Multifamily Market Still Healthy, But Product Sales Down

Overview

Multifamily vacancy crept up a bit to 4.96% in the First Quarter 2009. For comparison, the overall vacancy rate a year ago was 3.80%. The Clackamas/Oregon City/Milwaukie submarket had the highest vacancy at 6.00%, nearly two percentage points up from last quarter. Vancouver’s vacancy decreased more than a percentage point, however, to 4.81%. Southwest Portland had the lowest vacancy at 4.28%.

Average rental rates in all apartment types rose slightly, between $2 and $5, during First Quarter. The Downtown Portland and Wilsonville submarkets saw significant price increases in certain apartment types. The price of a 2 BR/2 BA unit downtown increased by $26 to $1,800, and a 3 BR/2 BA in Wilsonville rose by $18 to $868. The overall average to rent an apartment in Vancouver was $679, the lowest of all submarkets.

Market Trends

The current economic stress is evident in the multifamily market. Vacancy rates are increasing in suburban markets, including Vancouver and free rent incentives are now common, driving down effective rental rates. We expect to see this trend for the balance of 2009.

Many experts today view multifamily as the most stable product type and the one least affected by the uncertainties in this downturn, though the uncertainty has affected sales activity. Product sales were down dramatically in 2008, and we expect this to continue throughout 2009. It’s difficult to determine where values will settle, but going forward, they will be determined based more on tried and true methods like cash-oncash returns, driven by real numbers and interest rates, rather than specific pro forma models. Cap rates will be calculated more conservatively with much more scrutiny on underwriting, in-place income, historic performance, cost of capital and market stability.

The federal stimulus package got off to a bit of a bumpy start and its impact is still unknown, but it is encouraging to see economic stimulus action being taken, and investors may have some reason to be optimistic. Smaller, local banks will benefit from the stimulus, allowing them to clear the overhang of single family development inventory by extending lower interest rate loans. Low mortgage rates, along with the $8,000 tax credit for first-time home buyers, are stimulating the balance of the single family market and sales are picking up for homes under $350,000. On the multifamily side, Fannie Mae still has the lowest rates, but these rates come with more scrutiny on the borrower and property.

The full report is available on our Web site.