Tides Change in Portland as a Rising Multifamily Market Begins to Normalize

As brokers, we are often asked our opinion on the local market. The topic seems to have garnered even more interest than normal as of late. There is a multitude of variables investors will point to as they attempt to define what is happening in the market. The new legislation coming down the pipeline has probably caused the biggest challenges to the local multifamily market. Nationally, there are a lot of people worried about a recession because of the inverted yield curve. However, a recession hasn’t occurred every time the curve has inverted. There is no crystal ball to look at and make our investment decisions, but I think the outlook for Portland is still rosy.

What appears to be happening is we are going from a rising market to a more normalizing market. In a rising market, prices increase, buyer demand increases, velocity increases, yield spread narrows and inventory moves fast as investors speculate on the market. In a normalizing market, prices become more realistic for in-place yield, there are fewer buyers in the market, velocity drops and the buyer/seller gap widens, which causes assets to sit or not sell.

This seems to be the case here in Portland as days on market are longer, more inventory is available, cap rates have increased and prices have finally started to come down. Some of these price changes are due to new legislation where landlords are no longer able to raise rents to market on existing tenants or give no-cause evictions in order to remodel and raise rents. We have also seen a decline in rents recently as developers oversaturated the market with new units coming out of the ground over the past few years. Concessions on new construction assets have been as high as two months of free rent.

Local Portland investors are frustrated over issues like inclusionary zoning, reinforcing masonry brick buildings, statewide rent control and tighter landlord/tenant laws. These factors may make doing business harder and increase costs as some owners move out of the market or to professional management. The out-of-state investors (primarily from California) are also looking at the statewide rent control as an issue they were trying to avoid in their home state. This has caused some investors to take Portland off their consideration list.

Though 2018 was a very strong year, 2019 hasn’t been a disappointment. People have to accept the changes that are outside of their control. Investors need to be able to weather the storms because rents are down and vacancies are up. Sellers may have missed the peak of the market but we haven’t dropped too far yet — we’ve just leveled off. The one thing that always remains true in good times and bad is that people need a place to live. Portland isn’t too bad a place for that.

The reason Portland has a rosy future for investors is that rent control has never worked in any city and its usual byproduct is that rents will go up. With the inclusionary zoning, the number of new buildings coming down the pipeline has halted. This just became a simple supply and demand equation where the city has shut off the supply while demand has continued.

There is a need for affordable housing, which is a citywide problem and not just a developer/owner issue. Developers and owners are more than willing to work with the city to come up with a solution that satisfies both parties.

— By Michael Shall, vice president of investments, Marcus & Millichap. This article first appeared in the October 2019 issue of Western Real Estate Business magazine. 

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