Multifamily Market Updates: December 2022

Hello!

‍

As we approach the end of the year, it's the time of year to be grateful. This year, I'm grateful for:

• Locking 3% interest rates (a thing of the past)

• For clients and friends across the industry

• And for an amazing year servicing the Inland Northwest Multifamily Markets!

‍

Our team had an incredible 2022. Here are a few highlights:

• Our team was the #1 producer in multifamily brokerage in the Inland Northwest.

• We're proud to have served so many investors this year, leveraging our advisory approach with apartment owners locally.

• In addition, we also:

              - Doubled the size of our team to 4 members

              - Expanded beyond Eastern Washington into Northern Idaho and Northeastern Oregon.

              - Made 1,519 phone calls, held 136 meetings, and provided valuations for 3,624 units.

• I'm extremely grateful to all those who have trusted our team with their business and for those who have relied on our insights throughout the year.

• Please reach out if there is anything we can help with as you wrap up 2022.

• Lastly, we're excited for what 2023 has in store! Whether the market is up or down, our team will be active and dedicated to your success next year.

‍

Overall Market

• A handful of macroeconomic indicators below are confusing economists, leading to continued uncertainty.

              - The 10-Year Treasury is down to 3.51% from it's high at 4.25%, the opposite of what many expected.

              - Inflation cooled in November to +0.1% month-over-month (+7.1% vs last year).

              - Many believe the Fed needs to push the US into a recession to truly tame inflation, but cooling inflation means the Fed could slow rate increases.

              - It's not typical to enter a recession in a growing job market and unemployment has remained low at 3.7%.

• Market uncertainty and conflicting indicators will likely remain until at least mid-2023, at which time there are two likely paths forward:

              1. The market begins to thaw with velocity returning and the market stabilizing.

              2. We head deeper into a recession and multifamily owners are forced to refocus on asset management simply to hold onto assets and cashflow.

• Our team is focused on preparing owners like yourself for either scenarios as we head into the new year.

• We will be tracking the below metrics closely as indicators of where the market is heading:

              - Rent Growth

              - Vacancy

              - Interest Rates

              - Sales Velocity

              - Cap Rates

• By reviewing a combination of these metrics each month, we'll identify trends earlier than your competition, so that you can be proactive and opportunistic in your approach to multifamily investing in 2023.

• What other data would you like to see monthly? If you have input for our team, we're all ears, and will work to incorporate other insights.

‍

Multifamily

• 2022 was a record year for investment activity when you consider the market size (roughly 2.2M population across 36 counties).

              - There were $708M in apartment sales volume

              - Across 116 transactions

              - Which totals 5,017 apartment units

              - At an average cap rate of 5.38%

• To go a level deeper, our team delineates between institutional (typically $40M+) and middle market sales:

              - 52% of sales came from just 5 institutional transactions totaling $370M

              - The remainder came from the middle market across 111 transactions ($337M)

• Middle market sales varied by geography with Spokane capturing 46% of sales, Tri-Cities capturing 22%, and Yakima, Moses Lake, Walla Walla, and Wenatchee capturing below 10% share of volume each.

              - If you'd like to see a deeper look at this transaction data which is custom-built from our exclusive buyer emails, shoot me a note and I'd be happy to share additional detail.

• As we head deeper into winter, month-over-month (MoM) rents continued to decline, which is still seasonally common.

• This November we saw year-over-year (YoY) rent declines for the first time in 2 years. Trends varied by market:

              - Richland +0.1% MoM / +5.2% YoY

              - Kennewick -1.0% MoM / +5.3% YoY

              - Spokane -3.3% MoM / -0.3% YoY

              - Spokane Valley -1.9% MoM / -0.7% YoY

• The question remains if these rent cuts are seasonal and temporary or if they're permanent and a signal of future apartment demand.

• As we mentioned above, the macroeconomic indicators are perplexing, as we've never seen job/wage growth combined with weak housing demand and those two metrics are typically closely intertwined.

• We'll be keeping a close eye on rents through the winter, with new updates as 2023 kicks off.

‍

Development

• I'm asked regularly, “Do you expect to see distressed multifamily opportunities in 2023?”

              - Distress meaning assets selling for less than they were purchased for, less than the debt on the property, or a significant discount to 2020 values.

• Here's my perspective

              - Existing Assets: Most value-add investors acquired assets with 3-5-year fixed-rate debt, and if they bought in the last 3 years, rent growth has their business plan covered. Major distress like what you might find in Phoenix or Las Vegas is unlikely in the Inland Northwest for existing assets.

              - Development: We could see some distress from developers who extended their cash position into new projects that will be coming to lease next year.

              - If we see slow-to-no rent growth plus sustained high interest rates, developers may not have the option refinance, forcing them to sell close to their build cost just to get out of the project.

              - I don't believe these opportunities will be abundant and if they do exist there's a catch. There will be buyers lined up to acquire these assets at a discount, making the deals less attractive to investors hoping for distress.

• That said, many developers are finding ways to get creative and keep healthy projects moving. Some examples of creativity our team has worked on: seller financing, landowner partnership agreements, or simply developing unique projects that stand out from the rest of the market.

• This article does a great job of highlighting projects in Spokane that contain some of these unique and creative elements which should help sustain the developers in the years to come.

‍

If I don't speak with you directly before the end of the year, we wish you and your family a happy holidays, Merry Christmas, and Happy New Year.

‍

Personally, I'm looking forward to planning and strategizing for 2023, plus soaking in time my family.

‍

Best,

Mason Fiascone

‍

‍

‍