Multifamily Market Updates: August 2022

Hello!

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August is nearly over and then its back to school, pick out Halloween costumes, Happy Thanksgiving, Merry Christmas, and Happy New Year - in the blink of an eye.

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Given the time it takes to buy or sell an asset, you need to make decisions by the end of September to complete portfolio moves by the end of 2022. Now is the time to create a thoughtful approach to end of year planning and ensure you capitalize on existing market conditions.

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Overall Market

• As investors return from summer break and focus on results by the end of the year, I believe there will be substantial investment activity in the inland northwest, beginning in September.

• Why? A combination of factors:

                  1. Record High Values. If you zoom out, property values are up +30-50% from 2020. While they may be down slightly from six months ago, the inland northwest has seen record-breaking appreciation the last two years.

                  2. Tax Changes. 100% Bonus Depreciation phases out after 2022, going to 80% in 2023. This means the same property purchased in January ‘23 instead of December ’22, provides an investor ~20% less tax benefit, decreasing the relative price that investor is willing to pay next year.

                  3. Market Velocity Catch-Up. After a brief stall in activity due to volatile interest rates, the middle market ($2-30M) is moving and aggressive, with less lender pullback than institutional deals. This delayed activity is catching up, increasing velocity and momentum into Q4.

• These factors - record values, tax changes, and velocity catch-up - will drive a flurry of investment activity in September, closing by the end of 2022.

• It's time for you to prepare, whether you're an existing owner or an investor.

                 Owners: Now is the perfect time to simplify your portfolio. For example, you can reposition your most challenging asset at record high prices and exchange into a simpler portfolio - such as newer construction, consolidated geographies, or passive investing - all while increasing your cashflow.

                 Investors: You will find the acquisition opportunities you've been waiting for, if you're looking and ready. Keep your capital sources close and move quickly when the right opportunities arise.

• Are you feeling unprepared for the end of the year? Reach out here on email, and we'll make sure you're in the best position to capitalize on opportunities and meet your investing objectives.

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Multifamily

• The last two years have presented massive changes for multifamily investors (as we've shared with you previously).

• Now in the last three months, we've identified a shift away from that 2-year trend.

                 Last 2 Years: Historic Rent Growth (11-36% since March 2020) and Historic Cap Rate Compression (28-37% since 2020). These trends combined have increased asset values +30-50%.

                     Last 3 Months: Rent growth is cooling. Month-over-month rent growth is flat through the summer and vacancy is normalizing from less-than-2% to around 5%

• Given this market shift, we believe there are 3 key trends that will impact multifamily owners over the next 12-18 months:

                     Rent Growth Continues to Cool. The market has caught up after COVID interruptions, and is operating on fundamentals again. Layer in new construction supply, existing supply renovations, and rent growth catching up to wage growth, it's possible some owners will see asking rent declines in Q4 with no year-over-year rent growth in 2023.

                 Expenses Not Slowing. Owners should expect annual property expenses will continue to increase 11-13%, especially for properties built before 2000. Payroll and wages, renovation and repair costs, and even utility bills are increasing substantially. These expenses are rising faster than consumer CPI (which was 8.5% in July).

                 New Supply. Most inland northwest markets have substantial apartment inventory delivering in 2022, expanding total inventory by 4-9%. Delays from 2020-21 have pushed deliveries into 2022, which will continue to normalize vacancy and cool rent growth, even trickling down to 1970s assets.

• What does this mean for you? It depends on your investment goals and unique situation.

                 1. For example, is your goal to maximize value? It's time to get creative in achieving lease trade-outs, minimizing expenses, and ensuring your asset stands out among your competition.

                 2. Is your goal to hold the asset the next 10+ years? It's time to identify opportunities to reduce costs over the long-run through capital improvements and management efficiencies today.

• Whatever your situation, let's meet for 20 minutes to review an executive briefing of these 3 trends and more importantly, how they will impact you. Reply here on email and we will coordinate a time to review.

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Development

• More employer-based development is coming to East Pasco, with Tarragon planning a 2.1 million square feet industrial facility, projecting another 1,500 employees in that space.

• Homebuilding appears to be slowing across markets, down ~15% in the Tri-Cities from the historical average. Homebuilding is typically the sector that responds fastest to market volatility, and the single family market was quick to respond to interest rate changes this year.

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While it feels far away, the end of the year is right around the corner for multifamily investors. Are you prepared to meet your 2022 investment objectives?

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Our team will evaluate the market combined with your unique situation and ensure you're in the best position to meet your investing goals. Reach out to review today. I look forward to being a resource for you and your team.

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Best,

Mason Fiascone

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