MARKET SNAPSHOT: Apartment Properties in Portland, Ore. Will Lose Value

By Erika Schnitzer, Associate Editor Portland, Ore.—What is the multifamily market in Portland, Ore.-Vancouver, Wash. like? Look at Phoenix for the answer, says Gary Winkler, senior broker-multifamily investments in Colliers International’s Portland, Ore. office.“Our expectation is value loss and a number of properties not being able to meet debt coverage. We believe that you can look at a market like Phoenix and you can see what’s happened—we’ll probably follow suit,” he tells MHN. Unemployment in the metro is currently at 11.6 percent, compared to the national average of 9.5 percent—as of June 2009—according to the Bureau of Labor Statistics. In the Portland-Vancouver metro, “we’ve had a lot of companies aggressively purchase here and drive prices up,” says Winkler. “We had flat rents until about 2003-2004 and then rents went up slowly as the economy was hot, and now rents are decreasing again.”Along with the 3,000 units that were brought online recently, a condo boom has contributed to the metro’s shadow market and increasing vacancies—which is currently 6.6 percent in Vancouver and 7 percent in Portland. In addition, notes Winkler, the metro is experiencing competitive concessions, rent loss and a rise in evictions. Net effective discounts on monthly rents in Class A communities range from 5.6 percent to 16.7 percent, according to Colliers’ Portland Multifamily Investor Quarterly, Mid-Year 2009. “For our market, we had a lot of players come in for the value-add play and they would come in and put $10, 000 to $15,000 a unit into the property and go in and revamp the units and up the rents. Our demographics don’t support higher rents, and on top of that, we had a company come in and build a really nice high-rise LEED-certified apartment building and it filled up instantly so a misconception took place that our local market could absorb this type of product,” Winkler explains. “What ended up happening was a bunch of builders came in and built high-end units with an expectation of $2.50 per sq. ft. and on top of it, performing it out at expectation at 5 to 5.5 cap rate,” he adds.Cap rates are rising, and the expectation, based on cap rate compression, is that the metro will return to historic norms—about 100 basis points between classes, says Winkler, noting that historic cap rates for Class A properties are 7 to 8 percent, while Class B sees 8 to 9 percent and Class C assets experience cap rates above 9 percent. So far this year, only five transactions of 50 units or more have occurred, compared to 25 transactions at the same time last year. Despite this, trading is taking place among properties with 35 units or less by local investors, according to Collier’s Portland report.As to when the he expects the market to turn, Winkler believes that the Portland-Vancouver metro will see a recovery after most of the other major metros in the nation.Click here for last week’s Market Snapshot on New York.