About  |   Sales & Leasing  |  Commercial Management  |  HOA Management  |  Residential Management  |  Maintenance  |  Contact

Apartments for Rent
Houses for Rent
Commercial Property
for Sale & Lease
Articles by
Cliff Hockley


The Portland Area Apartment Market - A Review Of YTD 2008 And A Look Forward To 2009

MARK D. BARRY & ASSOCIATES

APARTMENT APPRAISAL SPECIALISTS
7628 SW 32nd Avenue, Suite 200, Portland, Oregon 97219
(503) 243-2925 Fax: (503) 246-0714
mb@barryapartmentreport.com
MARK D. BARRY, MAI

The Portland Area Apartment Market - A Review
Of YTD 2008 And A Look Forward To 2009
October 15, 2008
Rental Housing Association of Greater Portland

Introduction and Overview

A. Economy

1) National Economy - General

  • Unemployment of 6.1% as of 8/08 vs. 4.7% as of 8/07

  • GDP growth of 1.4% for first half of 2008

  • 9.4 million people unemployed; up by 592,000 in August 2008

  • 2.2 million more unemployed in the last year

  • Oil prices at $81/barrel; inflation at a 17 year high

  • The bursting of the real estate bubble: single family home prices down 16.3%

  • Credit crisis and extraordinary stress in 2008: a greater crisis than the S & L problems of 1990, Asian meltdown of 1998, or dotcom collapse of 2001

  • Panic of 2008: DJ Industrial Average down 32.9% for the 12 months through 10/13/08; and down 22% in the eight trading days ended 10/10/08; on track for the worst year since 1937

  • Major shakeout of lenders, financial institutions and investment banks; Indy Mac, Countrywide, Bear Sterns, Lehman, Merrill Lynch, Fannie Mae, Freddie Mac, Wachovia, Washington Mutual, AIG, etc.; a global credit crisis is underway. Instability of our financial system has necessitated government intervention

  • 10 year Treasuries are at 3.86% as of 10/14/08 vs. 4.69% as of 10/15/07; flight to safety

2) Economy-State of Oregon

  • Unemployment rate of 6.4% as of 9/08 vs. 5.3% as of 8/07

  • 115,000 Oregonians unemployed as of 9/08 vs. 92,000 in 9/07

  • Loss of 10,000 jobs in August 2008, and 7,300 jobs in September 2008

  • Loss of 11,300 construction jobs in the last year

  • 2,100 fewer real estate jobs in the last year; and 1,700 fewer financial jobs

  • 1,400 workers laid off when Hynix Semiconductor closed their plant in Eugene

3) Portland Metro Economy

  • 6.0% unemployment rate as of 8/08 vs. 4.9% unemployment rate as of 8/07

  • Non farm payroll employment of 1,040,500 as of 8/08 vs. 1,038,200 as of 8/07

  • Gain of 2,300 non farm payroll jobs in 12 months ended 8/08, or 0.2% increase vs. 1.5% job growth for the previous year vs. 2.4% two years ago

    • GOOD NEWS:

      1. Farmers Insurance: 550 employee call center opened in Hillsboro in August 2008 (after closing 368 employee call center in Tigard)

      2. Stream International: more than 500 new jobs at the Beaverton call center; heavy reliance on Hewlett Packard, which is no longer sending these jobs offshore

      3. Transportation & Security Administration: up to 100 new part time jobs at airport

      4. FedEx: moving forward with plans to build a 425,000-square-foot distribution center on a 78-acre Troutdale parcel, with 765 jobs

      5. Solarworld AG: In October 2008, they opened a $440 million solar cell and wafer production plant with 250 current jobs, and possibly 1,000 jobs by 2010

      6. Boeing of Portland: Expected to expand by 50% at the state-of-the –art plant in Gresham, with up to 1,800 employees

• BAD NEWS:

  1. Boeing of Portland; Machinists union on strike at Boeing of Portland; 1,250 machinists are impacted

  2. Wells Fargo: 146 positions eliminated at the loan processing center in Beaverton

  3. Nike: laying off 150 workers at its Wilsonville Distribution Center (as it announced in 2006 that it would do), and will consolidate the footwear distribution in Memphis

  4. Hewlett Packard: layoffs of 60 employees in Vancouver in September; more cuts to come?

  5. Lattice Semiconductor: 125 employees laid off in September

  6. Freightliner: October announcement on closing the Swan Island plant in June 2010, with a loss of 1,000 jobs

B. Apartment and Single Family Construction – Portland Metro

  • Permits for 2,725 new homes in YTD 2008 through August; 2008 will be the slowest year for single family construction since the early to mid 1980’s; permits were issued for 7,458 new single-family homes in 2007 vs. 9,141 new single-family homes in 2006; versus an average of 10,500 per year for five years from 2000 to 2005

  • Permits for 2,695 apartments in YTD 2008 through August; prior years shown below are misleading due to including condominiums. 2008 as an active year for apartment construction

  • 2005 to YTD 2008 apartment and single family permits are as follows:

  • Very slow in apartment construction in Washington, Clackamas & Clark County

  • Multnomah County seeing an active year for apartment construction

  • Multnomah County has taken over from Washington County as the leading area where apartment construction is taking place

COUNTY 2005 APT. PERMITS 2005 SINGLE FAMILY PERMITS 2006 APT. PERMITS 2006 SINGLE FAMILY PERMITS 2007 APT. PERMITS 2007 SINGLE FAMILY PERMITS YTD 2008 APT PERMITS THRU AUGUST YTD 2008 SINGLE FAMILY PERMITS THRU AUGUST
Multnomah 2,914 1,659 2,386 1,748 3,166 1,567 2,283 598
Washington 847 3,766 1,493 2,790 720 2,146 390 850
Clackamas 226 2,396 570 2,213 108 1,942 NONE 658
Clark 257 3,044 600 2,390 547 1,803 22 619
TOTAL 4,244 10,865 5,049 9,141 4,541 7,458 2,695 2,725

C. Single Family Market – Portland Metro

  • Median home price of $280,000 in the metro area for August 2008, or 7.3% lower than the $302,000 median price of August 2007

  • 2000-2006: Incomes were up by 10%, but the median single family home price increased by 72%

  • Portland ranked as having the 5th lowest price decline in the nation, but ranked as the seventh most overvalued market in the US

  • Home ownership percent increased nationally from 66.8% in 1999 to 68.8% in 2006 but declined to 68.1% in 2007. Oregon at 64.3% for 1999 vs. 69.0% in 2004 to 65.7% in 2007.

Around 7% of the 2004 Portland homeowners are now renters
  • 13,621 closed sales in Portland Metro through August 2008 vs. 20,607 sales through August 2007, or down 34%. 2000-2005: 30,000 to 34,000 home sales per year.

  • 10 months of inventory on the market as of August 2008 vs. 6.2 months in August 2007, and 3.6 months in August 2006

  • 41,397 listings as of August 2008 vs. 33,008 as of July 2006; up 25%

  • Marketing time up to 121 days in August 2008 to 56 days in August 2007

  • Problems with some major builders: bankruptcy for Renaissance Homes, Legend Homes, Marnella Companies, & RS Custom Homes; major auction of houses by Buena Vista Homes; bankruptcy at Haskins Realty Northwest and Trinity Carpet Brokers

Portland Apartment Market in YTD 2008 – Summary

A. Vacancies

  • Apartment vacancies at 3.6% as of Fall 2008, or up from 2.9% in Fall 2007; vacancies up slightly due to marginal economy, shadow inventory, some apartment construction

  • Apartment vacancies under 3.0% in Beaverton, Wilsonville, Oregon City, Clackamas, Inner SE Portland, Inner NE Portland, and the North Portland/St. Johns area

  • Apartment vacancies over 5.0% in East Vancouver (8.3%) and Hillsboro (6.2%)

  • Apartment vacancies by Unit Type:

Studio: 1.2% 1-1: 3.1% 2-1: 4.1%

2-2: 3.7%
3-1: 9.7%
3-2: 6.4%

• Apartment vacancies in the Portland area over the last decade have ranged from 2.9% to 8.3%, with an average of 5.6%, and are summarized as follows:

1998 = 5.8%

1999 = 7.0%

2000 = 4.3%

2001 = 5.2%

2002 = 7.1%

2003 = 8.3%

2004 = 7.5%

3/05 = 6.3%

9/05 = 5.9%

3/06 = 3.9%

9/06 = 3.4%

3/07 = 3.2%

9/07 = 3.2%

3/08 = 3.3%

9/08 = 3.6%
>Source: The Millette Rask Report; and the MMHA Apartment Report

B. Rent & Income Levels

  • Virtually no concessions or discounts used

  • Turnover rents are up around 4% to 8% in YTD 2008, and in some cases higher; biggest increases in urban area

  • Collections are up closer to 3% to 6% for YTD 2008 annualized

  • Landlords are increasing fees; and more are starting RUBS

C. Expenses

  • Property taxes for 2008-2009 are just coming out; preliminary figures show flat to slightly increasing property taxes in the city of Portland and Multnomah County; local option leaves (Children’s and Parks) expired, but partially offset by a 16.2% increase for the City of Portland Fire and Police Disability & Retirement

  • Gresham property taxes down 2.4%; Reynolds & Centennial districts up around 2.5%

  • YTD 2008 insurance costs are stable

  • Advertising costs have come way down in 2007 and YTD 2008; due to a better market and such sites as Craig’s List

  • Utility costs increases in the 10% to 15% range due to increased rates as well as better occupancy levels; main increase is in water and sewer

  • Impact of oil and natural gas on centrally heated buildings; strong incentive to convert; natural gas to increase 14%

  • RUB and other utility bill back programs getting better results when implemented; but few older units have a RUB system, which requires a long term commitment to the program, has a long way to go, and has very high administrative costs

D. Net Income

• Co Star’s figures show median YTD 2008 net income of $4,571 per unit per year, or up 5.6% from 2007. Information from 1998- YTD 2008 for median price per unit, net income per unit per years, and the median cap rate are summarized as follows:

YEAR MEDIAN PRICE PER UNIT MEDIAN NET INCOME PER UNIT PER YEAR MEDIAN CAP RATE
9/2008 $76,190 $4,571 6.00%
2007 $71,429 $4,329 6.06%
2006 $66,369 $4,181 6.30%
2005 $59,281 $3,918 6.61%
2004 $54,320 $3,911 7.20%
2003 $52,800 $4,013 7.60%
2002 $49,444 $4,104 8.30%
2001 $47,333 $3,886 8.21%
2000 $45,540 $3,839 8.43%
1999 $45,938 $3,923 8.54%
1998 $43,625 $3,765 8.63%

E. Apartment Values

  • Figures can lie, and liars can figure

  • Median price per unit up 5.7% per year from 1998 to 2008; and 7.6% per year from 2003 to 2008; YTD 2008 figures are misleading due to many high end sales. An increase of 2% to 3% is more realistic for non-urban, pre 2000 built apartments

  • Median cap rates: 6.00% for YTD 2008; 6.06% in 2007; & 6.30% for 2006

  • Hottest Markets: urban area apartments

Specific changes in the median price per unit for 2007 to YTD 2008 for different areas are summarized as follows:

MEDIAN PRICE PER UNIT
2007 YTD 2008 THRU SEPTEMBER 2007 to YTD 2008- % CHANGE
Portland/Vancouver Metro – All Units $71,429 $76,190 6.7%
Multnomah County – All Units $70,577 $76,190 8.0%
Washington County – All Units $72,812 $83,219 14.3%
Clackamas County – All Units $67,719 $75,000 10.8%
Clark County – All Units $72,222 $72,500 0.4%

F. Apartment Sales Activity (Multnomah, Washington, Clackamas, & Clark)

YTD 2008 through September as well as 2007 apartment sales activity by county:

COUNTY SALES VOLUME- THRU 9/2008 NO. OF TRANSACTIONS – THRU 9/2008 NO. OF UNITS SOLD – THRU 9/2008 SALES VOLUME- 2007 NO. OF TRANSACTIONS – 2007 NO. OF UNITS SOLD – 2007
Multnomah $185.0 million 64 1,836 $353.5 million 147 4,775
Washington $207.2 million 26 2,146 $566.2 million 54 5,699
Clackamas $73.2 million 11 824 $73.5 million 22 922
Clark $71.1 million 9 944 $235.5 million 29 2,532
TOTALS $536.5 million 110 5,750 $1.229 billion 252 13,928
  • Data available for YTD 2008 through September shows 110 sales of 5,750 units for $536.5 million. 2007 showed 252 sales of 13,928 units for $1.229 billion. Thus, the sales volume is down by 40 to 50 percent

  • Multnomah County seeing the most sale transactions due to so many apartments, and the smaller project size

  • Washington County seeing the highest volume due to many sales of larger complexes

  • Clackamas County sales for YTD 2008 misleading due to a sale of a 390 unit complex

  • YTD 2008: 10 sales over $24 million vs. 7 such sales in the first nine months of 2007

  • Sales under $5.0 million: 93 in YTD 2008 vs. 168 in nine months of 2007

Forecast for Balance of 2008 & Into 2009

The National Economy:

• Goldman Sachs Forecast:

  1. 3 to 4 quarters of negative growth in the US, with a 5% cumulative decline

  2. Unemployment to exceed 7%, and maybe even reach 8%

  3. S & P 500 earnings growth to decrease in 2008 by 10-12%; flat to negative earnings in 2009, with the trough in late 2009

    • National Association of Business Economists (as of mid September 2008):

      1. 69% think the economy is in a recession, or will be in a recession this year

      2. 1.6% GDP growth in 2009

  • International Monetary Fund: Their 10/8/08 revised report on economic outlook predicted that the US economy will grow by 0.1% in 2009, it’s worst showing in 18 years. “The world economy is entering a major downturn thanks to the most dangerous shock in mature financial markets since the 1930’s.”

    • Wells Fargo Forecast:

      1. GDP of -0.5% in third quarter 2008, -1.8% in fourth quarter 2008, -0.7% in first quarter 2009, and 1.3%, 2.7%, & 1.7% for last three quarters of 2009

      2. 6.7% to 6.9% unemployment in 2009

      3. 20% decline in vehicle sales

  • Chairman Bernanke: Federal Reserve Chairman Ben Bernanke warned that over the rest of this

year, the economy will grow "appreciably below its trend rate" mostly because of continued weakness in housing markets, high energy prices and tight credit conditions.

Portland Metro & State of Oregon Economy:
    • Oregon Economic and Revenue Forecast -Office of Economic Analysis

      1. o 0.7% to 0.9% decline in employment in the third and fourth quarter of 2008

      2. o Anemic growth of 0.4% in the first quarter of 2009

      3. o Mild recovery by late 2009, with a better 2010

      4. o “Heightened risks for a much deeper downturn in 2008 & 2009”

    • Other forecasts by our state economist for 2009:

      1. o Loss of jobs in financial sector, leisure & hospitality, wood products sector, computer & electronic equipment, construction, & transportation equipment

      2. o Increase of jobs in trade, transportation, & utilities; professional & business services; and government

      3. o Oregon population growth will slow but still be above the US growth rate, with rates of 1.3% in both 2008 and 2009, & 1.4% in 2010

  • As of September 2008, Wells Fargo’s economist expects Portland single family prices to fall 6.4% in 2008, and another 11.9% in 2009

Real Estate Finance & Impact on Apartment Lending:
  • Multifamily debt originations down 42% over the last year

  • Fewer multifamily sales due to tougher financing, and a gap between what sellers will sell for what buyers are willing to pay

  • More uncertainty on getting financing; lower loan amount

  • Change in debt service coverage or the way NOI is calculated

  • More equity in the deal

  • 70% to 75% LTV maximum

  • More due diligence; longer time frame to put down hard money

  • Federal Reserve has shown it will step in and use policy instruments to ensure liquidity

  • 2009: What will the new administration do with capital gains; impact on apartment listings

Apartment Construction:
  • Land is still expensive, but the apartment fundamentals are solid

  • I expect we will see 2,500 to 3,500 new units in 2009, though financing will remain tough to come by; good fundamentals, but a tough economy

New Condominium and Condominium Conversions:
  • Slower absorption & inventory buildup; around 2.5 to 3.5 years of inventory

  • High rate of foreclosures in some buildings

  • Tougher for buyers to get financing

  • $10 million Hoffman Construction Co. lien on the 194 unit Waterfront Pearl condo

  • Over 1,400 condominium units will be or have been converted to luxury apartments. Had these condominiums been completed as planned, Portland would rival other underperforming condo markets like Miami, Las Vegas and Phoenix.

  • “Prices may have to come down 10% to 15% or more, maybe even 40%, in order to move inventory.” Ed Kashmarek, Wells Fargo economist

Apartment Vacancies:
  • Some “shadow inventory” of units from unsold condos and single family homes

  • Watch the economy; tenants doubling up or moving home

  • A very weak single family market will help the apartment market over the next year

  • Apartment vacancies of 4.0% to 5.0% by year end 2009 due to a tougher economy

Rental Rates:
  • Modest increase in rents in the first half of the year; flat in the second half

  • Income up 1% to 3% in 2009; slower growth due to a slow economy

Other Trends:
  • Apartment inspection programs in Gresham, and proposed for Portland

  • New condos going to rentals; and condo conversions going back to rentals

  • Smoke free apartment complexes

  • More utility bill backs

  • Problems with TICS; DBSI

Risks:
  • Credit crunch and financial market instability

  • Continued sharp stock market correction

  • Rising energy prices

Conclusion:
  • 2009: A weak economy in 2008 will push well into 2009

  • Obvious distress in financial markets, financial services, real estate, & construction

  • 2008 will go down as a good year for the Portland apartment market

  • Good fundamentals and a weak single family market will result in 2009 being a decent year for the Portland area apartment market despite anticipated problems with the economy

Mark D. Barry 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.



           

About  |   Sales & Leasing  |  Commercial Management  |  HOA Management  |  Residential Management  |  Maintenance  |  Contact

Copyright © Bluestone & Hockley Real Estate Services