First Quarter Reports Show Some Improvement for Portland CRE

NAI Norris, Beggs & Simpson has released its First Quarter 2011 quarterly reports for office, industrial, retail and multifamily commercial real estate, as well as its economic report.

Central City office vacancy rose slightly to 12.41 percent during First Quarter. The biggest office news downtown was the $129 million sale of Shorenstein’s First & Main to American Assets Trust. Suburban office vacancy also rose slightly, to 24.13 percent.

Industrial vacancy rose nearly a percentage point to 15.94 percent, with 529,020 sf newly available. Vacancy especially increased in North/Northeast, up to 18.94 percent, as a number of tenants vacated large spaces. But positive signs included Subaru’s build-to-suit lease at Rivergate Corporate Center III.

Retail vacancy remained fairly stable at 6.3 percent. Vancouver is seeing considerable retail activity, including a new Cinetopia under construction at Westfield Vancouver Mall and the recently-announced New Seasons in Fisher’s Landing, opening this October.

The multifamily market has seen recovery more quickly than other property types. Apartment vacancy was 2.74 percent during First Quarter, down from a peak of 5.43 percent during Fourth Quarter 2009. The multifamily investment market remains a bit sluggish, though the institutional market is more robust. The construction pipeline has also started to heat up.

Some Positive Signs for PDX Commercial Real Estate During Fourth Quarter

NAI Norris, Beggs & Simpson has released its Fourth Quarter 2010 quarterly reports for office, industrial, retail and multifamily commercial real estate, as well as its economic report.

Office vacancy in Central City decreased to 11.78%, with a few significant leases. Suburban office vacancy fell slightly to 23.88%, with 121,056 sf absorbed. One of the larger leases of the quarter was ACS taking 30,656 sf at Triangle Pointe for a new call center. Vancouver office vacancy rose slightly to 18.7%.

Industrial vacancy fell slightly to 15.01%, with 108,375 sf absorbed. As one recent study showed, the industrial sector is a bright spot in Oregon’s economy, and the Port of Vancouver has recently seen heightened activity with BHP Billiton’s 60-acre lease.

Retail vacancy was stable at 6.4%, with 81,081 sf absorbed. The area’s first H&M opened in November at Pioneer Place, and H&M also leased nearly 20,000 sf at Washington Square. Ross Dress for Less and Dick’s Sporting Goods also signed significant leases during Fourth Quarter.

The Fourth Quarter ended with a flurry of multifamily investment sales. The $79 million sale of Ladd Tower and $70 million sale of the Palladia Apartments were just two of the significant sales of the quarter. Apartment vacancy also fell to 3.09%.

Full reports can be accessed here.

Third Quarter Market Reports for PDX CRE: Signs of Improvement in Multifamily, Central City Office Markets

This week we released our Third Quarter 2010 quarterly reports for the Portland metro area. There's no doubt that we're still seeing the impact of the recession, but there was certainly some good news, too.

Office vacancy in Central City decreased to 12.13% with 282,442 sf absorbed, thanks to large leases at First & Main and the Meier & Frank Depot Building. Suburban vacancy remained stable at 24.06% with about 4,000 sf absorbed, the first positive absorption in the suburban office market since Third Quarter 2008.

Industrial vacancy was stable at 15.22%, with about 10,000 sf absorbed. A few large transactions occurred, including PFX Pet Supply leasing 70,000 sf at Columbia Corporate Park I in North/Northeast.

Retail vacancy decreased to 6.5%, and a few projects broke ground, including the 215,000 sf Progress Ridge Town Square between Tigard and Beaverton. Retail sales were up in August and September with the help of a strong back to school shopping season.

Multifamily was a bright spot during Third Quarter. Vacancy fell to 3.65%, the lowest it has been since Second Quarter 2008. The multifamily investment market also showed increased activity, especially for properties developed as condominiums and converted to apartments.

A PDF of all the reports can be found here.

Multifamily Vacancy Down in Portland in Second Quarter

Overview

Multifamily vacancy decreased to 4.11% during Second Quarter. Downtown Portland units continued to be leased up at a healthy rate, as vacancy for both new and seasoned units fell around 2 percentage points. Last quarter, this report began tracking a number of recent central city deliveries, and two new properties, the Matisse in South Waterfront (272 units) and the Broadstone Enso in the Pearl (152 units), will be added to the report when they are stabilized in 2011. Rental rates increased by $10 overall, or a cent per square foot, and as expected, downtown units led these increases.

Market Trends

It’s a good sign that vacancy is down and rents are increasing, and landlords are offering fewer concessions (except for new downtown properties), which indicates a healthier market. If new units continue to be absorbed at the current rate and the economy shows signs of solid recovery, we should see stabilization in 2011. But owners and managers remain guarded in their optimism, questioning whether recovery will occur without significant job creation, which we haven’t yet seen.

Despite the uptick in occupancy and some other positive indicators, the multifamily investment market remains sluggish. According to CoStar’s sales comparables, just two transactions over $3 million occurred during Second Quarter, one being the $38.75 million sale of the 188-unit Tupelo Alley in North Portland, which was a solid institutional sale. Investors remain uncertain about the region’s economic outlook, and worry that the Portland Metro Area doesn’t have one particular economic driver or growth engine, which may lead to a flat recovery. Companies are hunkered down, waiting to see significant improvement before investing, and the volatility on Wall Street in May didn’t help. Potential owners are also deterred by the increased costs of utilities and fees associated with owning and developing.

The deals being done in Portland and around the Pacific Northwest are at lower cap rates; this doesn’t necessarily indicate recovery, but of finding the ideal buyer on the transaction. Few aggressive buyers are currently active, though, and there’s little leverage to do deals. Financing remains challenging, with a limited number of lenders. Fannie Mae and Freddie Mac are the two most active lenders, and a number of other sources, like Chase and some life insurance companies, are becoming more active in pursuing deals.

The full report can be found here.

Three Large Transactions in Portland Metro Area Announced This Week

Some good news on the Portland metro area investment front this week, just as sunny summer weather finally hit.

Retail Opportunity Investments Corp, a New York real estate investor, is buying five Portland metro area shopping centers for about $90 million. It closed on Vancouver Market Center for $11.19 million, and is under contract for Cascade Summit Shopping Center, Heritage Market Center, Happy Valley Town Center, and Oregon City Point.

Phillips Edison & Co. also purchased Johnson Creek Shopping Center, a 106,709 sf center in Clackamas, for an undisclosed price.

And Behringer Harvard Holdings purchased the 188-unit Tupelo Alley Apartments on N. Mississippi in Portland for $38.75 million in the largest multifamily transaction so far this year.

Investors Pays $1.7M for Box & One in SE Portland

An investor has purchased the Box & One, two mixed-use buildings at SE 28th and Ankeny, for $1.7 million. NAI Norris, Beggs & Simpson's Robert Black represented the seller.

The transaction had a 7.2 percent cap rate and was a market-rate deal, Black said.

The 7,318 sf project has ground-floor retail and five loft-style apartments above. It is home to Crema Bakery & Cafe, on the corner of SE 28th and Ankeny, whose space features roll-up garage doors. The other ground-floor retail tenant is Coalition Brewing, which is expected to open this year.

The retail and residential spaces have been fully occupied since the buildings were constructed in 2002, and the apartments garner market-leading rental rates, Black said. Just a block off of Burnside in a neighborhood with lots of pedestrians, the project’s location promotes bicycle and bus use, and the buildings are energy efficient and sustainable.

The buyer was familiar with the Box & One because he had often visited Crema on trips to Portland, Black said, and the building’s strong occupancy, unique design and excellent location were appealing.

“Mixed-use, neighborhood-scale projects are popular investments today, especially in Portland,” Black said. “The Box & One has such strong fundamentals that it was a great opportunity for the buyer.”

Overall Portland Multifamily Vacancy Down in First Quarter; NAI NBS Adds New Properties to Report

Multifamily vacancy decreased more than half a percentage point to 4.82%. Downtown, however, saw a significant increase in vacancy. This increase resulted in the addition of new product; we added ten properties totaling more than 2,100 units to the report this quarter.

Our report tracks buildings of 100 units and above in the metro area; we consider smaller buildings in some submarkets if they lack many 100+ unit properties. This quarter we added the majority of downtown units that have come to market in the past 24 months, excluding three properties that are under construction or have very recently delivered: the Broadstone Enso, the Matisse, and Indigo 12 West.

With the additions to the report, downtown vacancy rose 5 percentage points to 10.15% and vacancy in new units came in at over 15%. The new units have impacted existing and historic downtown apartments by pushing down effective rents on existing units and creating a more competitive environment. Concessions like free rent and parking are thus being offered on new and seasoned units, and marketing has become considerably more aggressive. If the economy continues to recover, the downtown market could begin to stabilize by the end of 2010.

Market Trends
Apartment managers and investors report seeing a significant uptick in tenant traffic in the latter part of the quarter. This is a good sign but doesn’t necessarily indicate a recovery, which is contingent on two to three quarters of increased tenant traffic, a reduction in vacancy and increasing rental rates. The suburban markets have seen good absorption of new product, since there has definitely not been an oversupply, and submarkets like the Sunset Corridor, East County and the close-in eastside are truly tightening up.

The multifamily market is heavily dependent on the state of the local and national economy, and especially on the fragile job market. Considerable improvement in the job market should be reflected in quarter-over-quarter improvement in occupancy and rental rates. The bright spots locally are that companies like FedEx, Boeing, and Genentech continue to invest in the area. And despite challenges, Portland continues to grow. U-Haul pegged Portland’s growth rate at 10.16% (No. 3 in the country) for 2009, meaning the number of families renting U-Hauls to move to Portland was 10.16% higher than the number of families renting trucks to leave.

NBS Companies and Stratton Launch NBS Multifamily Management

Norris, Beggs & Simpson Companies and Susan Bowlsby Stratton, a successful apartment management executive, have joined forces to found NBS Multifamily Management, a company dedicated to managing apartment communities of 100 units or more around the West Coast.

Why start a new venture in this economic climate? NBS Companies President J. Clayton Hering said he expects that as the job market grows, the demand for housing will increase, with a short supply of single-family and multifamily housing due to the significant reduction in construction over the last several years. With single-family lenders requiring greater equity and better credit, fewer people will be able to buy houses and will thus reenter the apartment market.

“With increased market activity the necessity for professional, value-added multifamily management will rise, and NBS Multifamily Management will provide a quality of service to enable multifamily owners to be competitive,” Hering said.

NBS Multifamily Management expects to hire more than 100 people in the area to run and maintain the apartment communities it will manage.

Stratton, who has more than 20 years of multifamily management experience up and down the West Coast, will serve as President of the new company. Stratton spent 13 years at Harsch Investment Properties, most recently as Senior Vice President of Operations, where she was responsible for the company’s multifamily division and managed up to 5,500 units. A native Oregonian, she will receive her Executive MBA from Pepperdine University in March.

“I am so pleased to be joining NBS,” Stratton said. “My years of experience combined with NBS’ very successful property management track record will allow us to shine in the multifamily management industry.”

Cassandra Haavisto will serve as NBS Multifamily Management’s Regional Manager for the Puget Sound area. Haavisto’s industry experience spans 20 years; she has managed more than 13,000 units during her career and worked for major companies like Harsch Investment Properties and Trammell Crow.

NAI Global's Global Market Report Details Challenging 2009

Commercial real estate markets around the world experienced the full impact of the global economic recession in 2009, according to the 24th annual Global Market Report released by NAI Global. Rising vacancy rates and declining rental rates were evident in virtually every market sector and geography, with weak demand and a growing supply of sublease space further eroding market fundamentals.

After a turbulent 18-24 months since the market peaked, 2009 marked a year where transaction volume nearly came to a standstill as corporate tenants waited for clear signs of recovery and investors remained on the sidelines waiting for signs the bottom has been reached. As the year progressed, government intervention in the form of stimulus packages in the U.S., Europe and parts of Asia took hold and by year’s end many markets had begun to stabilize. However, with U.S. unemployment topping 10%, consumer demand and spending power at their lowest levels in decades and international manufacturing and trade proceeding at a crawl, the global recovery will take some time to truly stimulate economic growth.

“The past year was extremely challenging for commercial real estate, and we don’t anticipate much new demand in 2010,” said Jeffrey M. Finn, President & CEO of NAI Global. “We’re working with our corporate clients to help them take advantage of the current tenants’ market to reduce their long-term occupancy costs. Many tenants are able to negotiate more favorable lease terms today in exchange for a longer commitment. This ‘extend and blend’ practice is a trend we see continuing well into the next 18-24 months.”

Investors who have been sidelined by economic uncertainty will see tremendous acquisition opportunities in the coming year as banks and financial institutions clean up their balance sheets and move more aggressively to dispose of commercial real estate loans and financially distressed real estate assets, said Finn.

“The recession has been over for six months and job growth is just months away, but the fact remains it will be impossible to predict what will happen next,” added Dr. Peter Linneman, NAI Global Chief Economist and Principal at Linneman Associates. “With significant tax, healthcare and regulatory proposals still in the offing, there is little clarity as to the ultimate outcomes or costs. We’re concerned with commercial mortgage delinquency rates as they have been on the rise and could keep the commercial real estate industry in neutral for several more months.”

NAI Global is one of the largest real estate services providers worldwide. Headquartered in Princeton, New Jersey, NAI Global manages a network of 5,000 professionals and 325 offices in 55 countries. Now in its 24th year, NAI’s Global Market Report offers insider insight and perspective on market conditions reported by NAI experts on the ground in over 200 property markets worldwide. To obtain a copy of the full report, contact psetaro@naiglobal.com.

Portland Industrial, Retail Vacancy Decreased During Fourth Quarter, NAI NBS Reports Show

NAI Norris, Beggs & Simpson has released its Fourth Quarter 2009 quarterly reports for office, industrial, retail and multifamily commercial real estate, as well as its economic report.

Office vacancy increased slightly to 11.81% in Central City and 20.95% in the suburban areas. The Northwest submarket saw some activity – the 87,976 sf redevelopment Soho 321 delivered, and a few leases were signed at Machine Works. Vancouver vacancy was flat at 18.56%, with positive absorption of 22,488 sf.

Industrial vacancy decreased to 14.85%, with 55,308 sf absorbed. This was the first positive absorption since Third Quarter of 2008. A number of sizeable leases were signed in North/Northeast, including MOR Furniture for Less leasing 156,000 sf at Kelley Point Distribution, and Rose City Printing & Packaging leasing 62,000 sf at Sandy Boulevard Business Park. Flex vacancy rose slightly to 16.16%.

The retail market saw some improvement this quarter as vacancy decreased more than half a percentage point to 7.4%, with 349,919 sf absorbed. The 140,000 sf Cascade Station Target delivered, and better than expected holiday retail sales results were encouraging.

Multifamily vacancy rose nearly a percentage point to 5.43%; a seasonal uptick in vacancy is to be expected, but this rise was more significant. Rents were largely flat. While multifamily permitting and construction is down, opportunities exist for developers to acquire buildable land at substantially lower prices. Yet barriers to development include lack of capital and uncertainty of future rental rates.

Click here for full reports.

NAI NBS Releases Third Quarter Reports

NAI Norris, Beggs & Simpson has released its Third Quarter 2009 quarterly reports for office, industrial, retail and multifamily commercial real estate, as well as its economic report.

Office vacancy in Central City rose slightly from the previous quarter to 11.12%, with -272,692 sf absorbed. Two Class B buildings in Northwest were major contributors to this rise in vacancy and negative absorption. Vacancy in the suburban office markets rose about a percentage point to 20.59%, and Vancouver office vacancy rose to 18.42%.

Industrial vacancy increased to 14.94%, with -531,805 sf absorbed. One positive sign for the industrial market this quarter was Daimler Trucks North America’s decision to keep its Swan Island plant open. The plant had previously been scheduled to close in June 2010.

Vacancy in the retail market rose to 8.0%, with 365,818 sf newly available. The closure of all Joe’s Sports & Outdoors stores helped contribute to the increased vacancy, but Dick’s Sporting Goods leased a few previous Joe’s locations in the metro area.

Multifamily vacancy decreased slightly to 4.64%, which can partly be attributed to more tenants being active during the summer months; some landlords offered rent concessions and other incentives to attract tenants. Multifamily rental rates rose slightly.

A PDF of all of the reports can be found here.

Portland Apartment Vacancy Rising, But Market is Poised for Upswing

Robert Black, Associate Vice President, NAI NBS

Portlanders may be noticing more “For Rent” signs on apartment buildings around the city this summer, one of the more noticeable signs of how this recession has affected the apartment market. Apartment vacancy is rising across the metro area and multifamily investment sales are down, but the Portland market will recover from this economic downturn and be well-positioned for a comeback.

NAI Norris, Beggs & Simpson’s Second Quarter 2009 reports show a slight increase in apartment vacancy from the previous quarter to an overall 5.03 percent; this report only surveys select apartment complexes with more than 100 units, so vacancy across complexes of all sizes could likely be a bit higher.

The increase in vacancy doesn’t mean that people are moving out of the city. In fact, the Portland metro area’s population has been increasing in recent years. The U.S. Census Bureau estimates that Multnomah County’s population rose 2.2 percent in 2008, and that the greater Portland area’s population reached 2.2 million people last year. Portland’s relatively low cost of living, in addition to diversified job prospects and plentiful outdoor activities, continue to attract new residents.

So where are the renters living, if they’re not leaving Portland? Many of them are doubling up in apartments, moving in with family, or renting single-family homes. Though Portland unemployment decreased slightly to 11.6% in June, renters are still concerned about job security and layoffs, so they are taking any steps they can to save money.

Some tenants are also choosing to purchase homes. With median home sale prices down 13.8 percent from this time last year, an $8,000 first-time home buyer tax credit from the federal government and historically low interest rates, buying a home is becoming an option for more people.

Landlords are doing everything they can to attract the fewer active renters in the market. Concessions today in certain submarkets are sizeable, including up to two months free rent on a 13-month lease for some new properties in the downtown area. Renters looking for a new place to live are shopping around for the best deals they can get, and existing tenants are also tuned in and looking for bonuses to extend their leases on expiration.

The Portland-area submarket that everyone is keeping an eye on is downtown. Downtown has seen a building boom over the past five years, and with the condominium market softening at the end of 2007, developers looked for conversion options for projects proposed and under construction.

What resulted was one of the largest deliveries of new units the market has ever seen. Between February 2008 and today, the market added about 2,030 new units in the Central Business District (CBD), according to NAI NBS’ research, with another 450 units under construction delivering between fall 2009 and spring 2010.

This may seem like a large number, but there’s a reasonable explanation. From 2003 to 2007, more than 1,500 existing apartment units in the CBD were actually converted into condominiums. This loss of rental units helped drive the surge in the CBD apartment market, and when the new units began delivering in early 2008 the CBD had strong fundamentals, with the largest historic rental rate growth and vacancy below 3 percent.

If history is our guide in estimating demand for CBD apartments, it will take time to absorb the new product, but once the market stabilizes, in about 24 months, vacancy will tighten and rent growth will return, since there will essentially be no building in the remainder of 2009 and 2010.

Vacancy in the suburban markets is increasing, but because much construction of the past few years occurred nearer to the city’s core, they are well-positioned for when tenants become more active again. And when this happens, the suburbs will likely be underbuilt, driving demand and pushing rental rates back up to 2008 levels and beyond.

Multifamily investment sales have been seriously affected by the recession. The Portland metro area has seen approximately $137 million in apartment sales so far this year through the end of July, according to data gathered from CoStar, a commercial real estate information company. That figure for January to July of 2008 was around $656 million. This equates to a nearly 80 percent drop in sales.

2008 was a record year for apartment sales, and one critical component to the sales volume that year was the number of institutional sales, which we define as sales valued at $20 million and above. In 2008, $380 million worth of transactions was in individual sales over $20 million, while thus far 2009 has produced just one transaction above $20 million. When we omit the institutional transactions, the volume in 2009 compares more favorably, at about 43 percent of the volume in 2008.

Despite the impact of the recession on the apartment market, Portland is in a good position for the upswing. U.S. News & World Report recently named Portland and its commercial market one of the ten cities “primed for a real estate recovery,” due to its green economy and overall economic health. When the job market and overall economy starts to improve, Portland’s multifamily market will be in a strong position for a rebound.

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.

VBJ Article Provides Commercial Real Estate Update for Clark County

The Vancouver Business Journal ran a story Friday exploring the present state of the commercial real estate market in Clark County. The article suggested that lease rates are decreasing and vacancy is going up, but that there are some positives. For instance, retail vacancy has increased, but it could have gone up quite a bit more. NAI NBS' Pam Lindloff, a retail specialist, and Garret Harper, who focuses on industrial leasing and sales, were interviewed for the article. You can find it here.

NAI NBS tracks vacancy and construction in Clark County for office, retail, industrial and multifamily properties. Our Second Quarter 2009 reports will be posted on this blog and on our Web site by mid-July.

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.

How is the California Multifamily Investor Affecting the Portland Market?

Plenty of real estate opportunities exist as occupancy rates remain high in area

Eric Shreves, Senior Real Estate Broker, NAI NBS

The condo-converting developer and the perceivably aggressive California investor have been leading actors shaping the expiring market cycle for local mid-market apartment properties. One need not be too bright to guess that condo developers are more cautious than they were 18 months ago. The California investor’s status has not received as much attention, but is equally important.

In 1999, mid-market multifamily investors from California represented 4 percent of buyers. That number skyrocketed to 27 percent in 2005, slipped to 25 percent in 2006 and dropped to 14 percent in 2007. Conventional wisdom says that these California investors drove cap rates down and values up. But was this really the case? If true, have values dropped as Californians have become less active in the local market? How do investors navigate this new climate?

About 70 percent of California investors come from the northern part of the state. What was happening in Northern California and the Portland metro area in 2005 to make the California investor such an influential player in our market? In the San Francisco-Oakland-Fremont market, the average price per unit was $167,825 and the average cap rate was 4.84 percent. In the Portland area, investors were enjoying an average price per unit of $61,057 and a 6.65-percent cap rate.

So California investors were simply chasing better returns than what was achievable in other major markets on the west coast. Through 2006, Portland offered the best cap rates on the west coast and was surpassed west of the Rocky Mountains by only Salt Lake City. However, family connections are another motivating factor influencing these investors to become active in the market.

Institutional investors may be purely focused on rate of return, but private entrepreneurial investors have more complex motivations. It’s not unusual to speak with a California investor who has a relative who recently moved to the Portland area and is looking for a project they can work on together. As more Californians move into our metro area, they will bring with them family and social connections that provide capital and expertise to make them real players in our marketplace. This is a difficult dynamic to quantify, but it is common enough to consider it a substantial influence in the rise of the California investor.

Many property owners expect California investors to pay prices previously unheard of. On its face it makes sense. Homeowners moving from San Francisco, where an average home costs $700,000, see similar houses for $350,000 in Portland and think this is a bargain basement price. A multifamily investor facing an acquisition cost of $167,000 per unit in San Francisco might find $61,000 per unit in Portland attractive. Most developers can’t replace a unit for $61,000. However, has the California investor consistently paid more for multifamily units than local investors?

The facts reveal that California investors have not paid substantially more for mid-sized multifamily property than their local competitors. Starting with the current market cycle in 2003, following the last local recession, California investors actually paid less than local investors on both a price-per-unit and cap-rate basis. Since 2003, California investors have paid an average of $5,482 less per unit than local investors and 26 basis points higher than local investors with cap rates. Of course, there are enough examples of aggressive buying to nurture this conventional wisdom. One subplot has been the activity of California investors in East Multnomah County.

Since 2003, California investors have made up almost 30 percent of East Multnomah County property buyers. Have they been paying premiums in that submarket above what local investors have been paying? Not exactly. If we analyze the highest achieved values on a price-per-unit basis in East Multnomah County, we find that 26 percent of that segment was from California and 70 percent were local investors.

Although California investors have not been primarily responsible for pushing values up and cap rates down in our market, they have played a substantial role by providing competition for limited local product. And that has indirectly affected values. However, they have been increasingly less interested in our market. In 2006, 25 percent of buyers hailed from California, but that number dropped to 14 percent in 2007. Did the decreased competition from California result in lower pricing in 2007 for local investors? Fortunately for sellers and unfortunately for buyers, this was not the case.

The average price per unit in the metro area in 2006 was $66,036 with a 6.43-percent cap rate. In 2007, after a 56-percent reduction in California buyers, the average price per unit increased slightly to $66,920 with a 6.15-percent cap rate. Now, 2008 seems to be a transitional period.

For the first two quarters of 2008, the main story of this market hasn’t been the emergence or disappearance of the California investor, but the slowdown in transaction velocity. To date this year, the Portland area has seen 48 total transactions for mid-market apartments. In context, the market has been averaging 115 in the first two quarters of each year during this market cycle. There is increased inventory available on the open market, but the bid-ask gap is wider than we have experienced in recent times.

Investors still have much to cheer about. The Portland market shows strong occupancy across the board that yields vacancy rates reflective of typical turnover rather than economic distress or increased supply. Most submarkets will be supply constrained for the foreseeable future due to land constraints and construction costs. Surrounding oneself with good counsel from an informed broker and property management professional will continue to be essential. For investors interested in selling an asset, it will be important to ensure expectations and pricing is in accord with emerging market conditions to capture a prospective buyer. For prospective buyers, it will become more important to identify value-add opportunities or core assets with reasonable sellers. No matter the market situation, active investors can always find opportunities.

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.