Portland, Ore.—Multifamily owners who suffered from five years of decreased occupancy, negative rent growth, and hefty concessions can finally breathe a little easier now that the market has transitioned from soft to strong.
“The market is bouncing back,” said Nancy McNeill, a multifamily broker with Norris & Stevens, Inc./TCN Worldwide in the city. “A lot of people are moving here, and we’ve had a lot of employment growth, which is positive for the apartment market.” She pointed out that Portland has experienced very little new multifamily construction for some time because of the city’s urban growth boundary, which limits suburban sprawl.
The in-migration and strong job growth that Portland has experienced since 2004 has finally started to affect occupancy and rental rates. During 2004 and 2005, the city added roughly 58,000 new jobs and 55,000 new residents, respectively, according to research firm Reis, Inc.
“The big thing about Portland is the livability,” said Bill Younce, an adviser in Sperry Van Ness’ Portland office, adding that the city attracts young people, who in turn attract employers that are looking for a young, skilled workforce. Established companies such as Intel Corp. and Nike, Inc., located in suburban Portland, are also hiring again.
Additionally, the appreciation in single-family housing has priced some buyers out of the market, forcing them to stay in apartments, said Brian Bjornson, managing director of the multifamily division at Norris & Stevens, Inc./TCN Worldwide. “Home prices have risen drastically—the average is around $223,000—which is a far cry from where we were,” he said. “With prices of homes moving up, there’s not as much opportunity for the entry-level buyer.”
Owners push for rent hikes
Portland’s marketwide multifamily vacancy rate was 5.6 percent at the end of the second quarter, down from a high of 7.1 percent in 2003, according to Reis, Inc. Although the research firm estimates that the vacancy rate will stay about the same for the next couple of years, local players are predicting that it will continue to decrease, probably reaching 4 percent. This year, Reis predicts that 1,011 apartment units will be absorbed, following the 553 units and 1,172 units absorbed last year and in 2004, respectively.
Local property manager JPM Real Estate Services has seen the vacancy rate for its 1,650-unit apartment portfolio plunge from 12 percent last year to about 3 percent today, according to principal Jack Palmer.
Central Portland, especially downtown and the nearby southeast, southwest and northwest submarkets, is outperforming the suburban markets, said Palmer. “Downtown and the close-in areas are more popular and trendy for renters,” he explained. The downtown vacancy rate is hovering right around 3 percent, according to a recent market report by local brokerage firm NAI Norris Beggs & Simpson.
Similarly, Riverstone Residential Group’s 3,600-unit portfolio has already reached 96 percent occupancy, according to Vice President Joan Carro. “When we get above 95 percent, we start pushing rents more aggressively,” she said, adding that concessions, which were once as hefty as two months free on a 12-month lease, have been dwindling since the middle of 2005’s fourth quarter. “We’re seeing 10 percent to 18 percent effective rental rate growth,” Carro added.
Strong occupancy rates have prompted Palmer’s firm to increase rents as well. “We’ve been able to raise rents for the first time in five years,” he said. “All the owners are trying to make up in six months what they lost in five years by raising rents 5 percent to 15 percent.”
Reis, though, estimates that most apartment owners won’t see gains quite that large. The firm predicts an increase of 2.4 percent in rents this year, followed by 2.7 percent in 2007.
However, industry experts contend that rental rates could grow much faster than Reis predicts. “Over the last three years, we’ve had the most difficult rental times ever, and now we’re pressing the rents as hard as we can because we don’t know what the ceiling is,” Bjornson said.
Portland’s downtown area, specifically the Pearl District, where artists, gallery owners, and loft developers have converted blocks of old warehouses into retail and residential space, is “white hot,” according to Palmer. Teeming with hip, young professionals, the Pearl District has experienced a $150 per unit increase in market rents since the start of the year.
And owners aren’t just raising rents, noted Brian Glanville, managing director of Integra Realty Resources’ Portland office. “Both large and small owners are starting to pass on the cost of water, sewer, and garbage,” he said, adding that owners had held off doing so for fear of losing residents.
Condos take over downtown
Industry players don’t see many obstacles to future occupancy and rental rate growth. “There’s very little new construction of rental multifamily,” said Robert Black, a senior market consultant with NAI Norris Beggs & Simpson. “Condos are the only things that are being built in downtown because land is too expensive for apartment developers.” He noted that the price of land has escalated dramatically over the past two years, increasing to more than $200 per square foot from $100 per square foot.
Glanville said that more than 15 condo towers—most of them luxury projects—are under construction in Portland currently, and more are planned. For example, Opus Northwest and Carroll Investments, LLC, plan to break ground this fall on The Ladd Tower, a 21-story project in downtown that will offer 190 condominiums, along with office and retail space.
Beyond condos, Reis said that only 1,441 new rental units will be delivered in 2006, representing inventory growth of less than 1 percent. The story is much the same for 2007, when 1,456 units are expected to come online.
“The new construction just isn’t enough to keep up with demand,” Younce said, adding that condo conversions have depleted the rental supply. “We’ve lost 1,300 units over the past three years to conversions.”
Experts estimate that another 1,000 rental units have been converted into condos so far this year. For example, locally based Reliance Development acquired the 562-unit Portland Center from Equity Residential for more than $77 million and converted the property into condos, which are selling for between $180,000 and $615,000 per unit.
More buyers than sellers
Portland’s dearth of new apartment construction, coupled with the job and population growth, has caught the eyes of investors, Black said. He added: “We definitely have more buyers than sellers.” One of his recent deals, the 70-unit Sienna Lofts in suburban Gresham, received three offers before trading for $6.25 million to a private buyer from San Diego. Over the past 12 months, more than 160 apartment properties have changed hands in Portland, according to CoStar, a real-estate research company, representing a value of more than $900 million. The average unit price was $72,000 and the average cap rate was 6.47 percent. Many properties have sold for more, said McNeill, who was recently involved in the $17.5 million sale of Kellogg Lake Apartments. Located on 17 acres just seven miles from downtown Portland, the 231-unit, Class B complex garnered five offers before trading for more than $75,000 per unit. “Portland is the best deal on the West Coast,” McNeill contended. “We have a good story to tell.”