Invest InlandNW: December 2023

Is relief on the horizon? The 10-year has been below 4.5% for 3 weeks (just below 4.0% today), levels not seen since late July. The Fed also indicated the potential for three rate cuts next year.

This is great news for investors, but we're not celebrating just yet. Instead of focusing on the weekly movement of treasuries, we're unpacking multifamily investing fundamentals and what we're hearing from investors today.

OVERALL MARKET

INCREASED ACTIVITY

Across the board, activity has increased in the Inland Northwest.

• Available Deals. There are more deals on-market today (54) than in the past 3 years since we started tracking every on-market deal in the Inland Northwest. When compared year-over-year, that's over 2x the number of available deals.
• Closings. In the last few months we've seen closings increase but transaction volume is still down -38% vs. 2022 and -27% vs. 2021.
• Rates. We've seen sustained activity in rate movement AKA volatility has persisted this year. The benchmark rate is ~4.0%, meaning the 10-Year Treasury went from 4.2% to 5.0% to 4.0% in the last 3 months.
• Distress. We're starting to see true distress appear, where investor equity is gone. These deals remain few and far between, but stress exists for most owners, even if true distress is not here yet.

ACTIVITY FATIGUE

This increase in activity is not healthy activity. It is putting a strain on investors as they are tired of looking at deals that don't hit return thresholds.

• Available Deals. The number of available deals points to the buyer/seller expectations gap and mis-priced deals in the market. Buyers have to underwrite 30+ deals before one comes close, leading to investor fatigue.
• Closings. Many closings didn't make it to the finish line on the first try. It wasn't until their second or third escrow that the deal got done at substantial discounts.
• Rates. Volatility is driving the fatigue. Unless rates drop on the day you're rate locking, daily volatility won't benefit you as a buyer or owner.
• Distress. While we know of deals where equity is wiped out, there is little-to-no public distress in the Inland Northwest so far. True distress takes a long time to work through the system.

OWNERS: WHAT THIS MEANS FOR YOU

• The increased activity and subsequent buyer fatigue means fewer buyers engaging on every deal, resulting in longer timelines and sometimes lower prices.
• Every deal requires more attention, handholding, and effort to get to the closing table.
• When considering a sale in today's market, it's important to have a thoughtful strategy to address investor fatigue so that you achieve the most competitive process.

BUYERS: WHAT THIS MEANS FOR YOU

• Among a market of tired buyers and sometimes unrealistic sellers, we believe there is opportunity for those who are willing to roll up their sleeves and get to work.
• Today you might be the only buyer on a property, and you might be 10%+ off on pricing, but if you're the only one to show up with an offer, your odds are better than when you were competing against 10 other buyers.
• Do this and you'll see more opportunities today than you did the past few years.

MULTIFAMILY BREAKDOWN

FUNDAMENTALS REPORT

• Supply & Demand. The Inland Northwest is no different than national trends as it relates to new construction supply. Markets that delivered the highest increase in supply saw rents and occupancy fall the hardest in 2023.
• Coeur d'Alene and Boise have been hit the hardest due to supply expansion.
• Looking ahead, Tri-Cities, Boise, and Coeur d'Alene have the most supply under construction.
• Rents & Occupancy. Rents are down year-over-year across most markets, but looking at a longer horizon back to March 2020, most markets are ending up at the same long-term rent growth (~30%).

BY THE NUMBERS

Spokane: YoY Rent Growth -5.1% | Occupancy 93.6% | Growth Since Mar '20: 31.6%

Spokane Valley: YoY Rent Growth -4.9% | Occupancy 92.3% | Growth Since Mar '20: 30.4%

Boise: YoY Rent Growth -3.6% | Occupancy 88.5% | Growth Since Mar '20: 30.5%

Coeur d'Alene: YoY Rent Growth -2.6% | Occupancy 88.4% | Growth Since Mar '20: 33.7%

Tri-Cities: YoY Rent Growth +2.7% | Occupancy 95.1% | Growth Since Mar '20: 34.7%

Walla Walla: YoY Rent Growth +3.9% | Occupancy 92.4% | Growth Since Mar '20: 24.5%

INVESTOR SENTIMENT

Given both investor fatigue and deteriorating fundamentals, investors are cautious in the short-term, focused on:

• In-Place Financials. Fewer buyers are willing to take risk on heavy value-add deals. Many would prefer a well-managed, light value-add deal with lesser returns.
• Location and Submarket. Buyers are looking for high-quality assets in high-quality locations, with the thesis that the best located assets will outperform in any market.
• Construction Pipeline. Investors are watching new construction closely, honing in on local submarkets and tracking development.

DEVELOPER'S CORNER

WHAT WE'RE HEARING

• With rents and occupancy falling while cap rates continue to rise, the market is working against developers today.
• In some cases, developers are in a position of real distress, meaning their equity is gone or are underwater on their construction debt.
• There are multiple assets for sale prior to construction being completed (151 units and $40M in asking price).
• Developers are still hoping for 2021 pricing with values near peak levels, which pushes away well-capitalized buyers.

WHAT'S NEXT

• It's all about timing. If you're working on a project with little-to-no equity remaining, it's important to get proactive and identify potential solutions.
• For many, that solution is to Persist til '26, weathering the storm.

LOCAL ROUND-UP

• Much of the local economic activity has revolved around public-private partnerships.
• Cascadia Partners is partnering with the City of Richland to redevelop the Columbia Point waterfront, an estimated $300M-$500M project.
• Several Spokane downtown redevelopment projects are in progress, including office conversions fueled by tax exemptions and credits.
• Investors are more focused on location and submarket specifics than the past few years.

MULTIFAMILY MASON TEAM

Multifamily Mason has officially launched! We shared details about who we are, our team, and more over the past two months. We have big plans for 2024 and are excited to continue the conversation.

We have a handful of compelling opportunities including Eleven01 at Saddlerock in Wenatchee (84-unit new construction), two Pasco properties with assumable debt, and the Airfield Site in Spokane.