Apartment outlook: 7,000 new units annually in Portland for at least 2 more years

Staff Reporter- Portland Business Journal

The Portland market may be on track to add 7,000 new apartment units each year between 2014 and 2016, but according to Jerry Johnson, there may be even more than that on the way.

“What we know about and can talk about is around 25,000 units either under construction or planned for the region” this year and the next two years, said Johnson, a principal at the consulting firm Johnson Economics. “There are even more that I can’t talk about.”

Johnson’s remarks came during Multifamly NW’s Fall 2014 Apartment Report breakfast at the Multnomah Athletic Club. He was one of the panelists who spoke to the 400-person audience on the state of Portland’s apartment market.

To sum up Johnson’s take: the market here is strong, construction is likely to continue booming and demand will endure, at least until mid 2016. What could hasten the party’s end could be a failure for wages to rise in tandem with increasing rents, improvements in the home ownership rate, rising cap rates and the chance that developers may overbuild the market.

“We’re hoping for a second wind on the party,” Johnson said, “but it might be time to start thinking about that hangover and holding off on that next round of drinks.”

1232 Commercial St NE, Salem ~ JUST LISTED ~

Nice stand alone commercial building. Good location with lots of visibility!  Two large open rooms.  The front half of the building also features some offices and restrooms. Building does feature heat and air condition and limited on-site parking along the South and East sides of the building.  Previously used for OMMP Coorperative Growing.  Tenant is responsible for confirming use within current zone and planning restrictions

   

Size:  3,088 SF
Price:  $0.68/SF/NNN
Zone:  IC – Industrial Commercial

Downloadable PDF

Listed by:
Ben Bednarz, Broker
Licensed in the State of Oregon

Listing Broker is part of the property ownership entity and a licensed Real Estate Broker in the State of Oregon.

Rents jumped 11 percent last year and are expected to keep rising

Staff Reporter- Portland Business Journal

Average rents in the Portland area rose 11 percent last year and are expected to continue to escalate, according to a report by commercial real estate firm Kidder Mathews.

The average rent is now $1.16 per sq ft, with downtown Portland reaching an average $1.93 per sq ft.

“Rental rates are expected to continue to escalate over the next year, though the general consensus based on market participant interviews is that there is not a lot of room for additional rental rate growth,” said the report. It predicted that continued growth in net operating income (NOI) will come at least in part from putting bill-back programs in place and eliminating tenant incentive concessions.

Property taxes have also continued to rise, particularly in Multnomah County, but the cost of gas and electricity has remained fairly constant.

According to the Barry Apartment Report, a publication covering financial trends relating to Portland apartments, the increased demand is due to major employers such as Intel, Nike, Kaiser’s Westside hospital and Daimler Trucks taking on more employees.

New construction projects, including the Collaborative Life Sciences Building at Portland’s South Waterfront, Trimet’s Portand-Milwaukie Light Rail project and the re-start of Park Avenue West have also created jobs.

Where’s the Inventory?

By Gabe Johansen, Apartment Broker SMI Commercial Real Estate, LLC

As the economy slowly improves and banks get back in the business of lending there has been a steady increase of incoming phone calls being directed to my office and it’s not the institutional investors who have composed the buying majority of multifamily transactions throughout the recession who are calling.  Rather, it is the smaller investors who have been sitting on the sidelines for a while who are once again interested in getting in the game.  This is great news for many reasons, but it does pose one fairly large challenge… in today’s market finding that perfect apartment acquisition may prove to be more difficult than it sounds.

Do you remember the famous Wendy’s hamburger commercial from the 1980’s that, for what seemed like the whole decade, kept asking us where the beef was?  Almost thirty years later the question on many of our industry’s minds is… where’s the inventory?  A quick search on LoopNet, CoStar, MLS or any other property search engine will paint you a picture of a pretty sparse shelf.  Most investors and apartment brokers are currently abuzz about how few apartment projects are listed for sale.  Where there was once several pages of listings in many of the major markets in Oregon, now you will find one page or two at most in some cases.

Contrary to the supply, demand for multifamily real estate is very high. Cap rates continue to compress and several Oregon markets are seeing multifamily properties reaching pre-crash level rates.  Most apartment projects have already recaptured a large percentage of the value that was lost during the Great Recession.  So if demand is high, cap rates are low and values are approaching pre-crash levels… why don’t more apartment owners want to sell?

The apartment market is currently the undisputed champ of the investment world.  Vacancy is very low in most Oregon markets and rents are on the rise creating a healthy return for landlords.  Another factor to consider is lending.  Last year the Commercial MBS market doubled and apartment lending interest rates have remained very close to their historic lows.  Many apartment owners have opted to refinance their properties to take advantage of these low rates and further increase their cash flows.

This leaves many multifamily property owners asking this question… “If I already own the best investment available to me in the marketplace today, what would I replace it with if I sold?”  Many investors would love to increase their unit count or move their investment dollars to a different area for various reasons.  As landlords contemplate selling they also understand  that unless they are able to identify an exchange property and complete a successful 1031 tax-deferred exchange, Uncle Sam is going to expect a sizeable check come tax time.

With inventory being as low as it is, a lot of investors have decided it is safer to hold on to what they have rather than risk footing a large tax bill.  Chasing a bigger or better opportunity just isn’t worth the risk for some and without a larger selection of available inventory it is just too hard for them to get a good comfort level around selecting a potential exchange property.

There are however, owners out there who are interested in cashing out and moving away from the multifamily market entirely or becoming the bank by offering seller financing.  These are the individuals who will ultimately begin filling up the shelves again and taking advantage of a seller’s market.  If that happens to be you, grab a hamburger and call your apartment broker today.

SMI Apartment News – Winter 2013 Edition

The Winter 2013 edition of the SMI Apartment News is now Available.

Click on the eNewsletters icon to access the current edition as well as past editions back to Summer 2008.

For additional information, please contact our office directly at 503-390-6060.

 

 

Multifamily… Buy, Sell or Hold?

MIAMI—When it comes to multifamily, times are changing once again. We’ve been talking to Calum Weaver of CBRE’s Multi-Housing Private Capital Group, about why multifamily keeps growing and whether or not the multifamily supply can keep up with demand.

In part three of this exclusive series, we’re focusing on the buy, sell hold question, as well as how private capital investor profiles are changing. So read on for some sound advice from a South Florida multifamily market veteran whose team recently listed 113 units at Bermuda Cay in Boynton Beach, one of the last fractured condo deals in South Florida.

GlobeSt.com: If I’m a multifamily owner, I’d be asking myself: Should I sell, hold or refinance? What’s your advice?

Weaver: From a price perspective you’d do well to sell now, there are plenty of buyers out there. If your debt is maturing in the next three years, it’s a good time to lock in refinance because the debt market is still pretty fluid. The fundamentals will continue to stay strong for the next 12 to 36 months. So if you do refinance and lock in you should be able to ride the wave of positive trends going forward.

GlobeSt.com: Has the profile of the typical private capital investor changed?

Weaver: Some of the more aggressive activity has come from foreign and first-time buyers who are diversifying their overall investment portfolios. They’re seeking a steady predictable cash flow generation of 5% to 7% all-cash IRR, or on a leveraged basis, in the low to mid-teens. This is an attractive proposition in a low yield environment, especially as inflation risks emerge.

Many buyers are taking advantage of low interest rates. Consequently, all-cash buyers, which in previous years had the advantage to move quickly and close transactions are now facing stiff competition from buyers who are financing deals.

GlobeSt.com: How are changes in the mortgage market and interest rates affecting trades? Will interest rate movement decrease value of properties?

Weaver: However you want to spin it, by any metric, interest rates are  still at historic lows. They have gone up in the last 90 days, and that could affect the value of certain properties up to maybe 5%, but it’s really going to depend on the location and the property.

It hasn’t changed the equation, as it were—I don’t see any drawback on trading activity in the foreseeable future. And liquidity in the multifamily lending market continues to favor borrowers. There’s strong activity among local banks, CMBS, FHA and insurance companies. And this access to cheap debt is encouraging confidence in investors. They’re willing to finance stabilized properties  at a 75% loan-to-value ratio in the mid 4% range.

Land Prices Spike as Developers Race to Break Ground

The race is on to build and deliver new units while the upturn still has momentum, but the frenzied pace of competition has bumped up land prices significantly.

Developers purchased more than $3.6 billion in new development land in the first quarter of 2013, according to data from New York-based Real Capital Analytics (RCA). This is the largest amount of new development land purchased in the first quarter of a year since the Great Recession began.

Steven Coon, a principal at Kansas City-based Land Development Strategies, said securing financing isn’t the most difficult part of getting a land acquisition deal done. In today’s market it’s more about finding a prime location to build upon and hoping it has been primed for the beginning stages of development.

“You buy raw sites when the market cycle is down,” he said. “Since the market cycle is up, most people are looking for a more developed site because they want to build now. They want to be able to deliver new product—now, as soon as possible.”

Coon estimates the price of land has risen by about 10 percent over the last year as the race to find a good place to develop gets more competitive.

Gold Rush

As the demand to break ground on multifamily housing grows, so do the pockets of those who bought land to develop.

Demand is pushing some land owners to consider selling even though their property isn’t on the market, Coon said.

Portland Parking Saga Continues…

Brace yourselves, developers. City rules governing construction of multi-family projects in Portland have changed.

The Portland City Council on Wednesday approved a plan that requires developers who construct projects with 30 or more units to provide at least some on-site parking. The number of spots increases proportionally based on the project’s size. Some parking can be eliminated by adding bicycle, motorcycle and shared vehicle parking.

The move is not unexpected. Residents in some inner Portland neighbors have been rallying against large-scale developments with no on-site parking claiming they make already scant on-street parking even more difficult to find. In the most publicized case, the city pulled the permit on an 81-unit Southeast Division Street project that was half built, leaving the developer in limbo.

As Wendy Culverwell reported recently, it’s not necessarily the plan that has developers worried. It’s the process. In fact, many developers say they favor on-site parking and many already add parking.

The new rules take effect in 30 days.

Back in the Saddle Again

In the past year, the general economy has tried to cope with the debt crisis in Europe, a polarizing presidential election, the nation falling off the fiscal cliff and, most recently, the imposition of $85 billion in automatic federal spending cuts from the sequester. Also in the past year, the nation’s multifamily housing market has once again posted solid gains in spite of these challenges.

For most metro locations across the country, apartment market fundamentals have either reset or improved from their pre-recession conditions, reports Witten Advisors’ president, Ron Witten. “Basically the national apartment market has fully recovered,” he says. “Apartment values are not quite back to where they were prior to the boom, but have regained much of the decline in value during the deep recession,” he said.

By all accounts, market indicators are overwhelmingly positive for continued strong rental housing demand, which will fuel a healthy hike in new construction projects in core markets across the country this year.

A host of major new multifamily projects were either announced or broke ground in major cities across the US in recent weeks, including the massive Hunter Point’s South project in Long Island City, Queens. The City of New York and the Related Cos. broke ground on the initial 925 units of the development, which will eventually feature 5,000 apartments—making it the largest rental housing development of its type since the 15,000-unit Co-Op City was completed in the Bronx, NY 40 years ago.

While leaders from the National Multi Housing Council and the National Association of Home Builders have noticed a loosening of credit for certain multifamily projects proposed in key urban centers such as Houston, New York City, Dallas, Austin, Los Angeles and Washington, DC, construction activity could be impacted by a promised 10% cut in Federal Housing Finance Agency multifamily finance deals this year, as announced recently by FHFA acting director Edward J. DeMarco.

Developers are feeling optimistic again, leading to increased deliveries next year.

Source: Axiometrics

Steve Edwards, a partner in the real estate & land use practice group of Manatt, Phelps & Phillips, told GlobeSt.com, “As the capitalization rates for multifamily properties continue to fall, one reason the market has remained viable is the relative availability of low-interest financing from FHA, Fannie Mae and Freddie Mac. It can be expected that any curtailment in the availability of such financing will not have a positive market impact.”

But for now, it’s status quo. As of early 2013, the multifamily sector has been performing well, although the pace of improvement was moderating somewhat from the previous two years. Mark Obrinksky, chief economist and VP of research for the NMHC, says that while some key indices have dropped slightly, the continued expansion of the rental housing market that began in 2009 is still solid. Population growth and other positive demographics suggest that demand will continue to be strong in 2013-14, he says.

David Crowe, chief economist with the National Association of Home Builders, says construction started on 246,000 multifamily units in 2012, up sharply from 178,000 in 2011. He expects a 31% improvement to 321,000 multifamily unit starts for the sector in 2013.

The 10 years leading up to the housing crash saw the market averaging approximately 350,000 new units per year through 2008. Crowe says that rental demand—fueled by a sharp rise in new household formations since the economic recovery took hold—is the primary driver for the projected increase in starts.

So, while there has been a marked increase in new construction, the industry is really just beginning to return to normal levels. “Multifamily has been doing a lot better than single-family because of the rise in demand, but it’s still behind its normal levels,” he notes.

The NAHB noted that permit issuance for future apartment rental projects rose 1.5% to a 341,000-unit pace in January, the highest permitting activity posted since mid-2008. Permitting activity rose 10.1% in the Northeast, 1.4% in the Midwest and 1.1% in the South. The West registered a 0.5% decline in permits issued in January.

NMHC’s Obrinsky points out that during the 1997-2006 period, new construction of five or more multifamily units averaged approximately 300,000 each year. In 2012, there were 233,000 unit starts.

David Crowe, NAHB: “Multifamily has been doing better than single family because of the rise in demand, but it’s still behind normal levels.”

“We’ve already seen a big increase in new construction compared with the trough that we saw back in 2009 and early 2010, but that construction has not yet even taken us back to the level we saw for the 10-year period from 1997 to 2006,” he says. “At this point, we’re looking at a further increase in new multifamily construction and we could reach as much as 300,000 in 2013.”

Household formations in the US are currently averaging about 850,000 a year, as compared to approximately 500,000 during the recession, reports Crowe. “Most of those new households are between the ages of 25 and 34,” he says. “A large majority of them are typically renters anyway, and in this cycle almost all of them are renters because credit standards to get a mortgage are tighter, down payments are higher and a lot of these people will have several jobs before they settle down, so their mobility is greater than their predecessors.”

So at the same time demand is driving new multifamily projects, the industry is also playing catch-up. During the recession there were barely more than 100,000 units in multifamily housing starts each year in 2008 and 2009. “That is barely enough to keep up with what falls out of the stock because of obsolescence,” Crowe notes. The spike in new construction is due to replenishing some of the stock, but “most of it is answering significant demand for rental projects.”

Jay Denton, VP of research for AXIOMetrics Inc., a Dallas-based multifamily research provider, says that from a broad perspective his firm expects urban cores to see peak deliveries in 2013 and 2014, with the suburbs seeing an increase in activity afterwards.

“The real test will be taking place over the next couple of quarters,” Denton says. “If the new properties absorb units quickly at solid rental rates, then I would expect to see construction maintain its current pace. So far, the results have been great.”

With all the new construction, there is a question of its impact on rental rate growth. Current indicators suggest that rent growth will moderate from now through 2016, but will then rise thereafter. The national multifamily occupancy rate was 94.04% in January 2013, down from 94.11% in December 2011, according to AXIOMetrics. Supply remains tight in the class A and B markets, which are both enjoying occupancy rates above 94%. The class C national occupancy rate in January 2013 was 92.4%.

Jay Denton, AXIOMetrics Inc.: “If the new properties absorb units quickly at solid rental rates, then I would expect to see construction maintain its current pace. So far, the results have been great.”

While rents have grown collectively at approximately 13% since the end of the recession, that rate should moderate to a slower, but steady pace over the next few years. Most analysts put effective rent growth in the US in 2012 at anywhere from 3% to nearly 4%.

Still, some segments are seeing more of an impact than others. In class A properties, for instance, effective rent growth has been falling steadily, Denton relates. In 2011, rent for high-end product grew 5.1%, the best of the three asset classes. Today, however, that growth has declined to 3.2%. Class B properties have been increasing at about a 3.7% clip for the past 16 months. The biggest winner of late is the class C apartment sector, which according to Denton is now seeing effective rent growth at about 4.6%.

Due to the availabilities and attractive rents, at least compared to class A and B properties, “Class C properties are now starting to fill up more than they were before, which is giving landlords in that segment some pricing power,” Denton reports.

Performance also varies by location. The top markets for rent growth in 2012 were urban core areas that far outpaced the national rent growth of approximately 4%. According to Witten Advisors, the top 10 cities in multifamily rent growth at the end of the third quarter of 2012 were San Francisco, at 9.8%; San Jose, 8.5%; Charlotte, NC, 7.3%; Denver, 7.0%; and Oakland, CA, 6.8%. Rounding out the top 10 were New York City and Houston, which both saw rents growth at a 5.9% clip; Austin, TX, 5.6%; and Columbus, OH and Salt Lake City, at 5.3% each.

Some cities, meanwhile, saw lease rates decline over the same period. Rents in Baltimore, for instance, fell 2.9%; San Diego saw a 2.5% drop; Sacramento rents fell 1.2%; and Las Vegas lease rates declined by 90 basis points.

One factor curtailing the potential of overbuilding this year and beyond is the cost of construction. “The properties delivering now had lower construction costs than what it would be if the projects were started today,” says Denton. Land, construction material and labor costs have all increased of late.

Peter Torres, Astor Cos.: “Everybody is open to doing business, though they’re still very conservative. But it’s not what it used to be; for a while there were no loans at all.”

Another factor, to an extent, is financing. Although recent surveys by the NMHC continue to report that financing is constrained in top markets, NMHC’s Obrinsky and others say they hear that the lending environment may be improving somewhat.

“We are clearly seeing construction lenders—banks, primarily—interested in making new loans on new apartment developments,” Witten says, “as long as there is enough cash equity in the project. Therefore, equity investors are also interested. They are careful, but they are interested.”

Peter Torres, vice president of the Astor Cos., a rental and condominium development firm in Miami, agrees that financing has improved in recent times. A few housing developments in the greater Miami area have been able to secure conventional financing. “We’re working with a few lenders on some our projects and we’re finding that they also have changed some of their terms,” he says. “Basically everybody is open to doing business, though they’re still very conservative. But it’s not what it used to be; for a while there were no loans at all.” Despite lenders’ requirements of large deposits and other conservative-oriented policies, Torres’ firm has found the transaction parameters workable.

Six months to a year ago, there was a very strong lender bias toward cities on both coasts. “The intense focus on those markets has lessened because pricing has gotten so expensive,” Witten reports. “So we’re starting to see a broadening of capital to markets across the country. Tertiary markets are still finding it difficult to find financing, but major non-coastal metros such as Denver, Dallas and Houston are now active players in the new rental apartment sectors.

In fact, Witten Advisors projects Houston as the number-one market for rental housing starts, currently forecast at 16,200, followed by New York City (14,400 in starts); Dallas (12,300); Austin (9,900), Washington, DC (8,700); and Los Angeles (8,400). Likewise, Axiometrics reports that of the nearly 164,000 units scheduled for delivery in 2013, a third will be concentrated in just six MSAs: Washington, DC; Dallas; New York; Seattle; Austin; and Houston. By all accounts, however, any imbalance this may cause in those markets will be temporary.

Riverfront Letdown

Riverfront planners say they’ve painted a vision of the shared longings of Eugene residents for a place downtown along the Willamette River to play and rest.

The ecstatic testimony to date on the proposal for the Eugene Water & Electric Board site would seem to prove them right.

But there’s a hazard in arousing public expectations for a project when nobody can say whether it’s likely ever to be built, given the intricacies of the proposition and the fickle real estate marketplace. Mass enthusiasm can easily turn to mass disappointment.

Just ask the Tokarski family of Salem, who have developed more than $1 billion in real estate over four decades.

Six years ago, patriarch Larry Tokarski and a partner spent $7.25 million to buy an old Boise Cascade plant on a prominent corner on the south side of downtown Salem — right along the Willamette River. They planned a mixed-use development with 200 condominiums, retail underneath, public plazas, pathways and restaurants with views of the Willamette.

They allowed for green space and for unearthing Pringle Creek, which had flowed beneath the industrial site for more than 90 years, according to coverage in The Statesman-Journal newspaper. The developers adopted many ideas that the Urban Land Institute generated for the property.

Salem was jazzed by the picture the developers painted.

“Salem has the opportunity of a lifetime here,” the mayor proclaimed.

A Statesman-Journal executive editor opined that the project would “transform Salem’s image while stimulating downtown to become an urbane and culturally interesting destination.”

The waterfront was poised to be a gem, said Salem’s longtime public works director, who had gone to work for the developer.

Brian Hines, a Salem resident and blogger, imagined a gracious scene, as in Paris or, at least, San Antonio, with a waterfront strung with walking paths and bejeweled with restaurants.

“You could go down and walk around at night and be connected to downtown,” Hines said. “You could sit down in a nice restaurant and watch the lights.

“Developers come in with their little boards and make it all look wonderful.”

The Salem mayor climbed a backhoe to strike a ceremonial blow at the facade of the first industrial building to be razed. The Salem City Council obliged by approving the South Waterfront Mixed Use Zone — just as the Eugene City Council is expected to do for the riverfront plan here soon.

– Dreams dashed

The parallels between the Salem project and the Eugene riverfront plans are significant.

The Salem property, like Eugene, is along the river and bisected by an active railroad track. The Eugene plan also envisions a mixed-use neighbor­hood with retail below and condominiums above.

Salem residents were thrilled about opening up Pringle Creek. Eugene residents want the same for the long-buried Eugene Millrace.

Salem residents imagined themselves sipping coffee or beer and watching the Willamette idle by — just as people in Eugene are doing now.

The Eugene Riverfront Master Plan is so very sensitive and well thought out, “It’s just everything a community could possibly want,” Eugene resident Jo McDow said at a public hearing.

But Salem’s dream never came to pass. Instead, the project stopped and was frozen in time for four years.

A half-razed Boise Cascade building continues to “uglify” the prominent corner south of downtown Salem, Hines said.

Finally, in November, the Tokarski family announced that the mixed-use plans weren’t workable. The developer submitted plans for a 118-unit apartment complex, which they hope to start building in June.

The Salem planning staff had to tell the developer that, as part of the new plan for the waterfront, the city’s rules require more public access and more bicycle parking than the developer was proposing for the apartment complex. Those features were among the many hallmarks of the original mixed-use vision.

“Now, they’re going to have a fence that blocks off people from the development,” Hines said. “You’re rolling along on your roller blades or your stroller, and you want to go through the development. You can’t. There’s going to be locked gates, even gates for the paths. …

“It’s going to be a shadow of what was promised back in 2009.”

No restaurants will offer a riverside meal.

“That’s one concept that we have thoroughly vetted and that we simply cannot get interest in from either local (restaurants) or national franchises,” said Jason Tokarski, who is overseeing the development now for his family’s Mountain West Investment Corp.

“It’s not Portland”

In February, the developers announced that Marquis Companies of Milwaukie would add a 52-bed nursing home to the site. Construction is expected to begin early next year.

The site will now have two main uses: apartments and a nursing home, one Salem area blogger noted. “This doesn’t exactly scream ‘downtown living.’ ”

The Tokarski family was facing exceptionally nasty headwinds. They unveiled their vision for the mixed use project in 2008, during the biggest economic downturn since the Great Depression.

“(It’s) a context you can’t really leave out of that comparison,” said Kaarin Knudson, whose firm, Rowell Brokaw Architects, was hired to shepherd the Eugene project.

Consequently, the Tokarskis are chastened. They’re reluctant to show watercolor renderings of development plans.

“I want to be careful that we are not showing something that gets everyone excited,” Tokarski said. “Over the years, it has been difficult to reframe the project in the public’s eyes and to help the city staff and the community understand what would really work on the site — given the economic challenges that persist.

“Salem is not a high-rent market, whether it’s commercial or retail or apartments. It’s not Portland, and neither is Eugene.”

The development has retained one feature the Salem public had dreamed of. The Tokarskis hired Eugene’s Staton Companies’ demolition experts to break open a 50-foot swath of concrete that covers Pringle Creek.

Eventually, the public will be able to walk creek-side from Salem City Hall, under the busy Commercial Street to where the creek pours into the Willamette.