1. The Population Growth
2. Employment Market
3. New Construction and Conversions
4. Financing

Portland growth projections, by county⁹
Clackamas County anticipates a 1.4% average annual growth rate through 2025
Multnomah County: .65%
Washington County: 1.95%

There is clear demand for apartment housing in the near future. The percentage of people who rent their housing versus those that own is approximately 31% (U.S. Census, 2004) corresponding to a homeownership rate of 69%⁵. The rental housing figure includes assisted living, mobile home parks, and college housing. Jim Redden of the Portland Tribune reports that the number of households in Portland-Vancouver area is expected to grow by 55,000 households by the year 2030⁷. With an average of 2.3 persons per household, the annual population increase is expected to be 5,500; corresponding to an annual household increase of 2,391.We estimate the net increase in rental housing demand for 2008 and 2009 is approximately 700-1000 units.

Occupancy levels soaring:Vacancy rates within the Portland/ Vancouver area have dropped to 3.23% according to the Spring 2007 MMHA Apartment Report⁴. Data shows that this is not just a Portland phenomenon. The most recent historical data show national vacancy numbers have decreased while apartment rents throughout the national market have increased. One influencing factor that has affected supply is the increase in the number of condo-conversions. Apartment complexes being converted to condos not only decrease supply but increase the number of renters looking for places to rent, which lowers apartment vacancy rates.

Job growth:The Portland MSA job market is steadily growing. A significant portion of new jobs in the past few years have come from the booming housing market. Here is an analysis of the current employment:



Analysts forecast a decrease in the magnitude of job growth because of the housing supply slowdown. The Oregon job market outlook is expected to be stable due to resilience in other job markets¹ (semi-conductor, electronics, transportation equipment, Port of Portland). Red Capital Group forecasts job growth in Portland MSA to increase faster than the national average³. With consistent job growth in the Portland MSA coupled with low unemployment percentages (5.1%, Spring MMHA) the demand for rental housing will continue.


Supply catching up with demand:New apartment unit developments are in progress with more in the pipeline. New apartments are expected to be built over the next few years. Red Capital Group reports in their July Multi-family Housing Update for the Portland, OR MSA that “supply is expected to rise to an average of nearly 1500 units per year from 2007 to 2011”³. However, the CHMA for Portland MSA anticipated a 2,425 unit net loss in apartment supply for 2007 and 2008. While new units are coming online, more are being taken off the market due to condo conversions, demolition, and other factors. The consensus from various sources is that the “net” new supply of apartment housing will be equal to the local demand of approximately 800-1000 units per year.



Rent Increase:What do all these factors mean for rental rates? Jerry Johnson, a principal with Johnson Gardner a real estate and land development consulting company, estimates rent increases to be 8.5% in 2007 and 6% in 2008¹⁰. It is too early to forecast rental rates for 2009.

Financing: It’s not getting any easier.
The commercial lending market has taken a hit over the past few months. The unrelenting flow of negative news stems from one central cause, sub-prime lenders foreclosing on properties leading to increased lending spreads and tighter lending practices. Sub-prime lending, also known as “Alt-A” lending was most prevalent in the single family home market, but the effects of banks over lending to borrowers with less than desirable qualifications permeates throughout the entire lending community.
The effects of the lending downturn on apartment lending are showing up in the following areas¹¹:

• - Higher interest rates: 6.40% - 6.75%
• - Banks cutting lending programs that help borrowers
• - Increased lending spreads: 1.70 – 2.25 spread
• - Banks more restrictive: lower allowable/ supportable debt with same NOI. Debt service coverage ratio (DSCR) between 1.15 – 1.30


What does this mean to the apartment investor? It means finding lending for apartment deals is going to be more expensive. One form of lending hit the hardest by this downturn is the conduit loan. These loans have been a significant source of financing for larger apartment deals (+ $2 million). Conduit loans function by borrowing money from the market, using that money to make loans, and then re-selling the loans back to the market for a slight spread over their cost of funds. With investors requiring a higher return on these loans, conduits must increase their spread in order to make their profit. With higher lending costs and no relief in sight, apartment investors will spend more time than before identifying properties that can produce enough cash flow to cover the higher interest rate and increased debt service coverage ratio (DSCR).

Conclusion:
Many factors point toward slowly increasing demand in apartment housing market. There are indications that supply will keep up with demand. Positive population figures and consistent job growth coupled with low un-employment show demand for apartment housing will continue to be strong. Buyers cannot bank on rents increasing at the same rate as they have in 2007 and are expected in 2008. Opportunities to invest in Portland area apartments will continue to exist with low vacancy rates, consistent increase in the multi-family rental housing stock, and low cap rates; but new buyers will need to dig deeper to find ways to make deals work without banking on significant cash flow returns. Investment goals should be long term, with investment strategies taking advantage of three of the four ways to make money in real estate: price appreciation, debt reduction, and depreciation shelter. Unfortunately, in the foreseeable future, cash flow will be the missing link.

Bibliography
Note: Federal interest rates have been adjusted downward by a ½ point since we wrote this article. We don’t expect the interest rate adjustments to change our conclusions.
1. Comprehensive Housing Market Analysis, Portland. U.S. Department of Housing and Urban Development. 2006.
2. "Local Area Unemployment Statistics." Bureau of Labor Statistics. 6 Aug. 2007 .
3. Market Overview Portland, Oregon. Red Capital Group. 2007.
4. McConachie, Craig. MMHA, the Apartment Report. Metro Multifamily Housing Association. 2007.
5. "Occupancy Characteristics." U.S. Census Bureau. 6 Aug. 2007 .
6. Population Demographics in Washington County. Vision Action Network. 2007. 27 July 2007 .
7. Redden, Jim. "Move to Portland, and Live Where?" Portland Tribune 31 July 2007.
8. Rivera, Dylan. "Housing Market Shows Another Sign of Weakness." The Oregonian 17 July 2007, Sunrise ed., sec. E01.
9. Forecasts of Oregon's County Populations and Components of Change, 2000-2040. Office of Economic Analysis (State of Oregon).
10. Hockley, Clifford A. QuickFacts: Oregon Apartments: Rents Increase as Vacancies Decrease. Bluestone & Hockley Real Estate Services.
11. May 2007; Oregon Economic and Revenue Forecast. State of Oregon, Department of Administrative Services, Office of Economic Analysis. 2007
12. Gerritz, Tanya. "Rates!!" E-mail to Tanya Gerritz. 27 Aug. 2007.
13. Wade, Willers. "Liquidity Crisis Special Report." E-mail to John Brandhorst. 27 Aug. 2007.