Hello!
Up until last week, the market was moving as winter began to thaw and investment opportunities surfaced. But uncertainty in the market is back. Given the rising impact of inflation, projected interest rate movement, and war abroad, the 2022 outlook is becoming more uncertain.
That said, my clients are not feeling the global news locally just yet. And over the last two years, it’s been rare that global headlines deter middle market investments in the Inland Northwest. I will be watching closely as March unfolds.
Overall Market
- While the Fed signaled rate increases in March, inflation reached another peak in January at 7.5%, higher than expectations. There are still no signs of slowing inflation and if you’re not already experiencing inflation’s impact to your property’s bottom-line, you are likely to begin experiencing it soon.
- My team has executed multiple portfolio inflation audits this year, providing insights to owners on the specific ways inflation will impact their portfolio. We found that inflation is impacting repairs and maintenance items, replacement reserves, insurance, and payroll most severely.
- Especially for owners of properties built between 1970 - 2000, you should be anticipating an increase in expenses of 11-13%. One client we worked with is laying the foundation to make portfolio moves that will best position their portfolio to meet investment goals and hedge inflation for years to come.
- How? One of the clearest opportunities is to sell your oldest vintage properties and consolidate your portfolio into newer construction assets where inflation’s impact on expenses is projected to be just 5-7% this year, driven a lack of repairs, reserves, and lower insurance costs in newer construction than in older properties.
- One client has decided to implement additional rent increases after realizing that just to break even against inflation’s impact, rents need to grow +8%. Plus, if they want to grow their income to beat consumer inflation, they need to increase rents +13%. This requires reinvestment into their property, professional management, and the right team in place. I have no doubt they will profit in 2022 because of the insight our team provided and the action they're taking.
- It’s not too late to prepare your portfolio for inflation’s impact. I know that many owners have shifted from 2022 budget season into tax preparation, but if you had the opportunity to increase your property NOI by 8% this year, would you take it?
Reach out to find time to review your portfolio, inflation’s impact, and how to mitigate inflation. Your investments will be in a better position this year because of it.
Multifamily
- This winter the Inland Northwest saw its typical seasonal dip in asking rents, where in December, Spokane market rents were down 8.9% compared to September.
- Even with this dip in rents, property occupancy remained at the highest levels seen in years, driven by the demographic drivers behind multifamily that we’ve mentioned before – migration from coastal markets, unbundling of households, and home prices increasing.
- Leasing activity has increased the last two weeks and rents are rising month-over-month, making an early start for the spring leasing season. While peak leasing typically occurs in late March/early April, many owners are reporting a significant increase in showings, leases, and move-ins.
- New construction properties in lease-up should expect near-immediate occupancy if management properly coordinates the tenant demand. At one new property in Spokane, 40% of the units were leased within the first 10 days of Certificate of Occupancy!
Development
- Development in the Inland Northwest has reached a tipping point this year for two reasons:
- 1. Developers historically held onto assets they built, enjoying long-term cashflow and tax benefits. But cap rates have compressed close to Seattle/Portland, which means new construction values have skyrocketed in the Inland Northwest. This is causing many developers to consider selling their assets to capitalize on the full value of what they’ve built.
- 2. Rents in the Inland Northwest have reached a breaking point where new construction styles are viable on a cost-to-rent basis. Typically, we have seen 2-3-story exterior walkup (garden style) apartments, but now that some rents are above $2.50/SF and for smaller studios even above $3.50/SF, 4-over-1 podium construction with structured parking will meet developer returns for the first time.
- What does this mean for you?
- 1. As an investor, expect to see opportunities to acquire new construction this year. If you’re a developer and considering a sale, you’ll be shocked at the value of your property since you last evaluated its worth. If you’re wondering what your development is worth, reach out for a valuation so that you’re equipped with the best market knowledge, even if there isn’t a next step for your property.
- 2. Expect to see urban infill development in the city core in place of rural sprawl. The top rents are commanded in prime locations with high-quality construction and amenities that attracts tenants, which urban locations offer.
- 3. New developers are looking to break into the market early, which will drive an increase in new supply. Most of the developers I’m working with are coming from Boise and Portland, looking to enter Inland Northwest markets ahead of competition.
If a typical development cycle comes to life, this increase in housing supply will create an increase in vacancy and tapering in rents over the next 3-5 years.
- I’ll be keeping a close eye on new construction as I assist multiple new developers in identifying their next site, helping new entrants break into the Inland Northwest and deliver high-quality assets to the market.
Local News
- Spokane was featured heavily in this article from SFGate, which highlighted the increase in cost of living and home prices driven by migration from coastal markets, making even Spokane pricing out of reach for many homebuyers.
- Prosser, a smaller Eastern Washington market, received attention last month since a new $78M hospital is breaking ground and Tree Top begins moving a manufacturing line from Oregon to Prosser.
- Affordable housing projects continue as Spokane received roughly $850k in funding from the WA Department of Commerce that will support the development of 104 affordable units. In addition, Catholic Charities broke ground on Pasco Haven, a 60-unit complex that will provide housing to the chronically homeless in the Tri-Cities.
- Washington State continues to work against landlords, working to add more burdens to apartment ownership. SHB 1904 proposes that statewide landlords offer tenants 6 months’ notice to increase rent more than 7.5%. With inflation impacting your expenses +13%, it will become increasingly challenging to remain profitable year-over-year without expert management.
As I mentioned above, if you haven’t quantified inflation’s impact on your property’s expenses, we should chat. There are multiple strategies that we can apply to mitigate inflation’s impact, built custom to your goals over the next 10 years. I look forward to the conversation!
Mason Fiascone
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