Wednesday, January 7, 2015

Puget Sound and Portland/Vancouver: 2014-15 Top Economic Market Drivers, Part 2 - Portland/Vancouver


In Part 1 of this two part series on the 2014-15 top economic market drivers in the northwest, I covered the Puget Sound market; primarily these three forces: Amazon's growth, Chinese investors, and Boeing's 777X contract. Part 2, (written and researched by the HFO team) covers the top economic market drivers in 2014-15 in the Portland/Vancouver market. 

Part 2. Portland/Vancouver - firing on all cylinders. 

By Lee Fehrenbacher, with research by Tyson Cross, Cody Vaz, Matt Reynolds and Chris Wang.

With more breweries, handlebar mustaches and abnormally tall bicycles per capita than most cities in the nation, Portland is no stranger to colorful stereotypes. Infamously, it’s the place where young people go to retire.

But increasingly, Portland is becoming a popular destination for investors as well. In 2014, buyers pumped some $1.3 billion into the local multifamily real estate market. Stereotypes aside, there are very tangible reasons why – population, employment and economic growth being chief among them. And while it’s true that Portland has become something of a mecca for the young, they’re hardly moving here to retire.

The demographic shift:

In a 2012 study, researchers at Portland State’s Population Research Center found that Portland (along with Seattle) was one of only two of the 50 largest U.S. metros that had consistently been a top destination for young college-educated migrants over the past 30 years. That’s important because young, highly educated citizens bring new ideas and resiliency to an economy.

In Portland, millennials make up roughly 32 percent of the population – a proportion similar to populations in major metros like Seattle, San Francisco, Los Angeles and Phoenix, according to the U.S. Census Bureau. Additionally, nearly 44 percent of Portland’s population over the age of 25 has a bachelor’s degree or better – 15 percent higher than the national average.

Far from retiring, Portland’s young college-educated population not only participates in the workforce at a rate comparable to the national average, but a large number of these Portlanders are entrepreneurs – approximately 9 percent reported being self-employed between 2008 and 2010, as compared to an average of 6 percent among the nation’s 50 largest metros, according to PSU’s 2012 study.

PSU’s researchers attributed Portland’s young “brain gain,” in part, to the region’s efforts over the past three decades to, “manage its growth in a more sustainable way, and promote a vibrant ‘urban fabric.’” United Van Lines made a similar assessment this month when it identified Oregon as the nation’s top moving destination for the second year in a row.

“Unique amenities such as outdoor recreation, arts and entertainment activities, and green space protection likely continue to propel Oregon to the top of the list for the second straight year,” the company reported.

The same could be said for Portland specifically. With city plans dedicated to mass transportation, bicycle traffic and green space, Portland’s amenity rich urban neighborhoods have become a major draw for people around the nation. In fact, Portland has almost become attractive to a fault.

Employment gains vs. population growth:

Between January 2011 and August 2014, the Portland metro added 84,875 jobs – outpacing the 64,500 jobs lost during the recession by 20,375, according to a recent report, by the Portland Business Alliance.

Most of those jobs have come from local service sectors (education, health care, professional and business services, and leisure and hospitality) in lieu of traded sectors (manufacturing, construction, and trade and transportation), which tend to bring in more outside dollars. Nevertheless, the trend is undoubtedly positive and it’s hard to miss the prominent names of Intel, Nike, Boeing, and Oregon Health Sciences University, among others, next to the word “expansion” in business headlines. Portland’s tech start-up scene is also providing a healthy boost to the local economy, as evidenced here, here, and here.

Additionally, the Portland Business Alliance reports that the Portland metro – largely thanks to Intel and the electronics/semiconductor industry – ranked third in the nation last year for gross metropolitan product (GMP). But here’s the caveat – job growth is not keeping up with the population.

The Portland Business Alliance also reports that Portland’s employment per capita has been declining for more than a decade. In 2000, there were approximately 0.53 jobs for every person living in the metro area; by 2013, that number had dropped to 0.47. It’s not that the number of jobs is declining; it’s that the population is growing faster.

“One of the issues that we fight with is because we are attractive to the young creative class – the millennials – is people come here without the jobs and then they find the jobs,” Jerry Johnson, a principal at Johnson Economics, told me recently. “So we always have a lot of labor force available. It’s hard to get the price pressure.”

With more people competing for a limited number of jobs, wages in the Portland metro have had a hard time recovering from the recession. The Portland Business Alliance reports the median household income is still $4,408 below pre-recession levels. Eventually, that will put downward pressure on rising apartment rents but for now the population boom – coupled with the recessionary slow-down in construction and subsequent pent-up demand for housing – has made Portland’s rainy climate appear a lot brighter to multifamily investors.

Apartment sales:

Through fall 2014, vacancy throughout the Portland metro area continued to hit record lows with an average of 3.6 percent – 0.21 points higher than vacancy in the spring, but still well below standard industry performance expectations of 5 percent, according to Multifamily NW. As such, rents increased 11 percent over the previous year to an average rate of $1.22 per square foot. Pierce-Eislen expects the trend to continue.

In its 2015 forecast, the apartment analytics provider predicts Portland rents will grow by another 8.5 percent this year – the fourth largest increase in the nation behind Denver, San Francisco and the east end of the Bay Area, and a full percent higher than projected rent increases in Seattle. With a comparatively lower cost of entry, Portland’s strong fundamentals are providing investors from larger markets and enticing reason to chase yield locally.

Last year, investors spent approximately $1.3 billion on multifamily properties in the Portland metro area – outpacing the previous peak of roughly $1.2 billion in 2007. Of that activity, just 28 institutional deals valued at $10 million or more accounted for the overwhelming brunt of sales volume – approximately $1.02 billion. The majority of sales, 141, were valued below $10 million and accounted for just $226 million.

That doesn’t mean that smaller properties aren’t fetching large offers – HFO is aware of at least two vintage properties in the core under 20 units that are garnering more than $140,000 a door. By contrast, the median sales price per unit in 2014 was $96,645 – a 24 percent increase over 2013.

The development question:

Given the hot conditions of the Portland apartment market, it’s not surprising that development activity has erupted.

In addition to the mid-rise apartment buildings being built in nearly every nook and cranny of the city, at least five 15-story-plus high rise buildings are now currently under construction. Others are in the works. According to a recent report from the Oregon Employment Department, permits for more than 7,000 apartment units were issued to developers in the Portland metro last year – more than double the level of activity seen in 2009, 2010 and 2011.

Johnson Economics predicts the Portland market will see another 7,000 units in each of 2015 and 2016, and that’s generally expected to put upward pressure on vacancies and downward pressure on rising rents. That pressure likely won’t begin to be felt, however, until the end of this year, and with interest rates at historical lows – at least for the time being – Portland’s strong fundamentals will continue to make the market a favorite for apartment investors in 2015.

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