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The rental rebound

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Saturday, March 01, 2008

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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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