Invest InlandNW: February 2024

We're diving deeper into our Property Business Plan tool so that you are in a position to increase cash flow this year, tuning out the confusion in the overall market.

OVERALL MARKET

MIXED SIGNALS

Macroeconomic signals shifted this month, causing temporary confusion in the market.

• The Fed indicated rate cuts this year, which excited the market in January. Then February inflation data was slightly worse than expected, pushing benchmark interest rates to 4.3%, a +0.4% increase from January lows.
• Conversation is swirling about issues for regional banks. Banks remain upside down on interest rates and have exposure to commercial real estate in distress.
• The result is that investors are feeling less certain than they were to kick off the year, with a stronger dose of caution than last month.

INLAND NORTHWEST IMPACT

• Most investors were not counting on a 3.9% treasury benchmark to get deals done. A temporary 4.3% isn't changing their appetite to invest in local growth markets.
• Our team has put $34M under contract and has $41M of new listings that we're confident will transact.
• There are 75 assets and $338M of deals on the market, 23% under contract — an increase from 2023 averages (56 assets, $245M).

WHAT THIS MEANS FOR YOU

It's time to tune out the noise and focus on what you can control.

• If you're an existing owner, focus on the fundamentals of asset management.
• If you're an investor who believes in long-term potential of local INW markets, there are deals out there. Don't let a high-level market narrative stop you from digging into deals.
• If you're considering a sale, make sure you select the right team to harness the local market activity for your benefit.

MULTIFAMILY BREAKDOWN

PROPERTY BUSINESS PLAN

Many multifamily owners spent more time and effort on property ownership than planned last year AND saw unexpected cash flow declines. So, we created this Property Business Plan to review all things asset management.

We share insights gathered from evaluating 13,473 units and $1.03B of assets in the Inland Northwest over the last two years.

2023 RECAP

Look back on how 2023 performed, focusing on these key factors:

• Investment Score: How did your asset perform and why?
• Cash Flow: What cash flow did you take home? How was it compared to expectations?
• Capital Improvements Completed: What improvements were made? Any delayed plans?
• Debt Health: Is your loan-to-value and debt service coverage too conservative or aggressive?
• Return on Hassle: How much time and effort did you spend on the property?
• Portfolio Score: Was this property contributing positively or dragging down your portfolio?

1) IN-PLACE VS. POTENTIAL

• Here we look at rents, operating expenses, and property management. We often uncover 2-3 items that contribute to an increase in NOI immediately.
• Actions include: updated rent surveys, re-quoting property insurance, professional photography and 3D tours, and sharing goals with your property manager.

2) CAPITAL PROJECTS

• We bucket capital projects into three categories: Deferred Maintenance, Income Movers, and Expense Savers.
• Actions include: detailing systems issues in the next 5 years, testing interior renovations for rent upside, re-striping parking lots and charging for spots, and installing flooring to eliminate carpet replacement.

3) RETURN ON EQUITY

• There are typically opportunities to improve either your existing asset or identify new opportunities for your equity.
• Actions include: cash-out refinance, 1031 exchange from older into newer construction, cost segregation studies, and acquiring new properties to scale.

DEVELOPER'S CORNER

LEASING COMPETITION

• Properties delivering for lease-up today face tough competition. Tri-Cities has 1,043 units across 10 properties leasing today, a 5.6% expansion of inventory.
• Leasing concessions range from 3-6 weeks of free rent. Digital advertising costs have increased.

LOCATION, LOCATION, LOCATION

Spokane vacancy rates by submarket in Q1 2024:

• South Hill Spokane: 4.8% — premium market with less vacant land for new construction.
• Downtown Spokane: 6.6%
• North Spokane: 11.3% — more challenging neighborhood with nearly no barriers to new supply.
• West Spokane: 8.7%
• Spokane Valley: 7.1%
• Northern Idaho: 13.0%

At the end of the day, there's not much that can make up for a well-located asset, which especially rings true in a competitive market like today.