It’s a complicated time to own Apartments in The Portland, Oregon Metro area.
Faced with over building, Apartment owners throughout the Portland Metro and Salem metro are forced to find creative ways to attract tenants. It does not help that the population has been decreasing.
Population change: “Overall in 2023, Oregon’s population fell by 6,021 people, or 0.14%, to 4,233,358. This is the seventh-largest loss in the nation, behind California and ahead of Pennsylvania”.
This is compounded by two years of population loss. From 2021 to 2023: Oregon’s population has decreased by 0.5%, or about 23,000 people.
These losses plus the increased construction of apartments in 2021,2022, and 2023 have flooded the marketplace with multifamily units.
The chart above is part of a study called “Portland’s industrial Economy: Today and Tomorrow” published by Michael Wilkerson of ECONorthwest, and shows the losses of Oregonians, mostly moving to Washington (36,061), California (23,792), Texas ( 12,894) Arizona (12,093) and Idaho (8410) in 2022.
Why are people moving out of state? If you are wondering here are four main reasons:
Increased housing costs: according to the report, 12% of retirees said their reason for moving was due to housing costs, which is the highest it has been since 2014. A report from late 2022 found that Oregon was among the top 5 most expensive states to buy a house in Jan 14, 2023. Rental rates were not far behind, even with rent control laws in place.
Increased taxes in the metro: one reason Portland has lost so many people could be increasing personal income taxes, especially on higher income individuals and couples. “The only county in the greater Portland region that is growing is Clark County, Washington, which does not have an individual income tax.”
Crime in the Central Business District and lack of folks coming back to the office.
Remote work has allowed people to work from anywhere.
Note in the chart below the drop-off in Office leasing activities. Office vacancy rates in the metro averaged 21.5% in 2023. In the downtown that vacancy rate edged 30%. According to Colliers research that figure could approach 40% in 2024. This compares to an office vacancy rate of 13.5% in the fourth Quarter of 2020.
How Does this Affect Apartment Vacancies?
As the demand for office space declines in the CBD, so does the demand for apartments. See chart below . Of course Covid 19 had an effect on both.
The chart below shows how many units have been delivered year after year. There is no multifamily housing shortage, rather we have a strong case for over building. In 2023 about 7200 units were delivered to the market, but there was only demand for 3000 units in 2023.
The good news is that construction starts have slowed down, which allows the market to catch up.
As a result of the overbuilding rents have taken a beating. See next chart. It may take until the fall of 2024 or spring of 25 for rental rates to recover. Some markets are clearly majorly overbuilt, like southwest, northwest and southeast Portland and Aloha.
Rental increases – could be stalled for the spring and summer of 2024 as Owners decide to not incur the wrath of their existing tenants and force turnovers. It’s a tricky time given the number of units that have flooded the marketplace. This is driving concessions and a drop in rental rates. See chart below for -5.3 rent reduction in Portland for early 2024.
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Four major forces are pulling and reducing apartment values:
1. High apartment Vacancy rates - See charts above.
2. Increased operating expenses
3. Reduction in income due to concessions and lowered rents due to competition
“Multifamily demand in Portland continues its drastic recalibration from recent highs. Leasing has cooled drastically from its record-setting mid-2021 performance, and vacancies have trended to 7.1% in response.
Upward pressure on vacancies isn’t just a result of slowing demand. Construction has picked up and developers are expected to bring a wave of units online in coming quarters.
Market rent in Portland reflects some stagnation at $1,590 per unit, reflecting year-over- year growth of -1.9%, compared to the national index posted average growth of 0.8% over the same period.”
4. Stubbornly high interest rates stall in place because inflation seems to still ride at 4%
How Stalling Inflation Data May Concern The Fed And Affect Rate Cuts, Forbes magazine 26 Feb 2024
As a result, Multifamily sales are stalled (see chart from costar below).
Summary
In summary, the 2024 multifamily market is in a funk. With too much supply, increasing expenses, high income taxes, decreasing rents and value reductions due to concessions and higher interest rates it is very difficult for a potential Buyer to find an opportunity. Sellers can’t really afford to sell, as vacancies creep back up . All an investor can do is to sit tight and wait for the marketplace to adjust in the fall of 2024 and the spring of 2025. Some building owners may decide not to increase rents for the time being , to keep the tenants they have from moving out. An increase in immigration could speed that trend up, but that too could take until 2025 to adjust.
Clifford A. Hockley, CPM, CCIM, MBA
Cliff is a Certified Property Manager® (CPM) and a Certified Commercial Investment Member (CCIM). Cliff joined Bluestone and Hockley Real Estate Services 1986 and successfully merged that company with Criteria Properties in 2021.
He has extensive experience representing property owners in the sale and purchase of warehouse, office, and retail properties, as well as mobile home parks and residential properties. Cliff’s clients include financial institutions, government agencies, private investors and nonprofit organizations. He is a Senior Advisor for SVN | Bluestone.
Cliff holds an MBA from Willamette University and a BS in Political Science from Claremont McKenna College. He is a frequent contributor to industry newsletters and served as adjunct professor at Portland State University, where he taught real estate-related topics. Cliff is the author of two books, 21 Fables and Successful Real Estate Investing; Invest Wisely Avoid Costly Mistakes and Make Money, books that helps investors navigate the rough shoals of real estate ownership. He is the managing member of a real estate consulting practice, Cliff Hockley Consulting, LLC., designed to help investors and commercial brokerage owners successfully navigate their businesses. He can be reached at 503-267-1909 , Cliffhockley@gmail.com or Cliff.Hockley@SVN.com.
