Portland Multifamily Investors Are Voting With Their Money

HFO Broker Lee Fehrenbacher wrote an editorial published in the most recent Revitalize Portland Coalition newsletter, available for download at RevitalizePortland.com, about how "Investors are re-evaluating whether the City that Works actually pencils in the face of growing homelessness, crime, increasing governmental regulations, and one of the highest tax rates in the country."

"Last year, according to one local 1031 exchange company, of the 207 transactions totaling $220 million in Portland-based sales it saw come through its office, only 35 investors accounting for roughly $55 million remained in Portland with their replacement properties. Statewide, the same accommodator saw $435 million of $900 million in total sales exit Oregon via 1031 exchanges," Lee writes. 

However, there is light at the end of the tunnel, notes another newsletter article: "Tourism spending in Portland in 2022 exceeded $5 billion for the first time since 2019, the last year unaffected by COVID-19."

Read both articles in the Revitalize Portland Spring newsletter, available at RevitalizePortland.com.

Developers Say Building in Portland Has Become Unaffordable

Summarized from a news story written by Alex Zielinski for Oregon Public Broadcasting 

Portland developers are struggling to build affordable housing due to the accumulation of various development requirements that have been introduced by the city in recent years. Justin Wood, a developer, has said that these requirements are preventing him from building more affordable housing on a vacant lot he was interested in. Wood said that after he calculated the cost of building materials, labor costs, construction loans, city bureau development fees, and the cost to hold the empty lot for the months it takes for the city to process permits, he estimated that he would make about $35,000 in profit per unit. After taxes, the payout would drop closer to $20,000. 

To meet the city’s goal to significantly reduce carbon emissions and slow the effects of global warming, the city established policies that have gradually added up, making it difficult for developers to afford to build new housing in Portland. However, urban studies experts believe that rolling back these policies is shortsighted, and places Portland’s collective health at risk in exchange for developers’ financial comfort.

The city of Portland is facing a housing crisis, and costly construction requirements are believed to be a significant factor in slowing down the supply of affordable housing. Developers argue that the city's affordability crisis would be best addressed by building more housing affordable to households making near the area's median income. However, developers face regulatory costs that can be burdensome and may discourage them from building affordable housing.

To address this issue, the city is considering several solutions, including streamlining information about development requirements, creating a specialty team for quick permitting requests, and allowing housing developers to defer System Development Charge (SDC) payments for at least two years. These initiatives aim to make housing projects more financially feasible and spur additional investment in the housing market.

In addition, the state government has set a goal for Oregon to produce at least 36,000 units of housing each year, with the aim of adding 348,000 homes by 2030. The state legislature recently passed a bill requiring cities to establish their own annual housing production goals for specific income levels, and penalties will be imposed on jurisdictions that fail to meet these targets.

Experts argue that while many costly housing construction requirements may have been well-intentioned, they may now be obstructing the development of affordable housing. Therefore, it is essential to examine these policies and find a balance between maintaining high standards and addressing the housing crisis in Portland.

Washington State Legislature Advances Key Housing Bills: What You Need to Know

by Aaron Kirk Douglas, Director of Client Services

Updated April 19 with information from the Washington Landlord Association

In the Washington State Legislature, several housing bills are progressing, while one has already been signed into law. Here is an update on the current status of these bills plus an update on population growth in Clark County.

Bill Signed into Law: Mobile Home Community Right to Compete for Purchase
Effective July 23, 2023, when mobile home communities go up for sale in Washington, residents will be offered the right to compete for the purchase of the community. Residents will have a set time to respond, indicating their intention to buy the property. As an alternative to a three-year notice period, landlords may pay relocation assistance of $17,000 for a double-wide or multisection home, or $11,000 for a single-wide, plus the greater of 50% of their assessed market value or $5,000 plus the cost of mobile home disposal. Cash payments to tenants would thus be a minimum of $15,000 each. The tenants must also be provided with a 12-month written notice to vacate. Instead of paying for the loss of the home, the landlord may allow tenants to stay and pay rent for 24 months. In the end, the tenants may walk away with the money paid to them, and the landlord disposes of the homes. 

Bills Opposed by Multifamily Associations: Progressing

Washington State Real Estate Excise Tax Bill Revised, Moves Forward: House Bill 1628 initially proposed an increase in the real estate excise tax (REET). However, significant changes were made to the proposal by the House Finance Committee. According to the Washington Landlord Association's analysis, the committee's revisions under HB 1628 (H-1928.3/23) would do the following:

1. Beginning January 1, 2025, increases the ceiling for the Tier 1 1.1% state REET tax from $525K to $750K. As a result, Tier 2 (1.28%) will be $750K to $1.525M.
2. Beginning January 1, 2025, the state REET rate for Tier 4 (selling price over $3.25M) from 3% to 3.5% except for commercial property. Commercial property will pay 3% on selling price over $3.025M until December 31, 2026. A new rate of 3.5% takes effect beginning January 1, 2027.
3. This revision removes the creation of a Tier 5 REET for selling prices above $5M.

City and county councils may increase an additional local 0.25% REET without voter approval.

The specifically created definition for commercial property appears to exclude multifamily:

"Commercial property" means real property that is used primarily for business activities including, but not limited to, manufacturing, transportation, communication, utilities, trade, services, entertainment, and recreation. However, commercial property does not include agricultural land, timberland, or real property consisting solely of residential structures.

House Finance Committee legislators voting in opposition to the increased REET include Cyndy Jacobson (R-Puyallup), Ed Orcutt (R-Kalama), Amy Walen (D-Kirkland), Stephanie Barnard (R-Pasco), and Drew Stokesbary (R-Auburn).

Substitute House Bill 1074: Governing Security Deposits and Landlord Claims for Damage to Residential Premises

This bill is up for final passage and includes the following provisions:

1. Landlords must provide a signed checklist to tenants upon move-in, detailing the property's condition and any existing damages.
2. Failure to provide this checklist could result in refunding the full security deposit.
3. Deposits cannot be withheld for normal wear and tear on the property.
4. If landlords need to keep part of the deposit for damages, they must provide estimates or invoices within 30 days of the tenant's departure.
5. Landlords cannot charge for routine carpet cleaning as part of normal wear and tear.

SB 5197: Changes to Eviction Notice Forms and Eviction Processes
This bill is also progressing.

Bills Supported by the Rental Housing Industry: Progressing

HB 1110: Greenlighting Duplexes, Triplexes, and Fourplexes in Large Metro Areas. This bill passed the Senate on a bipartisan vote of 35-14, overriding local zoning rules that currently prohibit these structures in large parts of the state.

HB 1337: Encouraging Accessory Dwelling Units (ADUs) Development. This bill, which has passed the state Senate with strong support, aims to encourage the development of backyard cottages and mother-in-law apartments, also known as accessory dwelling units (ADUs). ADUs, currently limited to 1,000 square feet and 24 feet in height, have gained popularity as a housing solution. This bill is considered the most ambitious ADU proposal this session. A recent change, introduced by Sen. Liz Lovelett, removed amendments that would have allowed local governments to impose parking requirements, which could have hindered ADU growth.

SB 5045: Incentives for Renting ADUs to Low-Income Households. This bill would provide tax exemptions for three years to ADUs that have been renovated or improved if the rent charged does not exceed 30% of the tenant's income. It could improve the availability of affordable housing.

HB 1293: Streamlining Development Regulations. This bill aims to accelerate the permitting and design review by committee process and requires only clear and objective design review standards.

SB 5491: Exit Stairwell Requirement in Residential Buildings. This bill would direct the state building code council to recommend relevant changes to the building code, allowing for one exit stairwell in residential buildings of six stories or fewer.

HB 1042: Conversion of Existing Buildings for Multifamily Purposes. This bill would require cities to convert an existing building for multifamily purposes if existing zoning allows it.

SB 5290: Permit Streamlining. This bill would require local governments to exclude interior alterations from site plan review and help local governments move toward digital permitting processes. It was introduced in the House after a public hearing and referred to appropriations on March 28.

Bills Supported by the Industry That Died Recently

SB 5466: Encouraging Transit-Oriented Development. Urbanists viewed this bill as a way to reduce urban sprawl, increase affordable housing stock, and shorten commutes. Although senators supported it, representatives in the House did not. However, some form of the idea is expected to return in the next legislative session.

Clark County Growth Update. The Portland Tribune reported last week that Clark County's population is growing, while Portland and Multnomah County's populations are shrinking. According to the World Population Review, Clark County grew by more than 3% from 2020 to 2021 and another 1.5% between 2021 and 2022. In contrast, Multnomah County and Portland experienced stagnant growth and population decreases during the same period. Clark County also saw a 76% increase in the population of Black, indigenous, and people of color from 2010 to 2020.

The Washington state legislature is nearing the end of its current session, with lawmakers set to adjourn on April 23. Watch this space for continued updates.

Washington State REET Bill Revised in House Finance: Would Approve Change to Existing Minimum Tax on $3.025 Million to 3.5%

House Bill 1628, which proposed an increase of the Washington real estate excise tax, was tweaked by the House Finance Committee this morning. The original HB 1628 proposed expanding the real estate excise tax from its current three percent tax on transactions over $3.025 million to 4 percent on real estate transactions above $5 million. However, at a vote today in the House Finance Committee, the committee scrapped the increase to 4 percent. Instead, it approved a revision changing the existing maximum tax on transactions over $3.025 million or more from 3 percent to 3.5 percent. As a result, the bill has become more about increasing the local version of the real estate excise tax. 

In today's revision by the House Finance Committee, the committee argued over an amendment to exempt market-rate multifamily property (affordable multifamily is already exempted). The amendment was voted down. The committee also argued over whether city councils should be allowed to increase the REET tax without a vote of citizens. Again, most committee members voted not to put REET tax increases to local citizen votes. The newly revised bill would allow local governments to increase taxes by one-quarter percent on all transactions on top of the half percent most cities already charge, adding, for example, another $1,250 onto the price of a $500-thousand dollar house. 

The second substitute House Bill 1628 passed out of the finance committee on a vote of 8-5 with a do-pass recommendation. Legislators voting in opposition to the amended bill included Cyndy Jacbson (R) of Puyallup, Ed Orcutt (R) of Kalama, Amy Walen (D) of Kirkland, Stephanie Barnard (R) of Pasco, Drew Stokesbary (R) of Auburn. 

Watch the video from the discussion here. The discussion about the excise tax begins at about 25 minutes into the video. 

The Latest on HFO-TV: Market Conditions & Pending Housing Bills

Recently on HFO-TV, we discussed the state of the market as we head into the second quarter, including the impacts of recent rent control legislation in Oregon. In case you missed it, check out our latest interviews below or at HFORE.com/videos.aspx.

HFO-TV: Sightline Institute Researchers on Housing Production & Creating Institutional Pressure

HFO-TV: CoStar's John Gillem Explains the Portland Market's "Not Falling Skies, But Shifting Ground"

HFO-TV: Partners Greg Frick & Tyler Johnson Discuss the Q2 2023 Market and Outlook on the Year Ahead

Portland Government Gets a Failing Grade for Interacting with Local Businesses

A majority of respondents to a January survey by the Portland Business Journal reported a negative impression of how the city government interacts with businesses. 

"Eighty-six percent of respondents reported having a 'somewhat negative' or 'very negative' impression of how Portland city government interacts with businesses."

Read more at BizJournals.com

Governor Kotek "Disappointed" in Lack of Clarity on Plans for Homeless Funding

Oregon Governor Tina Kotek expressed disappointment on Monday that city of Portland and Multnomah County officials were unable to provide clear answers about how they plan to spend state emergency funding to address the homeless crisis. Kotek signed a $200 million funding package last month to rehouse 1,200 households and create over 600 new shelter beds by the end of the year, which will be distributed to local communities by the end of this month. 

Although Governor Kotek expressed her disappointment over the lack of clarity from Portland city officials and Multnomah County about their plans to address the homeless crisis with state funding, she has tentatively approved funding. For Multnomah and other counties lacking concrete details, the governor said the state will continue to assist them in developing their plans, and they have until April 28 to provide further details to receive the allocated money.

However, the governor denied funding for Clackamas County, citing concerns over their ability to expand shelter capacity.

Read more at OPB.org

NMHC Study: Cost of Homeownership Significantly Exceeds Renting

According to NMHC estimates, by Q4 2022, the monthly cost of owning a home was $1,176 higher than renting a professionally managed apartment. This marks the largest buy-to-rent premium, adjusted for inflation, since Q3 2006 — the peak of the housing bubble.

After adjusting for inflation, the annual rent growth rate for professionally managed apartments tracked by RealPage has decreased in recent years, with an average rate of just 1.2% between Q4 2019 and Q4 2022. This is down from the average rate of 1.6% over the previous five years, indicating a reduction in the amount by which rent growth exceeds inflation, writes NMHC Senior Director of Research Chris Bruen in a recent analysis.

Since the outbreak of COVID-19, inflation has surged, with prices for goods and services increasing by an average annual rate of 5% between Q4 2019 and Q4 2022. This is significantly higher than the average rate of 1.7% recorded between 2014 and 2019.

"When we fail to build enough housing, housing costs rise. Not only does this place an increasing burden on American households, but it also contributes to higher overall inflation (housing accounts for a full 40% of core CPI). And, when we fail to address inflation on the supply side, the Federal Reserve must curb demand through raising interest rates. This results in higher mortgage costs for home buyers and a higher cost of capital for builders, which further contributes to our nation’s supply shortage."

Read more at NMHC.org.

Backyard Cottages Get Green Light as Washington State Senate Passes ADU Bill

The Washington Observer reports today that the concept of increasing the availability of accessory dwelling units (ADUs) has been among the most popular this year with legislators expressing interest in permitting homeowners to construct smaller homes on their properties. 

House Bill 1337 seeks to promote the development of backyard cottages and mother-in-law apartments in areas where they are currently prohibited. These structures, limited to 1,000 square feet and 24 feet in height, have arguably become the most popular housing initiative this year. On Thursday, the Senate passed the bill with a 39-7 vote.

According to the Observer, HB 1337 is likely the most assertive ADU bill proposed this session even with competition from similar proposals. A noteworthy development in HB 1337 occurred on Thursday when Sen. Liz Lovelett, D-Anacortes, introduced a modification that reversed previous amendments that would have enabled local governments to impose parking requirements, potentially obstructing ADU growth.

Washington Legislature Embroiled in Climate Conscious Housing Development Changes

According to The Washington Observer, there is a renewed battle over climate-conscious housing. This marks the third attempt to revise the state's handbook for population growth and urban development with regard to climate change. Representative Davina Duerr, a Democrat from Bothell, is behind the latest push to update the Growth Management Act. House Bill 1181, which is quite complex, aims to promote high-density housing along transit corridors, restrict single-family development, and reduce traffic congestion, which contributes to CO2 emissions.

Washington House Bill 1110: New Version Would Provide Less Missing Middle Housing

House Bill 1110 would allow for the construction of duplexes, triplexes, quadplexes, and sixplexes in the state’s largest metro areas. However, an amendment proposed by Sen. Mark Mullet, D-Issaquah, would limit the bill's impact on cities with populations of 75,000 or fewer, allowing only duplexes.

The bill’s earlier versions aimed to be statewide, but unrelenting pressure from local governments led to the latest proposal. The Department of Commerce would oversee any decisions to halt middle housing permits if it meant straining water and sewer systems.

The bill most likely applies to the same 16 large cities as before, including Seattle, Tacoma, Spokane, Bellevue, and Everett but may potentially build fewer homes than initially anticipated. 

HB 1110 cleared Senate Ways and Means Committee ahead of Monday's fiscal cutoff. 

The bill’s supporters, including urbanists, Realtors, and builders, believe that its core mission of creating more housing remains unchanged, even if it means fewer homes will be built.