Political Impact on the Market - Fall 2019 Apartment Report
Seven months into a rent-controlled and legislatively restricted market, Oregon is starting to see signs of the impact. New construction is slowing, and investors are losing confidence, as the political climate continues to be very challenging for landlords. Portland’s four county Metro area will see slightly over 8,000 permitted units this year, down from a peak of 10,300 in 2017. Apartment sales volume declined earlier this year, but recently a few large sales have brought volume to a more normalized rate. Sales in Vancouver are up significantly as investors look to escape Oregon’s rent cap and restrictive regulations. Rising cap rates have been mitigated by declining interest rates, and the consensus is that we are entering a buyer’s market. Despite the real need for more affordable housing, legislative efforts appear to be hindering the ability of the private market to produce it. Rent growth is slowing, but rent rates continue to rise and vacancy levels are stable. The maximum rent increase in Oregon for 2020 has been published and stands at 9.9%. This cap applies to apartments over 15 years old.
Portland/Vancouver
Vacancy
The Portland/Vancouver vacancy factor improved from our Spring report, and currently stands at 4.42%. Inner and Central SE and West Vancouver have the lowest vacancy factors, both under 3.5%. Only four of the remaining eighteen surveyed areas are under 4%, with all others between 4% and 7%. The highest vacancies are found in Lake Oswego/West Linn at 6.6%, followed by Wilsonville and Hillsboro at 5.7%. Both Downtown and Northwest Portland have seen significant improvement in the past six months as newly constructed units are starting to be absorbed. Both areas are now under 5%. Three-bedroom, one bath units have the best occupancy of all unit types, with average vacancy of 3.7%. Studio units have the highest vacancy of 5%. This survey excludes new projects in the lease-up phase that haven’t reached stability, unless they are over one year old or over 85% occupied.
Rent Rates
Overall rent rates have continued to push upward. As the building boom continues, and our survey unit count grows, it’s important to note that our report includes an increased number of new projects that push the average rates higher. Rent increases in class “B” and “C” are more stable and increasing at a lesser rate. The survey does not differentiate by product class or age. Rent increases have averaged 4% since our Spring survey, but do not represent “effective” rent rates. Four of the twenty surveyed areas experienced declining rents. All of which were very minor reductions of 1% or 2%. Lake Oswego shows a 32% increase in rent rates, but that is caused by the addition of a new, class “A” project, and not indicative of the market segment as a whole.
Average rent per sq. ft. for all areas combined is $1.74. The Downtown core area has the highest rates at $2.43, with NW Portland coming in second at $2.34, and Lake Oswego third with $2.11. Outer NE Portland and West Vancouver continue to have some of the lowest rates, at $1.34 and $1.38 respectively. It’s interesting to note that in certain areas one-bedroom units have higher rents than two-bedroom units. This is due to the older age of the projects with two- bedrooms and the prevalence of smaller units in newly constructed properties.
Market Conditions
Over 7% of all Metro properties are offering rental incentives, with aggressive deals being offered in Class A projects in lease-up phase. Incentives are most aggressive in Downtown, with 20% of the surveyed properties offering incentives. The average number of days that a unit will stay vacant for the entire Metro area is 32. Hillsboro, Aloha and Clackamas continue to experience over two months average vacant days between tenants. The Inner and Central SE area is averaging only 10 days between tenants and North Portland/St. Johns is also quick to rent, with a 14-day turnover time.
Other Areas
The Salem market has seen continued softening and has a current vacancy rate over 5%. Salem rents have increased an average of 5.5% year over year. Vacancies in larger two and three bedroom units are particularly high. The Bend/Redmond area has returned to more normal vacancy numbers, averaging slightly over 3%, with rents seeing a 3% increase since last Spring. The vacancy rate in Eugene/Springfield has decreased to 4%, but rents have remained flat. Over 20% of surveyed properties in Eugene/Springfield are offering incentives.
Fall 2019 Apartment Report Contributors
Liz Tilbury, with Tilbury Ferguson Investment Real Estate, has submitted an article discussing the effect that state and local laws and ordinances are having on both buyers and sellers of apartments. She points out that sales volume is down from 2018 and a shift to a buyer’s market is taking place, although some sellers haven’t recognized it yet. She has seen institutional buyers shying away from Oregon due to the burden of new regulations, and lender underwriting for unreinforced masonry buildings (URMs) has been difficult to obtain. Liz points out that “B&C projects are performing solidly…whereas a number of urban projects are continuing to struggle with all the competition.”
Patrick Barry, from Barry and Associates, examines the overall issues in play throughout the Metro area. He notes how the political climate is having a negative impact on sales and values, and the current gap between buyer and seller expectations has produced a 30% decrease in sales volume on an annualized basis. He predicts that 8,300 units will be permitted this year. Rent growth will continue to slow due to the large number of units nearing completion, but the “Portland apartment market should remain stable, as we return to a more normal market.”
The increased legal and political challenges for landlords are discussed in an article submitted by Jeffrey S. Bennett, Attorney at Law. With the passage of Senate Bill 608, “…landlords now face significant restrictions on rent increases and no cause notices of termination.” The 2019 legislative session saw the disbandment of the landlord/tenant coalition, further eroding consensus building in Salem. Jeff notes that “…we live in an era saturated by a burgeoning body of statutes, ordinances and appellate law, the likes of which we’ve never seen before”. Sounds like we could all use a good lawyer.
Josh Lehner, State Economist from the Oregon Office of Economic Analysis, discusses both the national and state economic picture. He notes that “…for the first time in more than 50 years, Oregon has surpassed the national median household income.” Josh points out that the risk of recession is rising, but the economy is largely doing well.
The FAll 2019 survey represents a total of 75,601 units from 1,166 properties. All of the articles have been reprinted without editing the content, in order to present unbiased opinions. We’d like to thank all of the management companies and property owners who have submitted information. Their participation is critical in insuring the accuracy of our data and the continued success of this report.