Multifamily investing has been on a rollercoaster ride the last six years, and every owner we talk to is tired of being stuck on it. In this edition of Invest InlandNW, we step back from the day-to-day and review where we've been — so we can see where the market is heading from here.
To see the rollercoaster ride clearly, we need to zoom out. Let's look back on the last six years of Inland Northwest multifamily investing together.
For the modern history of multifamily investing in the Inland Northwest, values and net operating income (NOI) moved together. What the property earned determined what it was worth. Operations mattered, and owners who managed well were rewarded for it. Cap rates held relatively steady for years, with deals priced on in-place income.
Capital surged into real estate as rates fell to near-zero and multifamily became the star asset class among commercial real estate alternatives. This compressed cap rates into the 4% range, and buyers were pricing deals based on projected income rather than in-place performance. An asset earning $100k of in-place NOI might trade at a value that assumed $160k of stabilized NOI — income the property had not yet earned. Lenders, appraisers, buyers, and investors all got behind this thesis, and it worked… for a while.
For existing owners who capitalized (by selling or refinancing), they generated major investor profit.
But in the long term, it severed the feedback loop between how you ran your property and what someone would pay for it. Operating discipline stopped translating into property value, which had unintended consequences when we fast-forward to today.
Historic low cap rates, cheap debt, and wide gaps between in-place and projected income produced peak valuations across the Inland Northwest. Deals that could not be justified on current fundamentals were clearing the market on the assumption that rates would stay low and rent growth would continue at its prior pace. For owners who sold or refinanced near this peak, the timing was right. For everyone else, what followed was a gradual correction.
Interest rates rose sharply, and several costs that had been building in the background arrived at the same time. Insurance increased up to 40%, and property tax reassessments based on peak values arrived just as rent growth stalled and, in some property types, declined. Nearly every expense line-item in multifamily operations went up dramatically as inflation caught up at the property level.
Most owners were still catching up on rent growth from the peak, so increased expenses were absorbed, but cash flow growth flatlined. Values began to erode from their peak, and when we look to today, the operators who actively managed through the correction are in a materially different position than those who did not.
Cap rates in the Inland Northwest have normalized in the ~6% range, and buyers (and their lenders) are back to pricing deals on what they actually earn, not projections. The "Pre-2020 Valued on Income" formula is back, and it comes with a specific number:
Every $1 of NOI added to an investment translates to approximately $16 of value at today's cap rates.
That relationship was suspended for a while, but it is fully active again. The owners who understand this first are the ones positioned to take advantage of it.
The recoupling of NOI and values is not just a market dynamic to watch from the sidelines — it's a fork in the road.
Most Inland Northwest multifamily owners are on this path. Not by decision, but by default.
If you're not actively managing your asset, then you're seeing a slow bleed of income declines (vacancy creep, bad debt, longer turnovers, and the like) and expense increases, leading to flatlined NOI and a decline in cash flow this year.
In a recoupled market, this has a detrimental effect on values, ability to refinance, and overall returns on your invested equity.
And it's not most owners' fault. They're doing what worked for the last six years, without re-evaluating where the market is today. They put their properties on autopilot and it was growth-by-default. The skill of being an expert operator went dormant — and it's inactive right when it's needed most.
So what's the alternative to declines by default?
Owners on this path have recognized the recoupling and are operating their assets accordingly. They are directing their property managers toward revenue growth, auditing every expense line, and making capital investments with clear return calculations.
What this looks like at the property level:
Since values are recoupled with NOI, the math is clear. Every $1 of NOI is worth $16 in property value. Ratchet that up and every $1k per month of NOI is worth ~$200k in value.
Even if you're not a seller, this same math impacts a refinance, which in today's market is debt-service constrained — so every $1 of NOI is worth $12 in a refinance. Ratchet that up and every $1k per month of NOI is worth ~$135k in loan proceeds.
Said another way: owners actively managing their assets and driving NOI gains are building equity in a market where most of their peers are not.
Understanding which path your property is on is the most valuable diagnostic you can run in today's market. In most cases, a straightforward review of your financials and property condition tells a clear story.
The Multifamily Rollercoaster Review is a 20-minute walkthrough of where values and operations have been, where they're heading, and what your options are from here — customized to your property and goals.
It's built on the foundation of the 30,000+ units we've analyzed and the 1,500 units we asset-manage across the Inland Northwest.
If you have questions about where your properties sit on the rollercoaster ride, reach out and our team will schedule time to walk through a Rollercoaster Review customized to your properties and investing objectives.
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