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Local Portland Apartment Market Update

While apartments cannot boast of being unaffected by the current economic situation, they are one of the few investments that make sense toady. All investment real estate has been painted with a broad brush of negativity which unfairly drags down the values of apartments. This means that there are exceptional opportunities today that most investors overlook.

Vacancies have risen from 3.8% to about 6% across the Portland area market, just above the 5% that is considered normal vacancy. The increase in vacancy is largely due to economic uncertainty as more tenants double up and younger individuals stay home longer. This is evidenced by lower vacancies in 3 bedroom apartments. Hardest hit are higher end properties that are now competing with failed condo conversion projects. In previous recessions, Portland has endured much higher vacancies.

One of the primary reasons that vacancy is only at 6% is because supply has been constrained for years while demand has been growing. During the housing boom many houses were built but there has been little apartment construction. While our current population continues to grow, we have reached a point that those who are going to double up have done so. This means that vacancies can’t get much higher unless there is a large exodus of people from the Portland area but today there are more people moving in than out.

Rents have declined, particularly on luxury units, while concessions are up. A year ago for the most part no concessions were offered. Now a 1 month free rent is often seen to help fill vacancies. Rents will likely remain flat until the economy turns around in general. Because of pent up demand, rents will be quick to respond as the economy turns around. Rental demand is building and cannot be alleviated until rents climb by as much as 25%. The rents that can be charged today do not support the cost of new construction.

Expenses have climbed as tenants turn over more often due to changes in their personal incomes.. During their tenancy, tenants damage and cause wear and tear on the property. Most of the time the regular wear and tear are not addressed until the tenant vacates. Even though overall expenses have increased some, individual costs have held stable or declined slightly. One of the larger expenses is the employment cost for an on sight manager. For close to the same costs we can now get a much better manager. The manager is the number one factor in determining the success of the apartment venture.

Cap Rates have gone from 6% to close to 7.8% on local apartments meaning that buyers are paying less for the same income stream generated by the property. This is caused largely to distress in other types of investment real estate with poor fundamentals. Apartments are projected to do well based on solid fundamentals yet it is anticipated that investment real estate in general has a gloomy future for some time. Apartments are lumped into that same basket by most as it is a smaller niche in the total market. For that reason there has rarely been an environment better suited for the purchase of apartments than today. Prices are deflated by factors outside the industry but their near future is bright.

Prices on apartments are far lower than several years ago primarily because of higher cap rates. Now is a terrible time to sell a property. The only reason to sell at today’s market prices is if there is no other alternative. Transaction volume is way down from last year. We look for sellers that have serious trouble that is not associated with the property, usually issues with other parts of their portfolio. The number of local apartments for sale is down but the ones that do close are the kind of bargains not seen since the early 80’s.

There is no question that apartment operation has become more expensive and that rents have declined, but in comparison to other investment real estate, apartments are the high ground because the fundementals for supply and demand are good. They are fueled by a growing need for affordable housing from a local population that is stable in total numbers and in fact, still growing some. Interestingly enough, prices on apartments have come down the same amount as all other types of real estate. This creates a unique opportunity to buy a well performing asset at a large discount. To back this up, check out where lenders are still lending money. It is very difficult, if not impossible, to get any kind of financing for office, retail, or industrial real estate today, not to mention business lending in general. Apartments are the darling of the lending industry right now.

For 35 years we have invested with our clients into local apartments. Minimum investment is close to 100K.

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