WESTERN SNAPSHOT, FEBRUARY 2009

Portland, Oregon, Multifamily Market

Portland’s multifamily transaction volume in 2008 was down by approximately one third from 2007. From January 2003 through December 2007 there was an average of 242 multifamily transactions per year. The Portland metro area had seen just 131 transactions through mid-December, down from 204 transactions completed the prior year.

Although fewer transactions have been completed, it seems that prices have not yet fallen to meet market conditions. Apartment cap rates have been slowly creeping up, but local owners have found that increases in rents due to a healthy rental market have kept values from falling too drastically.

The lending market, which once allowed investors to purchase more for less, has now swung the other way. The fact is the apartment lending market had become too aggressive in the last few years. Lenders were allowing buyers to use extraordinary leverage to purchase property that, even in the best of times, couldn’t produce enough income to service their debt. Underwriting standards had to change. It has become apparent that the market is now approaching a more normal or traditional lending environment.

Portland’s unemployment, a large factor in determining the health of the multifamily market, increased from 6.4 percent in September 2008 to 8.1 percent in November, which reflected a 2.7 percent increase over the prior November rate. No doubt this will have an effect on rents and vacancy rates, but just how large of an effect remains to be seen.

Vacancy rates in the Portland metro area increased slightly in 2008. Some of this was caused by renters choosing to consolidate along with a high shadow rental market consisting of the over abundance of condominiums and new housing constructed in the last few years. Portland metro area rents have remained steady at approximately $0.86 per square foot; however, close-in core markets are still seeing strong rent increases. Instrumental to the short-term survival of apartment investors, consistent population growth and the lack of new apartment construction should help keep the rental market tight.

2009 may see things get worse before they get better, although the Portland market is seemingly realizing more positive signs than other markets. One of those is Vestas’ decision to move its headquarters to the Portland area, creating some 850 new jobs. The Portland metro market rents are expected to increase again, but at a slower pace than the previous few years. Multifamily investors will continue to trade in and out of property, and a 65 percent loan-to-value will become the norm. These are tough, unprecedented times, but Portland has the desire and the ability to ride this out and come out on top.

Greg Frick is a partner and Nick Klein is an associate broker at HFO Investment Real Estate in Portland.

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