Multifamily Market Updates: February 2023

Real estateurs are beginning to feel like day traders, watching key metrics like interest rates and velocity fluctuate. We'll break down these metrics and what it means for you in this newsletter. Thanks for joining us as we kick off a new year.

Overall Market

One metric, transaction velocity, provides a clear look into how our local markets are performing. Why transaction velocity?

• Velocity answers: How many deals are moving forward each week?
• This metric accounts for investor expectations, market uncertainty, lending availability, interest rates, rent growth, and more.
• When velocity slows, the market is misaligned. Sellers want more than buyers are willing to pay, uncertainty keeps buyers from moving forward, and capital markets freeze so buyers can't finance projects even if they wanted to.
• When velocity increases, it could mark the bottom of the market cycle and can be the perfect time to jump back in and buy earlier than your competition.

What does transaction velocity tell us about today's market?

• The market is stuck, making each deal more challenging, requiring more creativity and expertise than before.
• Year over year, transaction velocity is down -53% across the Inland Northwest.
• Last year, there were an average of 19 deals under contract and 13 deals on-market. When a deal launched it went under contract quickly.
• In Q4 2022 and this year so far, there have been an average of 9 deals pending and 31 on-market.
• We pull this data from our exclusive weekly deal tracker. Are you a principal/investor and want to see this deal activity weekly? Reply to this email to ensure you're on the list.
• This local trend was reflected nationally, as Q4 2022 went down as the lowest volume Q4 since 2008.

In addition to velocity declines, we're seeing flat-to-declining rent growth, higher vacancy rates, and rising operating expenses. See below for more details.

Multifamily

If you're a long-term owner with no plans to sell, then asset values and velocity fluctuations don't impact your day-to-day, but those aren't the only changes we've seen in the market.

In asset operations, it's been relatively easy to find tenants at record market rents the past 2 years, since vacancy has been below 2% and rents grew anywhere from 25-42% since March 2020.

Today, apartment owners are facing new challenges:

1. Increasing Expenses. In auditing our client’s financials, expenses grew 10-15% last year, driven mostly by maintenance and repairs, newly assessed taxes, insurance rates, and even utility costs.
2. Declining Rents. Latest reports show rents declining across the board. When comparing Sep 2022 to Jan 2023, rents in Coeur d’Alene were hit the hardest (-13.2%), then Spokane (-6.85%), then Tri-Cities (-0.57%).
3. Increasing Vacancy. The Inland Northwest as a whole experienced ~2% vacancy for the last two years. Now, vacancy is back to normal levels, ranging from 4-7% depending on the asset and how hard the owner is pushing rents through the winter.

All this combined makes for challenging asset management ahead. It will require more time, energy, and focus on your existing portfolio simply to achieve breakeven net income to last year.

In addition, asset values are down from their peak. Decreases range by market and property type, but values are down anywhere from 5-15%.

• Looking backward: Historically, cap rates in the Inland Northwest lag interest rates by 1-2 years. When interest rates rose, it took the market 1-2 years to recalibrate and for values to fall to a point where transaction velocity normalized.
• Looking forward: This lag means that values are likely to continue their downward trend, since we're only 6 months into this new interest rate environment.

So, it could take your net income and asset values 3-5 years to recover from their summer 2022 peak. Are you ready to dedicate the time and effort required to simply breakeven in 3-5 years?

If the prospect of breakeven or declining cashflow is not appealing, our team is equipped to put you in the best position to beat the market this year.

We've developed 3 creative strategies that are enabling our clients to rewind the clock to yesterday's values, lock in cashflow, and remove future market risk (like declining rents) and asset risk (like major CapEx).

We’ll be sharing these strategies in our March newsletter but by then it could be too late. If you want to review these creative strategies and what it means for you, then reach out today to setup a creative conversation with our team.

Development

Nationally, developers delivered 400,000 multifamily units in 2022 and are expected to deliver even more this year. This is consistent with the Inland Northwest where total supply expanded 6-9% depending on the market.

In the past month, our team has worked with landowners and developers to evaluate 1,430 prospective units. While developer's long-term pipelines are slowing, it doesn't mean they're pencils down on reviewing new opportunities.

If you'd like our team to review any of your upcoming projects, we're happy to help.

• We specialize in the valuation of multifamily sites (including sites sold with permits), pre-due diligence and marketing recommendations, and stabilized asset valuations. We want you to have the best market information to inform your development model and strategy.
• Simply reply to this email if you have a project you'd like us to review.

Local News

A question I often hear from investors is, “Where are people working in the Inland Northwest? Where is job growth coming from?"

• The answer is twofold because local growth is a snowball effect. Local businesses expand organically over time, then a large national firm enters the market, then local businesses grow to support the population growth, new jobs, and infrastructure.
• This article about SRM Development is a great example of the local business snowball effect, as they've grown from 50 to 80 employees in the last 2 years. There are countless examples like this across the Inland Northwest.
• In addition, we've seen large employer expansions such as Amazon, Darigold, and Reser's, which pushes market growth even faster.
• Add these together and growth snowballs. This translates to a diverse employment base providing stable, healthy growth for years to come.

The Tri-Cities saw permits for over $1B in construction in 2022, double what it was 5 years ago. Most of this came from large employer and warehouse expansion, but the number of new multifamily projects was a major contributor as well.

Pasco, one of the Tri-Cities, was ranked 8th on the SmartAsset “Top Boomtown” list of 2022. The Mountain West, Sunbelt, and Florida dominated the list, with Boise suburbs taking the #1 and #2 spots.

Our team is focused on providing you the information you need to beat the market in 2023. If that means locking in your existing cashflow and removing market and asset risk, we have creative strategies to help. If that means identifying the perfect time to acquire more multifamily based on market fluctuations, we can help.

Please reach out any time and we look forward to working with you this year.