Invest InlandNW: January 2024

We are experiencing renewed energy and optimism in the market, leading to more deal activity in the first month of the year than we saw in the last six months of 2023. We're hopeful this means great things for Inland Northwest investors in the year ahead, but we're not out of the woods yet.

OVERALL MARKET

BUYERS ARE BACK?

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

• Interest rates appear to have stabilized, with the 10-year treasury hovering between 3.9% and 4.15%. Compare that with 0.5% swings over the past 6 months and this feels more stable.
• Investors are eager to be active after a slow 2023. Most looked at hundreds of deals but closed on few, or none.
• Many had the chance to review the past year and set goals for the new year. Now, they're hitting the year running, chasing their 2024 goals with renewed vigor.

EXISTING OWNER CHALLENGES

• In closing out year-end books many owners saw inflation catch up to their operating expenses.
• The impact was widespread but especially seen in older properties, such as 1970s vintage assets, where operating expenses increased +10-12% year-over-year.
• The combination of eviction restrictions lifting, lifestyle expenses like student loan repayments resuming, and an overall softer economy is also weighing on property collections and vacancy rates.

THE BID/ASK GAP

• Seller expectations were set high at the peak of the market in early 2022. Buyers backed off that peak quickly, but Sellers did not.
• In 2023: Buyer wants to buy for $0.75x (bid), Seller wants to sell for $1.25x (ask). There was almost no closing that gap.
• Now, to kick off 2024, the bid/ask gap appears to be closing. Buyers are interested at $0.9x and owners are interested at $1.1x.
• We expect this bid/ask gap to continue to close, with more buyers and sellers finding win-wins in today's market.

WHAT THIS MEANS FOR YOU

• With buyers re-engaged to start the year, it's the perfect time to capture market movement and evaluate both selling and buying opportunities.
• If you own an aging asset (pre-1990s), you could consider a 1031 exchange into newer construction. Older assets will continue to see delinquency and rising expenses where newer construction is less vulnerable.
• You can harness the momentum in the market on a sale today but still find a discounted purchase to acquire, timing the market to your benefit.

MULTIFAMILY BREAKDOWN

2023 OPERATING DECLINES

A combination of factors contributed to declines in cash flow last year:

• Delinquency and bad debt increased. Especially among older vintages, non-payments were on the rise. This resulted in short-term income losses, which led to increased legal and turnover costs in the long-term.
• Operating expenses increased substantially. By analyzing ~$110M in deals, we found most owners experienced a +10-12% increase in total operating expenses across unit turnover costs, contract services, legal fees, and payroll.
• Market rents are flat or declining. Significant rent growth from 2020-2022 has come to a screeching halt. Record-breaking new supply has put downward pressure on rental rates.

2024 PROPERTY BUSINESS PLAN

• Because of these operating declines we're working with INW multifamily owners, sharing our 2024 Property Business Plan.
• Our goal is to ensure you increase cash flow and achieve your investing goals this year.
• This plan shares insights from evaluating 12,682 units across 230 properties, including a review of investing objectives, in-place versus potential operations, capital projects, and returns on equity.

DEVELOPER'S CORNER

THE SUPPLY PIPELINE

• Most investors are watching the multifamily new construction pipeline closely. In nearly every market, we're seeing record levels of new construction.
• In tracking recent lease-ups, what sets properties apart: Location near major employers, building quality with thoughtful differentiators, diverse unit mix, and timing relative to competing supply.

DEMAND DRIVERS

• Demand is still alive across the Inland Northwest. The reasons people move here remain, but migration has slowed to pre-COVID levels.
• Tri-Cities demand appears resilient with continued employment growth and migration trends.
• Spokane's downtown and South Hill are more resilient to supply increases than North Spokane and Spokane Valley.
• Coeur d'Alene and Montana demand is slower due to seasonality, expected to rebound in Spring.

MULTIFAMILY MASON TEAM

Some of our team goals for 2024:

• Sell $100M+ in apartments this year, a substantial increase over a slower 2023.
• Continue to dominate the market with #1 market share across the Inland Northwest.
• Make 1,500 prospect calls and meet with 200 property owners.
• Grow this newsletter, Invest InlandNW, to 5,000 subscribers (~2x).
• Hire sales associates in Bend, Boise, and Montana.