interest rates on property values, until now.

• Today, the multifamily market is standing still.

                   1. Buyer and Seller expectations are misaligned, causing deals to stall. The price a buyer can pay changes with interest rates overnight, but the price an owner wants to sell for changes slowly, as they watch property values erode from its peak.

                   2. Our team tracks every deal in Eastern Washington every week. The 2022 average shows 18 deals on-market and 17 deals under contract - a healthy balance of market activity.

                   3. Today, there are 29 deals on-market and only 7 under contract - a clear imbalance as buyers are not putting deals under contract at the rate the were earlier this year.

• Why are we feeling this impact today?

                   1. Debt costs have more than doubled and as rates rose above 5.5%, deal financials changed dramatically, requiring more cash for every deal.

                   2. Sources of debt have evaporated, with lenders putting programs on pause or changed their lending criteria.

                   3. For buyers, the fear of missing out on future deals has buyers are asking, “If I buy this deal today, am I passing on a better deal tomorrow?” This fear, combined with the lending environment, is bringing velocity to a screeching halt.

• Rates are expected to continue climbing and that effect will be felt more severely in months to come.

• The unknown: the trickle-down effect of rising rates.

                   1. Will we see major unemployment and layoffs? Will rents decline and the economy spiral downward?

                   2. Or will this be a balance-sheet only downturn and rents will bounce back in the Spring?

• Either way, it's clear that multifamily ownership will require extra attention and skill to succeed in this market. So, are you prepared for 2-3 more years of challenging asset management and ownership?

• Our team is dedicated to putting you in the best position in today's changing market. Reach out today, and we'll carefully evaluate your portfolio, provide proactive solutions, and put you in the best position to beat the market the next 12-18 months.

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Multifamily

• One question many investors are asking: Are rising interests rates changing the fundamentals of multifamily?

• The fundamentals:

                   1. Income - rent-to-income ratios nationally are still below 25%, a healthy level.

                   2. Collections - remain strong and September saw the best collection-rate since 2019.

                   3. Markets - the Inland Northwest is just as attractive to residents as it was 6 months ago. Lifestyle, cost of living compared to major metros, and family-friendliness is unchanged by interest rates.

• So, the fundamentals appear to be strong, but there are some cracks starting to appear. Those who are slow to react the next 2-3 years will be left with below-market returns.

• The cracks appearing:

                   1. Rents: Rents are down month-over-month in October. Nationally, it's the steepest October drop in the last 12 years.

                   2. The Inland Northwest markets vary in rent changes: Tri-Cities +0.3% / Spokane -1.3% / Spokane Valley -1.5% / Coeur d’Alene -3.4%

                   3. Month-over-month trends could be seasonal, since October is historically a down month, but investors and owners have become accustomed to nonstop growth since January 2021, so declining month-over-month rents is still coming as a shock.

                   4. Vacancy: Vacancy has increased from below 2% and now sit between 5-7% depending on the property and market.

                   5. With new construction expanding inventory 4-9% across markets, plus value-add operators turning through projects, new/upgraded units are putting pressure on rents and vacancy across the board.

                   6. Buyers: Many investors are on pause or only seeking major discounts and distress. Most buyers are weighing today's prices compared to prospective discounts 9 months from now and are choosing to wait for more distress before investing. This opportunity cost perception has put the market at a standstill.

• Owners: Given today's conditions, if you aren't prepared to weather another downturn for the next 2-3 years, it could be the right time to consider portfolio changes. You need to move quickly and ensure you have the right team who can find you the real buyers in the market.

• Buyers: I believe now is the time to make a deal. I recognize there are opportunity costs, but if prices are -10% in 6 months and your debt costs are +15%, aren't the economics the same today as they will be tomorrow? Now is the time to get in, negotiate while you're the only buyer at the table, and make a deal you are happy with for the next 5+ years.

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Development

• Current market indicators have many developers putting new projects on hold. A developer with 4 projects planned might only do 1 project today. Cash doesn't go as far, and extra reserves are required.

• With rising rates, it's possible we'll see “cash-in” refinances for many developers, requiring developers to further capitalize their projects after construction. Those with high-leverage construction debt may not have the ability to cash-in refinance and will be forced to sell, should increases continue without rent growth.

• Locally, it doesn't feel like development is slowing down, as new projects continue to pop up. The unseen impact of rates will materialize in 2-3 years when there is limited new deliveries and projects.

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Local News

• One of Tri-Cities four new major employers, Darigold, broke ground recently, and Reser's just opened their new plant, showing clear employment growth in the market.

• A new Electric Vehicle battery facility is coming to Moses Lake, backed by a Federal award.

• The Yakima Valley Mall will see a new flagship tenant, Nordstrom Rack, coming in 2023.

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As the market changes, it's critical that you have a coordinated plan in place to beat the market. Reach out to our team today and we'll ensure you're in the best position moving forward in a quickly changing environment.

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Best,

Mason Fiascone

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