Current State of the Apartment Market in Portland, Oregon
Many apartment investors are wondering what is currently happening with Apartment sales in The Portland Metro area. Patrick Barry with Barry & Associates, an apartment appraising company, and John Gillem with CoStar kindly allowed me to visit with them and share their information.
Current state of affairs
Apartment sales are driven by a variety of different economic drivers. Lending institutions must be willing to lend, properties must be appraised, and the economy needs to be forecastable. At this point, lenders are nervous; properties are appraising in some cases with pro-forma numbers, but interest rates have increased over 50% in the last nine months.
This has slowed the transaction volume considerably, especially for properties in the sub-50 unit range. Large properties are being purchased primarily by institutional lenders that typically have lower cost sources of financing.
Is this a result of a recession? Do we need to worry? The pundits are not clear about this because the employment market is so robust. Currently, the economy seems to be booming, with 11 million job openings currently available (from economist Sam Chandan’s SVN presentation on March 3, 2023).
Most companies are hoarding their labor, if they can, because it is so difficult to recruit new employees. According to Chandan, most of the employment churn is at the lower end of the income spectrum, driven by the ever increasing cost of living. Any time an employee can quit to get a higher paying job, they will do it.
Where is the rental growth?
Rental construction in the Portland core has been strong, but as taxes keep increasing, and as homelessness issues continue in Multnomah county, developers are moving their construction outside of the county limits to Clark, Clackamas, Washington, Marion, Polk, and Yamhill counties.
Population growth in the urban core will continue to decline even as new units come on, creating a fight for tenants. This is already occurring — many properties are offering significant rent specials to attract tenants. 1-2 months of free rent is not an uncommon offer. This may also drive a reduction in rents in markets that may be overbuilt. Suburban communities are not just attractive to developers and tenants; they are also attractive to real estate investors. In the metro area, about 9000 units are currently being constructed. The jury is out if the demand for them is there. It should be given the employment growth needs and the initial indications of immigration. Not only that with the ever-increasing interest rates, but renters also cannot afford to buy homes.
As the growth rate in Portland slows, Salem seems to still be charging ahead with a 4% annual growth rate. Oregon Household formation appears solid. As a result, the State of Oregon Office of Economic Analysis is concerned that not enough housing can be constructed statewide to meet housing needs, and that rents may increase significantly and become out of reach for the average renter.
What does that mean for valuation of properties? Most properties are selling based on capitalization rates and net operating income. At this point, property valuations are significant, but as interest rates keep increasing, buyers will find it more and more difficult to get properties to cash flow. In the short run, the current banking crisis will also reduce the number of banks and credit unions that will be able to supply financing. As a result, those that continue lending will probably increase the cost and interest rates to offset their risk.
Summary
In general, apartment construction is stable.
Vacancies remain below 5.5% in stabilized (i.e., not new properties that are going through a rent up phase).
Rental income may be slowly increasing, though that may be offset by higher utilities, maintenance rates, and taxes.
More rent control is rearing its ugly head at the legislature.
There are fewer transactions, as buyers cannot fund the high prices demanded by sellers. Investment activity is slowing, as the ask / sell divide is significant with increasing interest rates. Headwinds in the form of tight credit conditions will persist through 2023, also making it more expensive to build new units.
As interest rates increase, CAP rates may be forced up.
Construction is generally outpacing demand.
Most investors are waiting out the market if they are not forced to buy due to a 1031 exchange.
Clifford A. Hockley, CPM, CCIM, MBA
Cliff is a Certified Property Manager® (CPM) and a Certified Commercial Investment Member (CCIM). Cliff joined Bluestone and Hockley Real Estate Services 1986 and successfully merged that company with Criteria Properties in 2021.
He has extensive experience representing property owners in the sale and purchase of warehouse, office, and retail properties, as well as mobile home parks and residential properties. Cliff’s clients include financial institutions, government agencies, private investors and nonprofit organizations. He is a Senior Advisor for SVN | Bluestone.
Cliff holds an MBA from Willamette University and a BS in Political Science from Claremont McKenna College. He is a frequent contributor to industry newsletters and served as adjunct professor at Portland State University, where he taught real estate-related topics. Cliff is the author of two books, 21 Fables and Successful Real Estate Investing; Invest Wisely Avoid Costly Mistakes and Make Money, books that helps investors navigate the rough shoals of real estate ownership. He is the managing member of a real estate consulting practice, Cliff Hockley Consulting, LLC., designed to help investors and commercial brokerage owners successfully navigate their businesses. He can be reached at 503-267-1909 , Cliffhockley@gmail.com or Cliff.Hockley@SVN.com.
