Mid-Year 2008 Portland Area Apartment Market Update

by Mark D. Barry, MAI

The big news impacting the real estate market in YTD 2008 has been the problems in the single-family market, a much tougher real estate lending environment, the current crisis going on in the financial markets, and an obvious slowdown in the economy. So what has happened in the Portland area apartment market? The purpose of this article is to provide an update on the Portland area apartment market as of mid 2008.

Portland Economy: In recent months, our economy has stagnated. We have added just 3,000 non-farm payroll employment jobs over the last year, and have seen our unemployment rate increase from 5.0% in August 2007 to 6.1% in August 2008.

Residential Market: The Portland area single-family market was one of the last in the nation to head south. The median single-family sales price is now down 7.3% over the last year, with a ten-month inventory of homes. The condo construction and condo conversion market has come to a virtual halt, with inventories estimated at 2.5 to 3.5 years based on the slower recent sales activity.

Single Family and Apartment Construction: 2008 will be the slowest year for single-family construction in our market in three decades! Permits have been issued for just under 2,500 homes through July. Thus, we should see around 4,000 new single-family homes for the year, or well under half of the average number of homes added per year over the last decade.

Apartment construction remains slow by historical standards, but has been more active in YTD 2008 than in recent years due to favorable fundamentals. Permits have been issued for 2,249 apartment units in the four county metro area through July 2008. Thus, we should see around 4,000 new apartment units for the year. Around 83% of the YTD 2008 permits are in Multnomah County, with Trammel Crow Residential and some subsidized projects accounting for well over half of the construction. The balance of the activity is concentrated in Washington County, with virtually no new apartment construction activity in Clackamas County or Clark County.

Apartment Sales Activity: The first half of 2008 saw 65 apartment sales. This is in comparison with 139 apartment sales for the first half of 2007. Thus, the credit crunch is clearly having an impact on apartment sales activity due to tighter underwriting standards, and more limited availability of financing.

However, the first half of 2008 saw $360.7 million in apartment sales volume vs. $389.7 million for the first half of 2008. The first half of 2008 saw eight sales of $24 million or more vs. five such transactions in the first half of 2007. While the first half of 2008 saw 52 sales of apartments with a price under $5.0 million, this is in comparison with 127 such sales for the first half of 2007. Thus, the big slowdown in apartments sales activity in YTD 2008 has been in apartments with 50 units and under.

Apartment Values: The median sales price per unit of an apartment in the first half of 2008 was $78,362 vs. $70,000 in the first half of 2007, or almost a 12% increase. However, this is misleading due to a high number of sales of larger, newer high-end apartments in YTD 2008. If one eliminates the sales of newer, larger apartment communities, and instead looks at all of the sales of apartments of 100 units and less and built prior to 2001, the increase is closer to 3% over the last year. In addition, cap rates have declined by 5 to 15 basis points, with a median cap rate of 6.06% for the YTD 2008 sales.

Apartment Fundamentals
Vacancies: The Fall 2008 MMHA survey shows a slight up tick in apartment vacancies to around 3.6% vs. 3.3% in the Spring of 2008, and 2.9% in the Fall of 2007. I attribute this increase in apartment vacancies to a slower economy, some doubling up or moving home, many new row houses or condominiums being converted to rentals, and some apartment construction.

The apartment market in Portland and most other areas of the country has been immune to problems occurring in the single family and condo market. In my opinion, the main reason that the apartment market here has been so healthy is that fewer people can afford to buy houses, and are forced to rent. The US Census Bureau recently reported that around 66% of Oregon households are homeowners, which is a decline from the peak of 69% in 2004.

Rents and Income: The latest MMHA data as well as information from RealFacts shows an increase in rents of just over 5% in the last year on a per unit per month basis. Studios and two bedroom townhouse units are showing the largest increases, while one bedroom units are showing the smallest increase. The actual income for YTD 2008 is clearly up all over the metro area. Typical increases I see range from 3% to 6%.

Expenses: Most operating expenses, with the exception of insurance and advertising, are creeping up. Utility costs have shown double digit increases on the majority of appraisals I have completed in YTD 2008. I expect 2009 to be a tough year for owners of apartments with central utilities.

In conclusion, a flat economy, increasing unemployment, very slow single-family construction, high inventory levels of residential properties for sale, and a decline in the median single-family prices characterize our market for YTD 2008. In addition, there has been a noticeable slowdown in apartment sale transactions, which is partially offset by greater sales activity of larger, high profile complexes. However, apartment values are showing some increases, and cap rates are down slightly from a year ago. The apartment fundamentals remain solid, with below normal vacancies, and noticeable increases in rents and income. Increasing expenses continue to be a challenge, particularly utilities.

Mark D. Barry, MAI, is a real estate appraiser specializing in apartment appraisal work in the Portland-Vancouver metropolitan area. He has completed almost 5,000 apartment appraisals since starting as a fee appraiser in 1983. He has a BA from University of California at Berkeley, and an MBA in Real Estate from American University in Washington, D.C.