By Clifford A. Hockley
President Bluestone and Hockley
In early May 2018 the City of Portland introduced a rent control concept to limit annual rent increases for tenants to 5%. In addition, Commissioner Eudaly and the Rental Services Commission are testing out new approaches in application screening. Both will dramatically affect the cost structure for a landlord in Portland.
The basic objective of these two policies is to make it easier for low income tenants to afford rental housing in the City of Portland. Unfortunately, there are major misconceptions regarding the ability of local Landlords to absorb these costs.
Local landlords, buffeted by more and more regulation, are finding additional levels of regulation and rent increase caps difficult to swallow. These new policy changes are in addition to new unreinforced masonry regulations and massive zoning changes that will affect real estate investors.
Utilities, maintenance, and property taxes are slated to increase 5% annually or more in the next two years. This will likely increase rental housing shortages even more as landlords consider selling their investments that are not making money.
Commissioner Eudaly and the Rental Services Commission are introducing additional tenant screening criteria that are designed to maneuver the most challenged tenants into rental housing. These are the most difficult tenants to place and don’t have the money to rent from market rate Landlords. These tenants would be better served through not-for-profit and/or government-funded housing schemes because the targeted demographic do not have the income to pay market rate rents. Landlords do not have as much flexibility in setting rents, seeing as they have to pay market rate mortgages, and these additional screening requirements will affect the whole marketplace and create risk for all tenants and landlords alike.
Of the estimated 120,318 total rental units in Portland (2016 number), 80,445 are owned by ‘Ma and Pa’ investors. Any screening criteria changes made will have a huge effect on these small business people and their ability to maintain properties and pay taxes and mortgages.
For many rentals, the utilities (water, sewer and garbage) are paid by the landlord and are anticipated to increase over 5% annually over the next five years.
For example, quoting from a recent memo from Melissa Merrell, PUB Analyst, Portland Utility Board:
“While the board sees encouraging process changes and transparency efforts in both bureaus, we remain concerned about long term cost projections for Portland customers. Current rates of increase in the proposed ordinance are 8.7% for PWB and 2.35% for BES for a combined rate of increase of 4.46%.
We are grateful to the Mayor for directing BES to use more of its cash-on-hand to reduce next year’s rate of increase but are still concerned that at the current rule of thumb for increases [5% combined for both bureaus], utility rates would double in less than 15 years.”
Wage and Construction Cost Increases
Property maintenance usually accounts for between 5% and 15% of the annual operational costs, excluding capital expenses. These increased maintenance costs are being driven upward by the construction boom, the reduction in immigration, and the increase in minimum wage. (See chart below.) Additionally, health insurance companies are forecasting 7%-20% increases in their 2019 premiums. We forecast wage and construction cost increases in excess of 6% annually for 2018 and 2019
|Portland Metro Minimum Wage Levels|
|Date||$ increase||% increase|
|Average annual wage increase||6%|
Property Tax Increases
Due to increased demand, Portland housing prices have increased significantly. As a result, every homeowner’s assessed value will likely go up by 10% or more in 2018. For example, a current home with an assessed value of $400,000 would increase by $1.40 per thousand or $560 a year due to the new school bond alone. The 2017-2018 property tax bill will include this increase as well as the affordable housing bill bond increase. This is in addition to strong appreciation in the Portland housing market. So, a 2016-17 tax bill that was $5,000 will probably increase to $6,500 or more in the 2017-2018 bill. (https://realestateagentpdx.com/portland-property-tax-going-2018/10482)
New Screening Criteria
- Newly proposed screening criteria regulations are designed to take screening decisions out of the hands of landlords and instead focus on allowing almost any tenants with a low credit history the ability to rent. Most disturbing is the requirement that landlords approve applicants with monthly incomes as low as two times the rent amount. This obligates landlords to rent to tenants that may not be able to pay their rent consistently.
- Additional changes mandate that all applicants need to receive a time stamp on their application and a queue number. Landlords will also need to document all contact with prospective tenants and keep that record for over three years, including phone calls and email communication. Records must include the tenant’s name, how the contact was initiated (phone, email, etc.), reason for contact, and any information the landlord shared with the potential tenant. We expect these rules to cost us an additional $200 per applicant to implement. Mom and Pop owners will never be able to afford to comply.
- Inquiries to past Landlords are limited to the time frame of rental period that that specific landlord, ; rental payment history, security deposit charges due to intentional damage, court judgements, and outstanding debts. However, the landlord reference cannot be asked if they would rent to that tenant again, or about general complaints, lifestyle, or eviction filings. Any crime older than seven years from the date of offense (not the date of judgement) cannot be considered.
- Fair and effective screening was a landlord’s last line of defense against the recently imposed tenant relocation payments.
Let’s summarize with some statistics. See the chart below:
|Total Housing Units in Portland, Oregon||376,750.00||100%|
|Owner occupied housing||256,432.00||68%|
|Boat, Van, RV||134.00|
Notice that 80,445 of the units range from single family homes to 19 units. These properties are usually managed directly by the owners themselves and small property management companies. These folks don’t have the technical or financial resources to comply with the proposed requirements. A significant percentage of the rental home and condominium owners will likely sell their properties because they cannot comply. This will have a negative impact on housing supply. We anticipate that probably in excess of 5,000 rental homes could be lost to the marketplace, which is not what the city wants.
Landlords are generally reasonable people, but they rely on these investments for their income.
It is time for the city to realize that the policies being drafted affect the rental marketplace, not just the 13% considered very low income.
There are other options to create more housing in Portland:
- Erase or reduce system development charges for builders /developers that keep their properties as low-income housing for 30 years.
- Establish a grant program to help not-for-profit organizations build and manage low income housing.
- Use federal block grant funds to have Prosper Portland (formerly known as the Portland Development Commission) buy up a 25-year strategic land reserve to support future low-income housing development and grant that land to not-forprofit developers as the need arises in the future.
- Spend money on an office to help senior citizens rent out vacant rooms in their homes.
(This kills two birds with one stone; it helps low income renters and supports senior citizens raise money for their retirement.)
- Encourage developers to build shared and multigenerational housing where families rent together in a co-op style of living, allowing tenants to rent to subtenants.
- Simplify building and zoning requirements to reduce the costs of construction.
The mandates proposed by the city may seem free, but they are not. Landlords are being used as social service surrogates to support the system. To keep rental housing, real estate investors need to cover their operating costs and make a profit. Reducing income potential and revenue streams will cut out small Landlords, and the city needs small Landlords to keep its heart, personality and housing.
Finally, one of the new requirements demands documentation of all tenant/landlord contacts, and city commissioners should wonder if tenants will want to share all their information with landlords before they have a rental relationship. Tenants might have privacy concerns as landlords track all phone calls, emails and contacts.
It seems that commissioners have overreached with this last set of adjustments to public policy. The battle against homelessness should involve all citizens, not just residential Landlords.
Information from the desk of Cliff Hockley
From: KAYLOR Christian R * OED
Sent: Thursday, May 31, 2018 5:27 PM
To: KAYLOR Christian R * OED
Subject: Portland Economic Indicators – May 2018
Continuing economic growth for Portland in the data this month. Though we are seeing some slowing in the pace of job growth as we enter our second year of unemployment rates below 4%.
New 2017 population data was released this month. The city of Portland grew by 11% from 2010 to 2017. For 2017, Portland became the 26th largest city in the United States, up from being the 29th largest in 2010. If this trend continues, Portland is on track to become the 24th largest US city by the middle of the next decade. Portland’s population growth of 11% is above average among major US cities, but not particularly impressive. Seattle is the fastest growing major US city at 19%, with Austin and Denver close behind.
Looking around the Portland region, Hillsboro has grown by an impressive 16% from 2010 to 2017. Oregon City and Tigard both grew at about the same rate as the City of Portland, while cities like Tualatin and Gresham have been growing at about half that rate. In absolute numbers, the 62,465 new residents in the city of Portland is larger than population growth in the next 9 largest Portland area cities combined.
Multnomah County Economist
Oregon Employment Department