MARCH 2008: REAL ESTATE
THE
RENTAL REBOUND
Housing market turmoil and the law of supply and demand create
a robust landlord’s market.
By Abraham Hyatt
Thanks in part to the collapse of the housing market, 2007
turned into an uncharacteristically strong year for the
state’s multi-family rental market — an industry
that’s been sluggish at best in most regions since the
last recession. This year, analysts say, will be even
stronger.
The boom stems from several things. First, more people are
looking to rent. In the wake of the mortgage disaster, home
sales in the Portland metro area, for example, fell 13%, and
homeownership in the region fell from 68.3% to 66%. At the same
time, the state’s population grew by 1.6%, and the
average mortgage payments needed to purchase a new home became
unaffordable for many. Meanwhile, new construction of apartment
units was very slow in much of Oregon.
High demand, low supply — the result could have been
predicted with elementary economics.
In 2003, the apartment vacancy rate in the Portland region sat
at 8.3%. According to Mark Barry, of Portland real estate
appraisal firm Mark D. Barry & Associates, by the end of
2007 it was 2.9% — the lowest it’s been in more
than a decade. The Salem and Keizer area was even lower, at
2.7%, according to Shirley Layne, an appraiser at Powell
Valuation in Salem.
Vacancy rates in Eugene and Medford are also low, according to
anecdotal accounts from appraisers in those cities. The only
metro area where vacancies remained static was Bend, where
it’s around 5%, according to Michael J. Caba, an
appraiser with the city’s Bratton Appraisal Group.
With so few vacancies, landlords no longer have to make
concessions for renters, like allowing pets or offering
discounts such as a free month’s rent to new tenants, to
stay competitive. They’re also making tenants shoulder
more of the utilities burden.
And they’re raising rents, sometimes as much as 10%
between tenants. According to Portland’s Norris, Beggs
& Simpson, in the fourth quarter of 2007 the average rent
for a two-bedroom, two-bath apartment in the Portland metro
area rose to $840; one-bedroom, one-bath rental rates hit $731.
The average rent was $755. A recent study conducted by Layne
showed that rents in Salem increased between $12 and $80 over
the course of 2007, with the possibility of significantly more
growth in 2008.
Those in the industry say the current boom is a long-overdue
correction. But there are a number of economic influences that
could have a negative effect in the coming years: a national or
state economic downturn; a drastic shortage of units because of
rising land prices; a renting population that faces an
uncertain economy; and wages, at least in some industries, that
aren’t keeping pace with inflation.
While demand for apartment rentals is high, the amount of
supply is sometimes harder to quantify. In Salem and Keizer,
it’s pretty clear: An insignificant number of new
apartment units will be available this year.
But in Portland, Deborah Imse, executive director of the
city’s Metro Multifamily Housing Association, points to
the unsold single-family housing inventory that builders will
likely start using as rentals. That’s because
single-family inventory is up almost 90% in the Portland metro
area compared with last year. Once-booming Central Oregon is
seeing the same phenomenon. Appraiser Sarah Houston, with
Bend’s Sam Houston Appraiser, says signs advertising
“rent to own” are appearing in front of homes in
the city.
Another element of supply is condo conversions, but not the
kind with which the Portland metro area has become familiar.
Over the past few years, as many as 3% of Portland’s
apartments were converted to condos. That’s come to a
dead stop. “That market has fallen off the cliff,”
says Greg Frick, a partner at the Portland real estate
investment firm Hagerman, Frick, O’Brien.
This year will see the converse conversion. The
highest-profile examples are the 244-unit Wyatt project in the
Pearl district and the 220-unit Ladd Tower in downtown that
were originally planned as condos. Instead, they’ll go on
the market as high-end apartments.
Then there are the new projects. Ohio-based Red Capital Group,
a real estate capital firm, estimates that 1,750 units will be
built over the year, the majority of which will come from five
major projects around the Portland metro area.
Calculating the number of rental units can be a tricky thing,
even looking back on the previous year. For instance,
Multnomah, Clark, Washington and Clackamas counties report
there were permits for about 4,200 multi-family units in 2007.
But they don’t break apart which permits were for condos
and which were for apartments. Barry estimates that about 1,500
new units were available but acknowledges that figure’s a
moving target thanks to wild cards like the Wyatt or Ladd
Tower.
LOOK BEYOND 2008 and the trends become more vague. Red Capital
Group estimates that the number of new rental units in the
Portland metro area in 2009 will drop by 25%, and that new
projects will be focused on Northwest Portland and the Pearl
— a contrast to the geographically mixed projects that
will open in 2008.
On the other hand, in Southern Oregon, says Medford real
estate appraiser Jay Christensen, a number of new rental
projects have recently started construction. That’s in
keeping with a trend Layne found in Salem over the past seven
years: When vacancy rates bottom out, applications for building
permits jump.
No matter where in the state developers are looking to build,
the availability of affordable land is going to be a
significant issue. In their latest quarterly report on
Portland’s real estate markets, Norris, Beggs &
Simpson opined that the ravenous demand for housing in and near
downtown — with the accompanying skyrocketing rents
— will soon be followed by more development in those
areas.
Which is easier said than done. Tony Cassie, the regional
manager for the Portland office of the investment firm Marcus
& Millichap, points out that when a developer is able to
get a viable piece of land, then comes the city permitting
process. “They don’t make it easy here. It takes
longer to get to market,” he says. “That’s
one of the realities of building in the area.”
One aspect that no analyst questions is that landlords will
continue to push rents higher. As rents increase and
availability decreases, renters themselves perform their own
market adjustment, says Mike Williams, senior research
associate at commercial real estate services firm Cushman &
Wakefield in Portland. People take on roommates and renters
choose smaller apartments than they would have.
But it’s unclear how increasing rents in the
state’s largest labor market will affect the
workforce.
Art Ayre, state employment economist with the Oregon
Employment Department, says there’s one obvious
possibility: “It puts more financial pressure on people
who are renting, and so there’s going to be a shift in
consumption patterns,” he says. Spending on goods and
services could be affected.
“When you talk rents going up, other impacts will
occur,” Ayre says, “It’s very hard to tell
what exact impact it’s going to have on the general
economy.”
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