Portland Apartment Vacancy Rising, According to NAI NBS 2Q09 Report

Overview

Multifamily vacancy continued creeping upward to 5.03% during Second Quarter. Vacancy a year ago was 3.46%, for comparison. Vacancy in SE Portland increased considerably to 7.37%, and SW Portland vacancy also saw a large jump to 5.70%. Vacancy in both the Gresham/Troutdale and Lake Oswego/ West Linn submarkets decreased, remaining below 4%. Rents stayed essentially flat, hovering around where they were last quarter.

Market Trends

Apartment vacancy is on the rise, and our report, which polls select apartment complexes, may be slow to reflect this trend. The increase in vacancy isn’t due to residents moving away from Portland; even with the second highest unemployment rate in the nation, the area’s population is still growing at a healthy rate. Rather, tenants are doubling up, moving in with family, or moving to single-family rental homes. Landlords are now competing for the fewer active tenants by dropping rents and offering other incentives.

Downtown multifamily construction was booming in 2007 and 2008, with a large number of new units entering the market at the same time. As a result, 2,200 new units delivered from mid 2008 to March 2009. These new arrivals will take time to absorb and cause pressure on the entire market. But since very few new projects are in the pipeline, many of these units should be absorbed by 2011 evening out supply and demand.

The balance of the market has seen very light construction activity over the past two years. The lack of suburban building is allowing the small number of new units to be absorbed quickly. We expect to see a strong rebound to the suburban multifamily market when tenants start circulating. Though unemployment in Oregon is at an all-time high, Moody’s Economy.com predicts that Oregon will help lead the country out of the recession, with the state’s job market beginning to recover in late 2009, so leasing activity should increase and rental rates trend higher as unemployment decreases.

Transaction volume for apartment complexes remained very slow during Second Quarter. Cap rates are currently unpredictable and difficult to calculate, partially because of the volatility in interest rates and the lack of transaction data. But there is still some activity and financing available, especially through lenders like Fannie Mae and Freddie Mac.