Are Portland-area apartment buildings the next real estate hot properties?
The local apartment market is suddenly so hot that some real estate experts wonder if it is being overbuilt. Permits were issued for 3,333 apartment units last year. Dozens of apartment buildings are under construction throughout the region. Dozens more are in the planning stage.
In fact, 136 apartment projects were either recently completed, under construction or proposed to be built in the region, according to a survey conducted by Patrick Barry, an appraiser assistant with Mark D. Barry & Associates.
“There are twice as many units under construction as there are units that have recently been completed. In addition, there are almost three times as many units proposed as recently completed,” Barry says.
Activity is so strong, in fact, that TMT Development is hoping to restart its stalled downtown Park Avenue West project by adding 15 floors of apartments above 13 floors of office space.
But Barry believes there’s no reason to worry the market is getting oversaturated. Despite the flurry of activity, apartment construction in the region is actually below historic levels. In fact, much of it is simply compensating for the lack of activity during the Great Recession.
And demand will continue to grow, Barry says, noting that the region’s population is predicted to grow by 25,000 to 30,000 people a year for the foreseeable future.
“Apartment construction came to a virtual halt a few years ago. The construction that’s underway now is just beginning to address the demand that has built up since then,” Barry says.
Rents too low
According to Barry, the lack of new construction allowed vacancy rates to fall to the point where rents could be raised high enough to finance the new projects. There are around 265,000 multifamily units in the region. The vacancy rate is 3.6 percent, Barry says, compared to 5 percent in a balanced market. That equates to a shortage of 3,750 units — enough to convince lenders it is time to invest.
“Financing is available again, and developers are getting back into the market,” Barry says.
He tracks apartment construction in the region closely and publishes his findings every quarter in the online Barry Apartment Report. The most recent one, dated Spring 2013, lists 51 apartment buildings either under construction or recently completed in the region. Most of those — 36 — are within the city limits, with the majority concentrated in close-in east, north and west neighborhoods. Some are in such outlying areas as St. Johns, however.
To a certain extent, the Portland numbers are a little misleading. Many of those projects have far fewer units than the largest ones in the region in suburban Clark and Washington counties.
For example, The Reserve in Vancouver will have 418 units. The Tessera in Hillsboro will have 304 units. And the Terrene at the Grove in Wilsonville will have 288 units.
In contrast, many of the apartment buildings under construction in Portland have fewer than 50 units. One, The Sherm at 1101 S.E. Sherman St., has just 12.
But the sheer number of projects in Portland means that most of units are, in fact, being built in the city. More than half the permits issued last year — 1,739 — were for projects in Portland.
Barry says that should be no surprise. U.S. Census data shows that young people are flocking to cities. They are overwhelmingly drawn to apartments instead of houses, which cost more to rent and operate.
“For a long time, many more apartments were being built in Washington and Clackamas counties. Now it’s Multnomah County, and, specifically, Portland,” Barry says.
And, he says, larger apartment buildings are coming to Portland. Some are included in the “superblock” project planned in the Lloyd District. It tentatively includes 780 residential units and 50,000 square feet of retail space on the blocks bordered by Northeast Multnomah and Holladay streets and Seventh and Ninth avenues.
The trend actually started several years but stopped when the Great Recession hit. For the first time, more than half the apartment permits in the region were issued in Portland from 2005 to 2008. Portland slipped below half in 2009 and struggled to regain its edge until last year.
But not all of Portland is experiencing the boom. Virtually no new apartment buildings are under construction or planned in the outer east portion of the city. Barry says rents are too low there to finance new apartment construction. Practically the only ones being built or planned are publicly subsidized.
Long way to go
Of the other cities in the region, Hillsboro has the hottest apartment market, thanks largely to the new jobs being created by large employers like Intel. One company alone, Holland Development, has three major projects in the Orenco neighborhood. They include: The Tessera, which is under construction; the 190-unit Platform 14, which recently opened; and the 580-unit Platform District, which was just approved for construction by the Hillsboro City Council.
Barry expects apartment construction to continue increasing in coming years, especially in Portland. But even then, it could take a long time to match or exceed historic highs. Figures compiled by Barry show that apartment construction goes in cycles related to the economy, with highs in good times followed by lows during bad time. Previous high numbers of apartment permits include 6,806 in 1990; 6,652 in 1995; and 5,266 in 2003. Lows include 2,539 in 1992; 2,724 in 2003; and 1,007 in 2009. The 3,333 issued in 2012 is just about average for the past 10 years.
“I expect it to go higher in the future, but there’s still a long way it could go if the economy and housing market continue recovering,” Barry says.