Portland Apartment Market Still Favors Landlords

Portland might not have the best local economy among markets its size, but it does have a certain 'je ne sais quoi' that attracts young people interested in the lifestyle that the city has to offer, according to the most recent report on Portland’s apartment market by investment property specialist Marcus & Millichap.

Portland, Ore.—Portland might not have the best local economy among markets its size, but it does have a certain “je ne sais quoi” that attracts young people interested in the lifestyle that the city has to offer, according to the most recent report on Portland’s apartment market by investment property specialist Marcus & Millichap. One demographic fact illustrates the attraction Portland has for the young: During the last 12 months alone, the number of renters between 20 and 34 years of age has expanded by about 9,000.

Employment growth, which is needed to support this influx, hasn’t been bad, but not quite robust either. Despite the fact that the completion of the Kaiser Permanente Westside Medical Center offers indications of healthcare job growth around the corner, the current economic environment offers less employment opportunities than anticipated. By the end of 2012, the local economy will have created 19,000 jobs, or a 1.9 percent increase in total employment. In 2011, the total job growth was 1.3 percent.

The attraction of Portland for youth is good mainly for owners of lower-tier rental properties, according to Marcus & Millichap. By contrast, “operators in the Class A sector are concerned that residents with more established credit and income levels will likely enter the single-family arena as the Portland housing market shows signs of recovery,” the report notes. “Even in the event of a home-buying exodus, however, demand will outweigh supply in the rental market through next year, as much of the apartment projects under way are expected in the fourth quarter.”

Development will add significantly to the Portland stock of multifamily rental units in 2012, though not a vast amount. About 1,000 units will be completed this year, or a 1 percent addition, following almost no completions in 2011 (71 units). Despite a significant addition to total inventory, the vacancy rate for rentals in Portland will decline 50 basis points this year to 2.2 percent, the report predicts. Some 3,000 multifamily units are permitted for development, however, and even more are on the drawing boards, which might mean that supply will come closer to demand eventually—just not particularly soon.

Naturally, such an imbalance between supply and demand still means good times, on average, for Portland landlords. By the end of 2012, Marcus & Millichap predicts that asking rents will rise 3.8 percent to $870 per month, and effective rents will be up 4.6 percent to $800 per month. Asking and effective rents saw gains last year of 2.2 and 2.7 percent, respectively.

As for the investment outlook, the report says that a large number of private investors are buying smaller apartments near Portland’s core and then completing basic renovations. The upgrades are to facilitate higher rents for owners, and thus generate higher NOIs. “Only properties near major employment centers justify renovation costs, as buyers usually see going-in cap rates at 7 percent and bring assets back to market at the same first-year return,” the report explains.