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Alarming patterns of low supply and increasing need contribute to investor hesitancy, report finds.

COURTESY PHOTO: MULTIFAMILY NW - A panel met in April to discuss Multifamily NW's report on multifamily housing.Low inventory of rental housing, coupled with high demand, is showing an alarming pattern that is increasing investor hesitancy in cities across Oregon.

That's according to Multifamily NW's biannual apartment report for spring 2022, which surveyed owners and operators of multifamily rental housing, covering 86,589 rental units over 1,231 properties. Multifamily NW is an association of residential property managers, owners and vendors in Oregon.

The survey found that many Oregonians are moving away from urban downtowns, which is impacting the affordability and availability of multifamily rentals away from those dense areas — suburban areas that were traditionally considered more affordable.

According to Multifamily NW, the new data deeply contrasts with 2021 findings, which saw rent and vacancies remaining stable from 2020. The report also found housing production continues to lag behind demand, which is a major factor in the rising rents and low vacancy rates.

The 2022 report was released April 21, when Multifamily NW Deputy Executive Director Michael Havlik moderated a panel on the topic.

"This season's apartment report should raise concern among anyone genuinely interested in addressing rising rents around the state," said Havlik. "The demand for multifamily housing is adding pressure to markets from Portland to Bend to Eugene, and Oregon families deserve elected leaders that are willing to look at all solutions to this shared problem; first and foremost, how we can encourage providers to stay in the game, build new units, and start alleviating the serious supply issues."

The report found construction has slowed considerably, pushing vacancies lower and rents higher. Inflation is impacting the development pipeline in rent affordability, materials supply, wage growth and investment appetite. According to the study, average wages in Oregon have increased 17% in the past two years.

The report found many investors sold multifamily properties in the Portland metro area in 2021 — and sales volumes hit record highs.

The market has slowed in the first quarter of 2022, starting off with 86 transactions according to the report — more than 25% fewer than 2021 fourth quarter, which saw 116 transactions. The median price per unit was $187,900, the report found.

Major forecasts predict continued rent increases in the Portland metro area partially due to population increases as well, according to the study. The outlook calls for cleaning up the urban core to increase interest and desirability, as well as to cool demand and slow inflation with higher interest rates.

What this means for multifamily investors

Greg Frick, partner with HFO real estate, which helped produce the Multifamily NW report, spoke with Pamplin Media Group about investing in the multifamily real estate market. HFO also was one of the sponsors of the panel event.

"In terms of what we're seeing for investors, incomes and rents in some markets have definitely gone up," Frick said. "Broadly, we've seen a lot of increase, especially in some outlying areas."

The sales market is strong for investors in the multifamily sector, the Multifamily NW report found. Market conditions tightened from 2020 to 2021, and many owners saw substantial income increases. PMG FILE PHOTO: COURTESY PHOTO KIDDER MATTHEWS - The Edison Apartments complex in Gresham sold for nearly $20 million in 2022.

Before 2021, the busiest year for apartment transactions in Portland was during the building boom. In 2015, the area saw 273 sales, and in 2016, a record volume of sales for $2.95 billion, according to Multifamily NW.

However, in 2021, the area saw 315 sales totaling $4.42 billion — 50% above the previous peak, and more than 100% above 2020 dollars, according to the report.

The boom in construction from around 2017-19 in the Portland metro area increased vacancy rates, and slowed rent increases at the time. In 2020, there were about 10,500 units under construction in the area — but only 4,600 new units are now under construction to start the second quarter of 2022, the report found. And these won't be delivered and on the market for another 18 months.

Experts said barriers to new construction in the pipeline include national issues like rising materials costs and rising wages, as well as local concerns like the inclusionary housing policy that has been controversial and neighborhood cleanliness and desirability.

"There have definitely been concerns on the political front on how things are being addressed, and some of the regulations that are put in place frankly make it more expensive to operate," Frick said. "It's something nobody really talks about — the expense structure on providing housing, from taxes to utilities to maintenance to payroll, have increased. In some studies we did, it outpaces income increases."

Frick said it's a big concern right now, especially with the interest rates rising faster than expected.

The combination of mandatory affordable housing units when developing new multifamily units, coupled with the increase in homelessness and people on the streets, has caused investors to hesitate when thinking about investing in the area, the report said.

Changing population demographics, such as unique movements to and from urban areas due to work-from-home scenarios, in conjunction with rapidly rising interest rates that quickly climbed from an average of 3.18% to 4.67% this year already, are also causes for pause.

The inflation rate has been impacting investor returns despite increased rent, due to increased operating and maintenance expenses, the study found. These factors can deter developers and investors from the area.

"Short term, there have been some downtown issues, but long term, I find interest rates causing a little bit of hesitation," Frick said. "I think there's starting to be a realization we need to not continue to penalize providers of a service, and then expect more, making it tougher to lower the cost of service. I think that's where the disconnect is."

"When you have choices where you're going to put your investment dollars, there are a few checkmarks we have to overcome (in Portland)," Frick said. "The good thing is, we still do have in-migration."

Vacancy rates still tight

Average rent for a studio in Portland is $1,204 this spring, the study found, and $1,883 for a three-bedroom unit. The report found rent growth is up about 1% from last quarter.

"There's a lack of new supply that's going to put some pressures on rent — and pricing of single-family homes," Frick said. "Not bringing in supply, but bringing in regulations that restrict supply, that's going to cause some issues."

In the Portland-Vancouver metro area, the current vacancy rate is at 3.56% this quarter, up slightly from 3.36% last fall, the report found.PMG FILE PHOTO: STEPHANIE BASALYGA - Verso Apartments, Rembold Properties most recent development property, is a 172-unit project in Beaverton's Old Town area.

Vancouver and Aloha had the lowest vacancy rates, while downtown Portland and Northwest Portland have the highest vacancy rates, at 5.5% and 5.2% respectively. This supports the findings that renters are vacating dense urban areas in favor of more spacious or amenity-rich suburbs.

Average rents vary across the region, but in Clackamas, Tigard, Tualatin and Sherwood, average rent increased $0.07 per square foot over last quarter, the study found. In inner and central Northeast Portland, average rent is up $0.16 per square foot this quarter, and $0.08 in outer Southeast Portland.

"From a renter standpoint, you can move out. Rent (lowers) a little bit as you get away from the core," Frick said. "People driving two hours to get into town can find a difference in rent affordability, but if you don't have adequate supply coming online, you're going to have inflation. We have inflation right now."

One regulation in Portland that has directly affected new developments is the Inclusionary Housing policy, which requires builders of new properties with more than 20 units to include some affordable housing units.

On the other end of the spectrum, average rent is down $0.03 per square foot in Northwest Portland, West Vancouver, Milwaukie, Wilsonville and Canby.

Frick said the city also has put in place rent caps, and the city should take a hard look at how it is responding to housing providers in terms of the added costs these days.

"(We) keep correlating homelessness to affordability, but we need to look at studies from addiction to mental health," Frick said. "Yes there's an affordability component but it's not a large segment of what's out there. Frankly, there are ways you can see that proven, and if we want to address the problem there seems to be inconsistencies between policies and results."

For example, after the inclusionary housing policy was set in place, many developers built 19-unit properties in order to make the build pencil out and avoid the policy. The effect is ultimately fewer units being built overall, reducing utility of urban density opportunities.

New apartment builds in the construction pipeline are projected to decline from the five-year average, and vacancy rates are expected to remain low through 2022, the study found.

Finding a family-size rental with three bedrooms is even harder, and these units with one bathroom have the lowest average vacancy rate of 1.9%. This has become more popular as working from home has taken up square footage priority across many homes, and more people are competing for more rooms, trends suggest.

As for the micro living trend, studios in the area have seen a slight decrease in vacancy as well, falling from 5.2% last fall to 4.7% now.

Some urban economies are still lagging as incomes and wages rise, especially as everyone navigates inflation. The report said if high inflation persists, people can expect a boom soon leading to a bust within another year or two.

Having strong household finances will help renters take control. Paying down debt, rising wages, accumulating savings and market assets are all in favor for individuals. This can mean households are buying more; and especially with the shift to online ordering away from in-person shopping over the past two years, this has contributed to the strain on the supply chain.

But inflated prices can eat into gains, and cause households to reduce spending. This is why the Federal Reserve raised the interest rates, with the intention of combating inflation.

"Portland still has good in-migration and good job growth, and that's key from a multifamily standpoint," Frick said. "It's a desirable place to live. Yes, there have been some black eyes, but we're kind of getting over that. The wins of today seem to be coming around — looking at how we address some of these problems."

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