Multifamily Market Updates: May 2023

There is a lot of noise in the market right now. This makes it challenging to distinguish between national headlines and the impact to you and your investments in the Inland Northwest.

Our goal here is to share how national economic headlines impact your assets and investment strategy, so let's dive in!

Overall Market

1) Recent bank failures and its impact on commercial lending.

• SVB, Signature Bank, Credit Suisse, and now First Republic are four regional lenders who were seized by regulators and are going through the default process at different speeds.
• The first three failures happened quickly in late March. This week First Republic was seized by regulators, then purchased by JPMorgan.
• There are rumors of more regional bank failures pending and overall contagion, so the depth of the banking crisis is still unknown.
• Why does this matter to you?
• One of the primary sources of debt in the Inland Northwest is small local and regional banks. They have provided liquidity and opportunity to investors where national banks would not otherwise lend.
• If these bank failures lead to Inland Northwest regional failures, consolidation, or tighter lending criteria, then one of the best sources of debt for Inland Northwest investors could disappear overnight.
• This would pose challenges to both existing owners in need of refinancing, new investors entering the market, and without lender liquidity in the market, property values would continue to decline.
• Do you have a loan maturing in the next few years? Now is the time to start conversations. Reach out to our team and we can advise on your best route forward.

2) Interest Rates continue to move

• The Fed met this week and increased the Fed Funds Rate another +0.25%
• To date, the Fed has increased the Fed Funds Rate from 0.25% in March 2022 to 5.25% in May 2023.
• This is one of the fastest increase in rates in Fed history, which created the recent bank failures.
• At the same time, the 10-Year Treasury is completely detached from the Fed Funds Rate.
• The 10-Year started the year at 3.75%, dipped to 3.37% mid-January, increased to 4.06% early March, and is now back down to 3.31%
• Because of this volatility, real estateurs continue to feel like day-traders, which is distracting from a focus on fundamentals, deal-making, and asset management.
• To put rates in context, our team has received loan quotes from varying sources the past 4 weeks. Here is a snapshot of those quotes:
• Acquisition Loan, 5.34% fixed rate, 65% LTV, 10-year term, interest only available - Fannie Mae
• Acquisition Loan, 5.62% fixed rate, 75% LTV, 5-year term - Regional Lender
• Acquisition-Rehab Loan, 6.75% fixed rate, 75% LTC, 2-year term, 2 years interest only - Regional Lender
• Construction Loan, 5.75% fixed rate, 85% LTC, 40-year term - HUD 221(d)(4)

3) Multifamily Strength continues

• We discuss in more detail below, but apartment demand and rent growth returned to positive in Q1 2023 after a slow winter leasing season.
• In addition, new construction continues to absorb in the Inland Northwest, even if at a slower pace than last year.
• Vacancy rates have stabilized at ~5%, up from the less than 2% vacancy for the last few years.

4) Landlord-tenant legislative headwinds

• The summary: Washington State is doubling down on policy that negatively impacts landlords which will ultimately hurt tenants, but the changes aren't nearly as bad the original proposals.
• The details are too much to cover here, so we recommend this resource for a deeper dive into recent landlord-tenant legislative changes.

Multifamily

After 6 months of rent declines, Inland Northwest rents are increasing again this Spring.

• This is a positive signal indicating that rent declines were only seasonal, not permanent.
• Still, if we look at April rents compared to the Summer 2022 peak, the Tri-Cities is the only growth market. Spokane and Coeur d’Alene are still down seasonally from their summer peaks last year.
• Based on month-over-month trends, we expect rents to continue to grow as the snow melts and residents begin to move again.

Transaction Velocity is at a near standstill.

• Today only 24% of available deals are under contract.
• Compare that to last year, when 72% of available deals were under contract.
• Even at a near standstill, some deals are still getting done. Our team closed on two deals recently:
• 114 units in Walla Walla which included seller financing
• 17 units in West Richland which was an all-cash purchase due to high in-place yield

So, if the market is mostly at a standstill, what deals are still moving and why?

• Our team executed a deep dive into today's market and what deals are getting done.
• Plus, how owners like you can position your portfolio for success in this changing market.

Interested in hearing more about what deals are moving and why? Reply to this email.

We'd be happy to share more detail, custom-tailored to your portfolio and investing objectives.

Development

Our team is having more conversations with developers than ever before.

There is a diverse set of opinions among these developers:

• Some are looking to make portfolio moves, focusing on projects that best fit their development model.
• Others are selling sites to free up cash.
• Some believe now is the time to start new projects, as they will be one of only a few developers delivering units to the market while other groups pause, allowing them to benefit from supply/demand imbalances when the market stabilizes.
• Others are "pencils-down" and not looking to acquire any new projects until next year.
• Lastly, many local developers were building homes, townhomes, and multifamily projects the last few years. Those groups are now focusing exclusively on multifamily in an effort to avoid the volatility that comes with home sales.

If you're a developer ready to benefit from long-term supply/demand imbalances, our team has multiple development site opportunities for sale right now:

• Saltese Creek, a 400-unit development site in Spokane Valley
• Coming soon: a 93-unit mixed use site in Airway Heights (just outside of Spokane)
• We expect to have a few more opportunities based on our current pipeline and conversations.
• If you're in the market for your next development site in the Inland Northwest, please reply to this email!

As you can see, there is no shortage of headlines this year. If we can provide you with just one takeaway:

Cut out the noise, stick to your investing principles, and focus on what you can control.

In the meantime, we'll continue to equip you with the insights you need to meet your investing goals this year.

‍