Monday, April 23, 2012

2012: Déjà vu?

By Greg Frick, HFO Investment Real Estate
Reprinted from the Spring, 2012 Metro Multifamily Housing Association Apartment Report

The Portland area apartment market for 2011 continued along the same two lines as it did in 2010.  There were a small number of institutional sales constituting a large percentage of total dollar volume along with a large number of non-institutional sized transactions capturing a smaller portion of total dollar volume. As occupancy rates remain low, construction of new apartments has begun to pick up. Non-institutional owners are either refinancing at today’s low rates or selling to avoid future increases in capital gains. 

2011 Sales
From 2002-2008 the Portland apartment market averaged 179 sales annually of apartments 10 units and greater. In 2011, CoStar Comps reported 108 sales accounting for just under $1 billion ($960 million) in transaction volume -- the highest in the past decade.*  This was a significant increase in both volume and number of transactions over 2010’s total of 70 transactions and $544 million in dollar volume. Yet even though there was a 50 percent increase in transactions between 2010 and 2011, the market was still significantly below the average 2002-2008 transaction levels. 
This past year was a repeat of 2010 in terms of how transactions could be categorized. In 2011 there were 26 transactions over $10 million.  These 26 transactions accounted for roughly one-fourth of all the transactions and nearly 80 percent of all dollar volume.  In 2010 the number of transactions over $10 million accounted for 19 percent of the total transactions and 80 percent of the total dollar volume.  Historically area transactions over $10 million have accounted for just 10-13 percent of all transactions and 55-65 percent of the dollar volume.

Examples of these major institutional type sales from Q4 2011 include: Reflections at the park: 244 units in Vancouver, $21 million; Westview Heights: 198 units in Portland, $29.5 million; Timber Ridge: 238 units in Portland, $39.5 million; Museum Place: 140 units in Portland, $55.3 million.

2012 Q1 Continuing 2011’s Norm
The first quarter of 2012 saw the following transactions: Center Pointe: 264 units in Beaverton, $34.3 million; LaSalle Apartments: 554 units Beaverton, $77.2 Million; Parkside: 225 units Gresham, $16.45 million.

Occupancy Rates & New Construction
The Portland market is on the map for institutional investors.  As mentioned in this issue of the MMHA Apartment Report, even with a slight uptick in vacancies we are still at historically high occupancy rates and the Portland market continues to be ranked as one of the top U.S. rental markets.  And even though we’ve started to see an uptick in construction of new apartments in the market, especially in the downtown core, we are still vastly undersupplied for multifamily units.  Institutional investors looking to get a foothold in the Pacific Northwest are aggressively pursuing deals fitting their size criteria.

Smaller non-institutional complexes,  80 units and under
The number of transactions in this segment has picked up a bit from 2010 but not enough to see substantial compression in cap rates. There has been a slight value increase compared to 2010 levels.  Yet the values are still below the highs we saw in 2008.

Refinancing Picks Up Steam
There has been a huge pickup in refinancing. Non-institutional owners are taking advantage of the historically low interest rates and placing new debt on the property if their ownership timeline extends past 5 years. 

2012 predictions
There will continue to be a high-level of interest in institutional grade properties. Even with that said the aggressiveness will be tempered a bit. It is our opinion that we have reached the point where cap rates will not go much lower in the institutional transactions. We also expect to see a slowdown in the segment of institutional transactions for two reasons: (1) the high volume of properties which has changed hands in the last 2 years, and (2) the fact that Portland has a relatively small number of these larger properties.
We will also see cap rates compress in the larger B-type properties.  A segment of buyers are now looking for opportunities where they are not competing against the institutional buyers. Properties need to be 80 units and more to attract this capital.  These larger buyers are ideally looking for properties with some sort of distress to allow for greater yields, but this market does not have many properties that fit the bill.

In the non-institutional apartment segment, we anticipate an increased number of transactions as buyers take advantage of low interest rates.  Investors will sell properties as a result of political uncertainty and to take advantage of today’s low capital gains rates before they expire.
With such attractive financing available and cap rates as low as we have seen in years,  apartment sellers feel this is a great time to capitalize on apartments being the “it” investment. 

Feels a lot like 2006 again! Apartments are the hot investments and the DOW Jones Industrial average topped 12,000 for the first time….
Greg Frick is a founding partner at HFO Investment Real Estate, consistently ranked by CoStar as one of the area’s top commercial real estate brokers. This year all four HFO partners were named by CoStar to the list of top 10 sales brokers for 2011. Greg can be reached at 503-241-5541 or via e-mail at

* For the sake of this report, the Portland/Vancouver apartment market includes Multnomah, Washington and Clackamas counties in Oregon and Clark County in Washington State, and includes apartment communities of 10 units or more.   

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