It’s the catchphrase that’s been lobbied around amongst Portland, Ore.’s multifamily leaders: Cautious optimism. Yes, even as the term “optimism” has all but disappeared from the vernacular in this gloomy commercial real estate cycle, Portland’s multifamily market has a lot to enjoy. While Portland’s prospective residents have clearly become more diligent in their search process, leasing remains strong, and the general area is still considered an attractive secondary multifamily market thanks to solid occupancies, employment levels, and only a slight dip in rent levels.

In this environment, developers and investors are adapting, looking for opportunities that make sense, and checking and double-checking financials before making a commitment.

“Greater Portland’s population will continue to increase by approximately 35,000 new residents annually. Many of these are in the highly coveted 25- to 35-year-old demographic and tend to want to rent in the central city core,” says Brian Owendoff, vice president and general manager for Opus Northwest’s Portland operations. “What attracts them to Portland? Great neighborhoods, good schools, and exceptional recreation opportunities. In a phrase: quality of life.”

Slower, Not Over

Stable fundamentals lead many investors to consider Portland multifamily properties an attractive investment, but transaction trends have not been immune to the nation’s overriding economic downturn. Volume has slowed dramatically since the end of the third quarter of 2008, and sellers continue to be unwilling to move off of cap rates seen during the height of the market a few years ago. Today, a property must be near a 7 percent cap rate on real numbers in order to get any investor interest. This is an increase of more than 100 basis points from 12 months ago. Over the next 12 months, cap rates are expected to rise an additional 50 to 75 basis points as the multifamily investment market reaches the bottom.

With strict new lending requirements in place in virtually every multifamily market across the nation, gone are the days of underwriting a property based on its proforma. Instead, underwriting must be based on actual trailing 12-month financials of the property.

In Portland, underwriters are assuming expense growth of 4 percent with little or no income growth assumptions. The small private investor is the most active, looking to acquire B and C class properties ranging from 10 to 70 units. In this environment, however, the key to getting a deal done with a lender is a strong balance sheet and the ability to put as much as 40 percent down. Few deals are getting financed with less than 25 percent down, given that current underwriting standards call for a 1.25 debt service coverage ratio.

Even in this investment slow down, some buyers continue to remain active, acquiring value-added multifamily properties in Portland. Last August, Guardian Investments purchased the 279-unit Waterhouse Place Apartments in Beaverton, Ore., a suburb of Portland, for $30 million. The locally based firm plans to invest an additional $3 million—approximately $7,000 per unit—into renovations. The company will rehabilitate the 14.5-acre community with exterior upgrades such as updated landscaping, a resurfaced spa, new patio doors, and parking and clubhouse upgrades. The interior rehabilitation will include new carpets, floors, countertops, cabinet faces, hardware, and fresh paint.

Smart, Urban Growth

Much like investors, developers in Portland are challenged by a tight lending environment that requires additional equity from the developer as well as recourse financing. However, there continues to be great public and private support for mixed-use development containing a multifamily and retail component.

Portland’s urban growth boundary, which controls urban expansion onto farm and forest lands, has put a premium on density. Infill, brownfield, and mixed-use properties containing multiple components are viewed by a great many as the best use of available land. Working in one of the most environmentally- conscious regions, developers in Portland are encouraged to build “green” properties—those that seek to achieve LEED Silver, Gold, or Platinum rating.

According to CB Richard Ellis, there are 4,700 rental units in Portland that are under construction or in the initial lease-up phases. Additionally, there are 2,200 units in the planning stages, with fewer than 1,000 units expected to break ground in 2009. In this environment, it is a safe assumption that those developers who do proceed with projects during this stage of the cycle will need to have deep pockets and low basis in the land. Opus Northwest is one multifamily developer that remains securely in Portland’s “active” category, delivering approximately one-third of the new central city apartment product in 2009, including the Ladd and PARK19 projects. Ladd is a 332-unit, 23-story LEED Gold-certified mixed-use residential tower located in downtown Portland. The property features sleek architecture with floor plans ranging in size from 540-square-foot studios to 1,650-square-foot two-bedroom units. The site includes the First Christian Church, the Ladd Carriage House, and is in what’s known as Portland’s Cultural District. Ladd is scheduled for completion in August 2009.

Meanwhile, PARK19, located in the heart of Portland’s Northwest Historic Alphabet District, straddles the Pearl District and Northwest 23rd (Trendy Twenty Third). Completed in May 2009 (as scheduled at press time) and applying for LEED Silver certification, PARK19 has 101 units ranging in size from 530 square feet to 1,080 square feet; gated underground parking; a courtyard with a patio fireplace; contemporary finishes; hardwood floors; and high-efficiency appliances. The property is within walking distance of fine dining and shopping. Public transportation is also easily accessible with nearby bus stops, street car routes, and a Zipcar carsharing vehicle stall in front of the building.

In addition to Opus Northwest’s two communities, Trammell Crow Residential is developing Riva on the Park, a 22-story luxury high-rise with 294 units. The building features a pavilion terrace with an eco roof; courtyard with fireplace; oversized, energy-saving windows; and other green elements. Riva is adjacent to the South Waterfront neighborhood park along the Willamette River, next to the streetcar line, and with easy access to the Portland Aerial Tram. The property opened April 2009.

Bean Counters

Whether it’s a developer building new product or the owner of existing units, all eyes are on rental statistics. Like many other markets across the United States, rents in Portland multifamily communities have decreased slightly, particularly among Class A properties.

Rents are expected to continue to fall through 2009, but other fundamentals are positive. Overall, average effective rents increased in 2008 to $764 per unit as compared to $748 in 2007 and $704 in 2006. Concessions have also decreased.

Occupancy continues to remain fairly strong—in the mid-90 percent range, which is slightly higher than the national average. Over the next 12 months, many expect vacancy rates to increase in one-bedroom units, as one-bedroom renters looking to add a roommate start leasing two-bedroom units. According to research firm Reis, Portland’s average vacancy at 2008 year-end was 5 percent. This compares closely to 4.2 percent in 2007 and 5.2 percent in 2006.

In the coming months, the foreclosure crisis will no doubt put more pressure on rents and vacancies, as banks looking to dispose of assets allow some renters to acquire homes at severely reduced prices. However, with little new development on the horizon keeping supply in check, the Portland multifamily market will be attractive to those who proceed with cautious optimism.

Fast Facts

PORTLAND, ORE.

Population: 2.2 million
Occupancy: 95%
Median Age: 35
Median Household Income: $100,737
Average Rent: $764
Unemployment: 6.4%

Notable: The city has a number of unusual record-setting sights. Portland Saturday Market is the largest continuously operating open-air crafts market in the United States. Powell’s City of Books, occupying an entire city block, is the world’s largest independent bookstore. And the Portland Rose Festival’s Junior Parade is the largest children’s parade in America.

Karlin Conklin is chief operating officer of Guardian Management/Sperry Van Ness in Portland, Ore.