Invest InlandNW: August 2024

A buying opportunity has emerged in today's market. Will you capitalize? Falling interest rates have created a unique buying opportunity for active investors. For owners, this is the perfect time to evaluate your return on equity and identify opportunities for improvement.

OVERALL MARKET

Interest rates have dropped significantly, providing a buying opportunity for deal-makers today.

MARKET MOVES

• Benchmark rates have decreased -0.50% since last month, as the Fed indicates a high likelihood for their first rate cut in September.
• Investor sentiment has improved with renewed confidence in a soft landing, meaning the Fed may pull off the decrease in inflation without pushing the economy into a recession.
• Multifamily values are tied to interest rates in many ways. Treasuries (the benchmarks for multifamily interest rates) is a highly liquid market; prices and rates change daily. Multifamily properties are an illiquid market, so values adjust much slower.

AN EXAMPLE OF THE OPPORTUNITY

• An active investor puts a newer construction deal under contract at a 6% cap rate and expects their loan's interest rate around 6%.
• Rates move down -0.50% and now the buyer's loan has an interest rate of 5.5%. This results in positive leverage, potentially a higher loan amount and less equity required, and an increase in cash flow.
• The critical piece: the investor must be actively engaged in evaluating and pursuing deals. If you try to jump in today but haven't been looking the last two years, you'll be behind the trend.
• It's not too late but you need to move quickly, identifying opportunities before prices respond to interest rate movement.

OWNERS: THE KEY QUESTION

Will prices increase as interest rates fall?

• While prices and interest rates are correlated, they don't necessarily follow the exact same timeline. Prices reflect investor sentiment, not just interest rates.
• We also need to see: stabilized rent growth, operating expense growth slowing as inflation moderates, and balance between supply and demand.
• Multifamily prices may take longer to react than interest rates. Sales data will lag 90+ days from today.
• The opportunity has to be captured today, before the sales data works through the system.

OWNERS: WHAT THIS MEANS FOR YOU

• If you're exploring a sale or refinance, it's critical you have a knowledgeable team working for you. Values are changing quickly based on interest rates and investor sentiment.
• Our team engages the full market and solicits multiple offers, ensuring we capture the latest value trends.
• If you're interested in transitioning your portfolio from older aging assets to newer construction, it's possible to do so while increasing your cash flow.
• On newer construction available today, it's possible to lock in pricing at 5.5% to 6% cap rates. On your older assets, we can sell them into a lower interest rate environment at potentially lower cap rates.

MULTIFAMILY BREAKDOWN

How does your current Return on Equity compare to other multifamily owners in the Inland Northwest?

RETURN ON EQUITY

Falling interest rates present an opportunity for existing owners to improve their Return on Equity (ROE).

• Return on Equity takes the current equity in your property and compares that to your cash flow: Current Cash Flow / Current Equity = ROE.
• We can compare your existing returns to alternatives: Treasuries at 4%, Cash at 3%, New construction multifamily at 6%, Refinance equity at 5.5% and reinvest at 6%+.
• We also evaluate tax implications, hassle required, and other investing goals.
• When rates fall, even if prices don't change, the cost of accessing your equity falls, allowing you to explore reinvestment opportunities.

BENCHMARKS

Of the ~8,000 units we've evaluated this year, the average return on equity is just 5.2%.

• Many owners don't realize just how low their return on equity is on many of their existing assets.
• By identifying your current returns and evaluating opportunities to improve, you're likely to find solutions that will make your equity work harder for you.

DEVELOPER'S CORNER

Interest rate declines provide relief for many developers.

INTEREST RATE IMPACT

• Developers are the most impacted by the recent improvements. A small move in cap rates, even just 0.25%, can be the difference between breakeven equity or a positive equity multiple.
• While developers hope for continued movement, hope isn't a strategy. Instead of hoping for the best, our team gets involved early to drive NOI growth and correlating values.

ASSET MANAGEMENT

If you're a developer considering a sale in the next two years, we should be discussing our asset management services.

• We guarantee no other broker is offering this and that our involvement always leads to a higher sale value.
• Recent example: We suggested charging for 58 parking spots on a property with a unique parking layout. Within a week, 31 spots were leased at $30/month. At a 5.5% cap rate, our team added $380K to the property value that didn't exist prior to our involvement.
• We won't stop hoping for market improvements, but we will drive value by focusing on what we can control.