WESTERN SNAPSHOT, APRIL 2010

Portland, Oregon Multifamily Market

MARKET MOVES

A consistent trend since the housing market bubble burst in 2007 is the conversion of luxury condominium properties and projects into luxury apartment buildings in Portland’s central core. The difficulty has been that in order to meet debt service the rents on these repurposed condos need to be very high for the Portland market — $2.25 to $2.50 per square foot — but in many cases owners have not been achieving those levels. The variety of incentives being offered to prospective tenants reduces the bottom line.


Already, many condos are in trouble. In the past year, Macquarie Bank, an Australian financial institution, foreclosed on developer Paul Mayer’s Waterfront Pearl Condominiums on a debt of more than $18.4 million. The lenders for Williams & Dame Development and Gerding Edlen Development have taken over the sales on their John Ross and Atwater Place condominiums without foreclosing. Thirty condos at Atwater Place were auctioned off late in 2009 at 36 percent off the original asking price, and this month the lender intends to auction off 50 condos at John Ross at between 47 and 70 percent off the original prices.

Now, two of the condo-to-apartment projects are in trouble. Opus Northwest, the developer of Ladd Tower, changed course in 2007 from planned condominiums to apartments. That 190-unit building was completed early in 2009 and at last report was only 62 percent leased. Opus Northwest is now urgently looking for money for recapitalization, which may involve selling this building or other holdings in metro Portland. (Allied companies Opus South, East and West have already filed for bankruptcy.)

In February, Bank of America declared the developers of 2121 Belmont in default on $28.1 million. The $30 million, 123-unit condo project was converted to apartments in 2008 by Citiview, which had purchased a controlling interest from the original developers, Homer Williams and Scott Stehman. Management reports 94 percent occupancy, but many renters were offered significant concessions to sign. This turmoil at the high end of the apartment market has had little impact on the Portland apartment market as a whole.

MARKET MEASURE



As indicators of near-future market performance in the multifamily sector, vacancy rates can be deceiving. Taken alone, they do not reflect the true state of a community’s economic health, because often a lower vacancy rate has been achieved by reducing rents, offering concessions on fees and deposits or offering free rent in exchange for a lease. For this reason, average rents are a better bellwether. Average rents accurately reflected the apartment market slowdown and rebound earlier last decade. In the fourth quarter of 2009, rents began to decline slightly. Anticipate additional rent decline, but nothing precipitous, when first quarter numbers are in.



THE MARK OF A MARKET

The apartment market in Portland, with exception of the repurposed condo segment, has been fortunate to suffer from very little over-building. Beginning around 2003, the housing boom arrived, bringing with it higher land prices. In addition to market pressure from developers, high land prices were also supported by the legally imposed Urban Growth Boundary for Oregon cities, which encourages denser development within the boundary and discourages urban sprawl into farm and timberland with lower price tags. Land prices grew so fast, that apartment construction came to a virtual standstill. Except for subsidized housing or housing with tax advantages, developers saw no upside to apartment development when compared to condominium development or single-family homes.

Then, of course, the condo market deflated. But, the condos that have been repurposed as apartments are luxury units, mostly in the city core, with high rents. The inventory of average, middle-class apartments has grown very little. Since the market drop, in the face of tight financing with stiff equity requirements, steep construction costs including high cost systems and development charges and expensive building permits, and non-economic land prices, most developers are waiting before jumping back into apartment development. The upshot is that the apartment market in Portland is not experiencing the range of occupancy challenges that other types of commercial real estate unfortunately are.

— Brian Bjornson is managing director of Norris & Stevens/TCN Worldwide in Portland.

©2010 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.