Portland Multifamily Market Stays Strong

Amid housing 'crisis,' demand for local apartments should continue to flourish

Robert Black, Associate Vice President, NAI NBS

In Portland, during early 2007, rampant conversion of multifamily properties to condo development had been sucking apartment product out of the market for at least five years. Vacancy was low, rents were climbing steadily, investor interest was high and, right around the second quarter, a burst of new development brought the promise of much-needed supply.

Then, just as it was starting to become clear that Portland’s seemingly endless in-migration of young creatives might be financially flummoxed by housing prices, the subprime lending crisis hit and the national housing market was poised to crash. Condo development froze. The conversion tables turned and, to date, a total of three downtown condo developments have changed into multifamily properties. If thirty-somethings were already on the fence about home buying, the housing crisis has sealed the deal.

Statistics back this up. Home-ownership rates in the Portland metro area dropped two percentage points in 2007 to 66 percent, but the state’s population rose by 1.6 percent. As a result, multifamily landlords are enjoying high demand, low supply and the opportunity to raise rents as much as 10 percent between tenants. Concessions to renters, such as allowing pets or offering move-in incentives, are going by the wayside in favor of having tenants shoulder partial utilities costs.

It’s a far cry from a city like Phoenix, where vacancy is approximately 10 percent, compared to Portland metro’s 3.8 percent. Due to Arizona’s crackdown on employers’ accountability for hiring undocumented workers, a significant part of that city’s apartment-renting population has fled. In Portland, we have the opposite.

All of that said, it’s easy to lose sight of how comparatively good our housing market is in the Pacific Northwest. Oregon has a markedly lower percentage of subprime loans than the national average. Portland is one of only three cities in the nation where home values held well into the mortgage fiasco and have only come down slightly since last summer, having been flat throughout the first quarter of 2008.

On The Up-and-Up
Why is that? Our financial integrity is owed in large part to the quality of Portland’s lending and appraisal community, and our small-town feel. Our lending and appraisal community, by maintaining a gold standard of reliability, has reduced our exposure to the kind of fraud other markets have experienced. We are finding out that in other markets appraisers, working in collusion with mortgage bankers, inflate values for deal volume with higher commissions and higher interest rates at the expense of not just unqualified borrowers, but eventually, taxpayers.

In the southwestern United States and parts of California, a high-transient business population makes it possible for bad deals to not stick to the offending company’s name. In markets even slightly larger than Portland, business people behind less than desirable transactions have enough anonymity to slip by. In Portland, there is still the mentality that if you want to keep doing business in this town, you have to do good business.

Media Influence
Now we have a media circus trumpeting catastrophe around the credit crunch and impending recession. We read threatening headlines every day. Many industry leaders are saying it’s time to ignore gloomy headlines and get back to work. There are have several good reasons to do so.

Portland’s diversified economy is broad-based, with the trade, transport and utilities sector as the state’s largest employer. We’re also strong in distribution, wholesale and retail trade, regional government and business services. Portland’s secret weapon, within the current climate, gives us a definite advantage: manufacturing is the third largest labor sector in the Portland metro area. We are also strong in the high-tech labor market and the nation’s third largest producer of semiconductors. Shops in Swan Island, Rivergate and the eastside industrial district show no signs of slowing. With the dollar weak, exports are strong – keeping our manufacturing and trade markets afloat.

What Does It All Mean for Multifamily?
Still cautious, lenders are now underwriting more aggressively, requiring more and more detailed reports. Lenders and, in turn, borrowers, are under more scrutiny than ever. However, investor interest in the Portland market is high and the housing crash reinforces multifamily as the product type of the moment. Capitalization rates still aren’t under too much pressure to increase.

For the remainder of 2008, expect to see a higher-than-average volume of institutional transactions like BPG Properties’ $260 million acquisition of Boston Capital Real Estate Investment Trust and the $55 million sale of Hedges Creek in Tualatin. Midsize and entrepreneurial deals will keeping a lower profile.

Nationally, everyone wants and expects a deal on a house. But the subprime slide was so quick, sellers haven’t yet had a chance to absorb how little their houses are now worth. As a result, a wide gap between ‘bid’ and ‘ask’ may keep many prospective homebuyers in the multifamily market for months to come.