In January 2011, the IFC series Portlandia created a buzz in its pilot episode as it satirized the area's eccentric population and coined Portland as “a city where young people go to retire.”
While most apartment investors may not be in search of young retirees, the statement does suggest an attraction to the metro as a lifestyle city with a desirable quality of life. Portland residents can enjoy many outdoor activities within an hour's drive and then come home and indulge in one of the city's many microbreweries, vineyards, or nationally acclaimed restaurants.
This attraction is evidenced through the area's net in-migration trends. The metro exhibited population growth of 17.37 percent—or 1.45 percent, on average, annually—from 2000 to 2011. The continued migration of new residents has led to an extremely tight rental market that made headlines throughout 2011.
In May 2011, the U.S. Census Bureau ranked the Portland–Vancouver–Beaverton MSA as having the lowest apartment vacancy rate, at 4 percent, among the nation's top 75 MSAs. And Portland remains one of the most occupied cities in the country—the metro's vacancy rate was just 2.7 percent in the fourth quarter, according to New York–based market research firm Reis. This low vacancy trend is expected to continue for several years, as demand is forecasted to outpace lackluster inventory growth.
Price discovery is being put in play as a shortage of rental units is creating upward pressure on rents.
Asking rental rates in the metro grew at an annual pace of 2.2 percent and ended the year at $857, Reis reports. Although asking rents have only seen a modest increase, effective rents have seen more substantial increases. Some of the most robust growth has occurred in urban core submarkets such as the Pearl District, where effective rents have shot upward, in some cases in excess of 15 percent, as a result of concession burn-off coupled with increasing face rents.
Cap Rates Compress
Portland's apartment market has finally been put on the national map.
Since the end of 2010, investor interest in Portland has increased dramatically from all across the nation. The metro's continued population growth, lack of new construction, and recent job activity have created a perfect storm for sellers and a good story for investors looking for increased yields.
There has been a flight to quality for core assets. Many institutions are looking to capitalize on the urban trend as the renter demographic shifts to downtown, transit-oriented locations.
Capitalization rates for Class A core assets traded in the 4.5 percent range in 2011, and due to the lack of inventory available, it led to compression of suburban A and B assets that yielded in the 5 percent to 5.5 percent range.
Multifamily permits stood at slightly more than 1,700 units through November 2011, a substantial increase compared with the year prior, when only 659 permits were issued. However, the current year's permits fall well below the 10-year annual average of 3,222 permits.
If one were to assume that in-migration trends remain the same in 2012 while factoring in the metro's renter-occupied housing rate of 36.73 percent—along with an average household size of 2.57 people—demand for rental units would exceed 3,800 units this year.
The majority of the projects recently delivered or under construction are close-in urban infill developments typically consisting of mid-rise properties ranging in size from 50 to 175 units. This is in stark contrast to the wave of deliveries from 2008 to 2010, when more than 3,000 units were delivered, including a variety of high-rise luxury rentals and condominium tower conversions to apartments in downtown Portland.
Freddie Mac and Fannie Mae continue to lead the way for those borrowers seeking maximum leverage. All-in rates are currently in the 3.5 percent to 4.25 percent range, with potential interest-only periods.
Life companies are increasingly driving better terms (efficient rate locks, forward structures, and excellent pricing), especially for moderately leveraged, well-located, and high-quality assets. In fact, more than a third of all multifamily loan volume that HFF arranged in 2011 came from this lending segment. Look for life companies to continue to sharpen their pencils for Class A unstabilized and stabilized products.
On the construction front, domestic and foreign banks have increased their appetites along with life insurance companies. Infill sites in primary or secondary markets are the name of the game, with 30 percent to 35 percent cash equity ahead preferred. Mezzanine and equity capital continue to flow into this space for those projects needing the “gap” in the capital stack to be filled.
Open for Business
Positive population trends are not the only bright spot in the Portland metro, as the area is poised to realize benefits from growth in local employers.
The most significant such increase is the expansion at Portland's largest employer, Intel. Intel is in the process of a multibillion-dollar remodeling project at two of its existing research and development and manufacturing facilities while also constructing its newest D1X plant, in Hillsboro, on the west side of the Portland metro.
Another burgeoning industry comes from clean-tech companies. Growth in this industry includes the solar cell and panel manufacturer SolarWorld, as well as the Danish wind turbine company Vestas, which is currently taking part in a $66 million renovation of an old Meier and Frank warehouse for its North American headquarters.
These expansions are starting to take a foothold in the local labor market, as the seasonally adjusted unemployment rate in the Portland metro has decreased to 8.6 percent, down from the 10.3 percent reported a year earlier and the lowest rate since November 2008.
The key to sustainable rent growth will be the creation of high-paying jobs in the tech and medical sectors, which will lead to year-over-year revenue growth for landlords while keeping Portland in the spotlight for years to come.