Now Is The Most Interesting Time For Portland Multifamily, Which Isn't Really A Good Thing

These are strange times in the Portland multifamily market, according to speakers at Bisnow's Portland Multifamily Investment and Development Summit. How strange?

After a post-recession building boom, future development plans have dropped off. Concessions have returned to the market, yet investors are still eager to buy here. Homelessness has spiked even as the local economy and job growth have boomed. All in all, an interesting market. Maybe a little too interesting, the speakers said.

Historically, Portland has seen applications for about 3,000 to 6,500 new multifamily units each year. In 2016 that number spiked to about 7,500, so there is a reasonably healthy pipeline of approved projects in the works, totaling roughly 10,000 units, according to our speakers. 

Those will be developed over the next two years or so, most of them are in the urban core of Portland, and most are upper-end developments.

But more recently, the number of applications has dropped precipitously to about 650 in the last 12 months. Around the time applications dropped off, Portland's new inclusionary zoning rule, meant to increase the inventory of affordable housing, came into effect.

The new IZ rule had an impact on development, according to our speakers. But it is not the only reason building paused, or maybe something a little longer than a pause. Like in many other markets, Portland has seen rapidly accelerating land and labor costs, which are bearing down on multifamily developers. It is getting more difficult to find a site and pay for construction even for market-rate product, much less apartments with any affordable component, the speakers said. 

There is also the matter of interest rates, which are poised to rise more this year. Added to the cost of land and construction, the cost of money is putting the squeeze on apartment development in Portland. 

IZ complicates things even more, probably to the point of making a lot of projects unfeasible. In light of the sharp drop in applications, it is possible the city will rethink the IZ policy or roll out more incentives, the speakers said.

In short, it is now much more difficult to make money in multifamily in Portland compared to previously.

The Portland apartment market has appeared recently on investors' radar screens, the speakers said — not just local investors, but institutional and other private capital nationwide. Portland is not considered a tertiary market anymore.

Rather, it is a place to buy and hold. Part of the reason is that the Portland economy and job market have been expanding so much recently, and they are expected to continue to do so in the near to mid-term. Demand will not dry up, and supply will never quite catch up with it.

If new supply further declines as anticipated, that bodes well for the long-term valuation of existing product, especially in the urban core.

Another factor now at play in the investment market is that the amount of capital available for investment puts pressure on investors to find places to put it — and previously preferred investment markets, large gateways like New York or San Francisco, are terrifically expensive. 

Still, not everything favors investors in Portland. Rents are still rising, but not as fast as in recent years. Investors can probably not count on the kind of escalation in rents they used to get, even in the city. Also, concessions are more common than they were even a year ago — as much as a month's rent. 

Some parts of metro Portland might make development of new product easier, creating new competition for existing product. Beaverton, for example, has plans to streamline its permitting and approval process as a strategy to lure more apartment development to that city, the speakers said.

Finally, millennials might keep living in the city, but some of them might also start leaving Portland for less expensive places, or places where they can afford houses, namely the suburbs. Millennials might be having children later than their parents, but they are having children, and that might put some pressure on occupancy on the urban core.

Williams & Dame Chairman Homer Williams, a 40-year veteran of the Portland real estate industry who has been instrumental in the redevelopment of the Pearl District and South Waterfront projects, spoke at the event.

Williams said the Portland apartment market and the local economy are facing some of the same serious long-term issues as the nation (and indeed the world) because of fundamental changes in the economy.

"The greatest uncertainty facing the multifamily market is what will happen as jobs disappear in the next 10 to 20 years," Williams said. "The numbers are staggering. Between 35 million and 70 million jobs will disappear in the next 12 years. This will hit the boomers the hardest, since other jobs are being created, but not so many for the boomers."

The job losses will not just be for low-skill workers, but any industry that can be automated, Williams said. People who have worked all their lives will not be able to afford housing in Portland and a lot of other places. 

"Now is just the beginning of the homelessness problem," Williams said. "We need to rethink our approach to housing. There will be shelters in every neighborhood — there will have to be. Developers, business people and governments will have to pitch in to deal with the challenge of housing affordability as people lose jobs to automation."