MARKET SNAPSHOT: Institutional Capital in Portland Puts Pressure on Cap Rates

Portland, Ore.—Out-of-state institutional buyers have been eyeing multi-housing assets in Portland, Ore., pushing cap rates down for the rest of the market.

“There is a definite trend in the cap rates going down … mainly due to larger institutions coming into our market,” reports Gary Winkler, managing broker, Winkler & DuPont Real Estate Services, a Portland, Ore.-based firm  specializing in brokering  acquisitions and dispositions of multifamily and commercial properties in Oregon and Southwest Washington.

“They can get their equity extremely cheap,” Winkler tells MHN. “They can get money at 2 percent for their equity portion through bond sales; they can buy these things at such low caps and still get a return … It seems to have a trickle-down effect. In the rest of the country, there was a huge separation between buyers and sellers; these institutional players coming in are creating a similar type of belief, even though they are buying a really specific class of building. Sellers see that and automatically think those are pushing the cap rates down so their buildings are worth more now, even though equity is still trading at the same place it was when no one was buying anything.”

Cap rates decreased nearly 100 basis points from the first quarter of 2010 to the fourth quarter of the same year.

Meanwhile, metro-wide vacancy currently averages around 4.5 percent, though the range is more between 1 percent and 9 percent. Rents, however, have only increased slightly. “Everyone is hesitant to be aggressive [on pushing rents] because they’ve lived through some pretty bad stuff and they like having their units full,” Winkler points out.

The majority of sales for 2010 took place in the last quarter, says Winkler, which resulted in a significant increase in dollar volume. For example, dollar volume reached over $216 million in the fourth quarter, while it was only $48 million in the third quarter.

The 101-unit Park 19 in Portland sold for $28.8 million, or $285,149 per unit, while the 332-unit Ladd Tower sold for just over $79.3 million, or $239,006 per unit. Palladia Apartments, a 497-unit community in Hillsboro, sold for $70.25 million, or $141,348 per unit.

Distress, meanwhile, is just beginning to appear. “A lot of the banks were waiting to see what everyone was going to do locally,” notes Winkler. “We haven’t had as much distress as other markets, but we always sit behind the curve; we’re always slower than everybody else as far as trend lines go.” He adds that he expects to see some opportunities in this sector, but cannot predict how much distress will appear.

The Bureau of Labor Statistics reports that the Portland-Vancouver-Hillsboro, OR-WA unemployment rate was 10.1 percent, as of November 2010, but the metro has seen some positive signs of employment in recent years. The market is big on renewable energy sources, with many solar and wind power companies moving in. SolarWorld, for example, recently moved to Hillsboro.

“We have some pretty strong employers; it’s just that we don’t have enough employers,” says Winkler. “We have people looking all the time who are interested in Portland because of what it represents as far as LEED certification and how green-friendly we are.”

The one potential negative for the market is the fallout of low cap rates. “Where money is right now and what you can get money for as things equalize, I don’t think a double dip is something in the near future,  [but] I think it’s something that [could] take place down the road,” Winkler tells MHN. “As these markets turn around and cap rates go up, if you buy at a 6 and we go back up to 9, you have to have an extreme increase in income to offset that. When you do a 10-year, it gets difficult to make stuff work based on those lower cap rates.”