Whether apartment parking should be required in new development has been dominating commercial real estate headlines recently. In the discussions around this topic, we need to consider not just the immediate impact of any requirements, but also what is going to keep Portland the livable, healthy urban environment we’d like it to be, which ultimately means increased density.

Portland’s reputation worldwide is as a well-planned, green, highly livable and bike-friendly city with an effective public transit system. Part of the reason we’ve achieved this reputation is because the city implemented density overlays in the late 1980s, with the goal of supporting mass transit, commercial enterprise and safe, accessible housing. And in the early 2000s, Portland City Council voted to stop requiring developers to include parking in order to encourage development and increased density.

This policy was essentially a non-issue until the most recent recession, when the planets aligned for the for-rent market. Even before the recession hit in 2008, apartment construction was slow, essentially petering out to nearly nothing as the economy worsened.

The market was starved for new construction, but demand for apartments continued to increase as the population grew, and the single-family housing market going bust meant many former and prospective homeowners searched for rentals instead. The highly popular eastside was particularly stretched for apartments, because relatively little construction had occurred since the 1970s.

With land values dropping, developers bought dozens of infill parcels in close-in areas and planned new projects. Through 2014, we will continue to see apartment construction and deliveries on an unprecedented scale, with roughly 7,000 total urban units expected to come online in this building cycle. The development of nearly a dozen buildings with no parking within blocks of each other on Southeast Division Street really brought the parking issue to a head.

As a result, Portland City Council in early April voted to require parking for buildings of 30 units and above, on a tiered system with buildings with more units requiring a higher ratio. While these limits are fairly reasonable, they may well put a damper on proposed projects, or force developers to reduce the size of certain projects.

Parking can be prohibitively expensive for developers to build – particularly for small, infill projects. There are solutions, like the stacking parking systems used in a number of buildings in the area; however, they can be very expensive.

And just because developers build parking doesn’t mean residents will use it. Many residents, given the option of parking on the street versus paying for a designated space, will opt for the street. Developers also are putting in lots of amenities for car-free residents: Bike parking is now standard for all new buildings, as well as spots for car-sharing programs like Zipcar.

A potential solution that has only been implemented in one area of the city is zoned street parking, managed by the city and neighborhoods. The Northwest area is one of the most desirable places to live, work and shop in Portland; also, housing there is very dense. Parking there is tight, but that doesn’t deter residents and visitors, and the area garners some of the highest retail and residential rents in the city.

Portland needs to continue to increase density as it grows. When density increases, so does transit use – as do system improvements and the viability of car shares like Zipcar and car2go. Commercial enterprise also flourishes, contributing to the redevelopment of old significant buildings. One of the greatest attributes of the 24-hour neighborhood is the increase in safety, with more eyes deterring crime. Density is good for the environment and makes our city safer and more livable and walkable.

One of Portland’s greatest strengths is its vibrant neighborhoods, and those most popular for shopping and eating out tend to be some of the densest. Portland’s young population wants to live in a 24-hour neighborhood that offers work and play within a few-mile radius, where they can get to everything without a car, and these new car-free developments are meeting that need.

In order to have this dense city, there are going to be trade-offs. Maybe parking congestion is one of them, and it isn’t a big enough issue affecting the majority of Portlanders to completely change the course of our city.

Portland’s strong population growth despite economic challenges during the recession indicates that our population will continue to grow. By the end of 2014, we should see apartment construction slowing considerably as land prices rise and rental rates flatten. Construction costs are continuing to rise 15 percent per year, city fees are rising, and the parking requirement will also add to the cost of development. With the single-family housing market improving, we’ll see more construction of those property types, as well as condos. So, the parking issue will be solved by the market somewhat.

We have so many smart, talented, creative Portlanders thinking about and planning our city’s growth and change, and working to make it continue to thrive. For that, we’re very fortunate. The apartment parking issue requires give and take on both sides, so that we continue having a city known worldwide for its livability and effective planning. We need to stay the course to increase density in support of this healthy, urban environment.

Robert Black is a vice president who specializes in multifamily investment and land sales at NAI Norris, Beggs & Simpson, a real estate brokerage and asset/property management company. Contact him at 503-273-0364 or rblack@nai-nbs.com.

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Prospective tenants looking for apartments in Portland can tell you just how challenging it can be to find one, and NAI Norris, Beggs & Simpson‘s third-quarter apartment report reflects that.

The report has Portland-area apartment vacancy in the third quarter at just 2.78 percent. Though vacancy increased slightly from the previous quarter, the rate is still very healthy and especially impressive when considering that vacancy peaked at 5.43 percent during the fourth quarter of 2009.

Rental rates have risen significantly in recent years; overall, they’re up almost $40 year-over-year, and more than $70 in the past two years, to $852 – or about 98 cents per square foot. New units are leading the way in rental increases; in the third quarter the average rent for a new two-bedroom, two-bath unit was $1,726.

The lack of inventory and an abundance of prospective tenants means that landlords have their pick of many qualified tenants. So the apartment search and application process can be more competitive. And though rents in Portland are generally lower than in many major West Coast cities, such as Seattle and San Francisco, they are still increasing faster than wages.

The tenant mix in today’s market is also quite different than it was even five years ago. Portland continues to have a high proportion of young people, but today many former homeowners and families are renting, whether by choice or foreclosures.

Because the weakness in the single-family housing market has persisted so long, people are questioning whether owning a home is actually a solid investment and worth the time and upkeep required. It will be interesting to see how the apartment market is affected when the single-family housing market begins improving significantly.

Institutional sales have picked up during 2011, especially for Class A core properties. In June, for instance, Kearney Plaza sold for $37 million at a 4.8 percent cap rate; the property was 98 percent leased at time of sale.

Some high-quality suburban properties have been trading, but sales of Class B and C properties have been slower. These properties are generally purchased by cautious individual investors; in the past a B or C property would draw multiple qualified buyers, but now such a property may attract just one. The bid-ask gap also is still significant: Buyers want to underwrite conservatively, while sellers want the upside.

Investors with solid track records are able to attain financing at interest rates below 5 percent. So the barrier to purchasing properties isn’t the lack of financing, but the lack of good product.

We’re continuing to see some distressed projects finding new owners. Principal Real Estate Investors recently purchased The Beverly, in Northeast Portland’s Hollywood District, from Bank of America for a reported price of around $30 million. The building is 90,000 square feet and has ground-floor retail, anchored by a 43,000-square-foot Whole Foods.

The property was originally developed as condominiums in 2009, but delivered at the height of the recession and suffered from poor sales. The property’s location and quality have garnered it high rents, with studios renting for around $1,200 and two-bedroom units garnering as much as $2,950.

With Portland’s population increasing consistently, vacancy remaining very low and rents rising, developers are confident that new projects are now financially viable. They’re seeking land to build on around the metro area, but especially close in to the city’s core.

Projects in the works include everything from small infill projects in the close-in eastside to larger projects in Northwest, such as the 90-unit Pettygrove Apartments at Northwest 20th Avenue and Pettygrove Street, and the proposed 179-unit Savier Flats, which is reportedly on track for construction to begin in the next few months.

Also, Holland Partners is planning for two suburban complexes, in Wilsonville and Hillsboro, that would add more than 500 units. While financing for new projects can still be challenging to attain, ground is likely to be broken on many new projects in 2012.

When considering development, remember the cyclical nature of the multifamily market and the overall economy. Now that we’re on the upswing after a tough recession, developers are feeling positive about the economy and the need for more apartments in Portland.

But we must avoid overbuilding in order to try to prevent another painful cycle like the one we are still recovering from. After the condo market crashed a few years ago and a few thousand former condos came online as apartments, many quarters passed before those properties were absorbed – that is not a situation we would like to repeat.

The fourth quarter should be good for Portland’s multifamily market. There’s generally a push to close apartment sales before the year ends, so activity in the sales arena should be healthy. We’ll also continue to see new projects being planned and breaking ground, especially in the city’s core.

Robert Black is an associate vice president who specializes in multifamily investment and land sales at NAI Norris, Beggs & Simpson, a real estate brokerage and asset/property management company. Contact him at 503-223-7181 or rblack@nai-nbs.com.

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Signs of life are present throughout Portland’s real estate market, particularly for the multifamily sector.

While the multifamily market suffered during the recession, it didn’t suffer as badly as other commercial property types. Apartment vacancy rates rose and building sales fell significantly, but multifamily remained a preferred property type among investors.

Plus, the market has improved in the last few quarters. Multifamily vacancy throughout the Portland-metro area (including Clark County) fell half a percentage point between the second and third quarters to 3.65 percent, the lowest rate in two years. This improvement may continue enough for 2011 to yield significantly improved multifamily rental rates and stability.

There will likely be three tiers of recovery in the multifamily investment market. In the first tier, institutional appetite will return, and Class A assets in the core and close-in neighborhoods will begin to trade hands. This segment of the market is funded by institutional money, and Portland is a highly desirable market for out-of-area investors because of its location, livability, young and educated population, and an urban growth boundary that limits new development.

Already, some progress has occurred on this front locally. A number of major buildings – such as the Ladd Tower, 2121 Belmont and Park 19 – have been put up for sale and have reportedly received considerable investor interest. A number of these sales should close before the end of the year. Tupelo Alley sold in June for $38.75 million. The sales of core assets are generally at low cap rates.

Second, expect to see more institutional sales in the suburbs, starting in Class A and spreading into Class B, which will define the level of interest in Portland. In recent months, a few, large transactions have taken place in the suburbs: the sales of Clackamas Village Apartments ($20.7 million) and Twin Creeks Apartments ($17 million).

Third, sales in the $1 million to $5 million range will occur more regularly, which will help define cap rates. Because Portland is a smaller market, most transactions are in the $1 million to $5 million range, so their prevalence will signal when the Portland multifamily investment market has truly recovered.

This three-tiered recovery is unlike previous recoveries. In the past, smaller investors have emerged from a downturn first, actively buying distressed assets using cash and creative financing while larger investors stayed on the sidelines.

The number of transactions per quarter is a key indicator of market health. Transactions have slowly been increasing during 2010, with 30 in the first quarter, 35 in the second and 37 in the third. We expect the trend to continue in the fourth, especially because many sellers and buyers attempt to complete transactions before the end of the year.

Owners with assets that don’t quite fit their portfolios may think now is the time to sell, and buyers anticipating a major upswing believe now is a good time to acquire properties before prices return to peak levels. The market recovery will be official when there are between 50 and 60 transactions per quarter, comparable with 2006 and 2007.

A fundamental reset of prices is occurring for multifamily buildings. Many buildings are trading for values well less than construction costs, so buyers are in a good position to be profitable. Distressed assets are still available, and they may not move through the system until the first or second quarter of 2011. When most of the distressed assets are sold, more seasoned product will enter the market and more market-rate deals will occur, so pricing will be more stable than during the recession.

Financing has been a concern throughout the recession. It is available now at attractive rates and terms. This is good news for companies that possess capital and strong financials and can make a hefty down payment. However, owners in that $1 million to $5 million range are having more trouble.

The multifamily sector is reliant on overall economic conditions, and fortunately, positive economic news for the metro area has been plentiful. Forbes Magazine recently ranked Oregon the sixth best state to do business.

Vestas chose to remodel a historic building in Northwest Portland for its U.S. headquarters. It will provide hundreds of construction jobs, reinvigorate the area and reveal Portland as a great home for international companies.

The downtown office market is so tight that some developers are considering building new office buildings, and speculation abounds that work will restart on the stalled Park Avenue West.

Intel, the metro area’s largest employer, is providing many job seekers with hope in building a new facility on its Hillsboro campus. That news benefits the Sunset Corridor. Intel also may reopen the closed Fab 20 chip manufacturing plant.

All of this is positive, but Portland is still lagging in one area: job creation. The city’s unemployment rate has been stalled at more than 10 percent throughout 2010, and job creation remains a significant challenge. Portland’s much-lauded livability, however, has remained a draw throughout the recession. As soon as employment recovers, the multifamily investment market will see some major improvement.

Robert Black is an associate vice president who specializes in multifamily investment sales at NAI Norris, Beggs & Simpson, a real estate brokerage and asset/property management company. Contact him at 503-223-7181 or rblack@nbsrealtors.com.

The post 2011 a big year for multifamily appeared first on Daily Journal of Commerce.

Portlanders may be noticing an increasing number of “For Rent” signs on apartment buildings around the city this summer. Apartment vacancy rates are rising across the metro area, and multifamily investment sales are down; however, the Portland market will recover from this economic downturn and be well-positioned for a comeback.

NAI Norris, Beggs & Simpson’s report for the second quarter of 2009 shows a slight increase in apartment vacancy from the previous quarter, up to 5.03 percent; this report surveys only select apartment complexes with more than 100 units, so the vacancy rate for all complexes could be a bit higher.

The increase in vacancy doesn’t mean that people are moving out of the city. In fact, the population of the Portland-metro area has been increasing in recent years. The U.S. Census Bureau estimates that Multnomah County’s population rose 2.2 percent in 2008, and that the population of the greater Portland area reached 2.2 million people last year. Portland has a relatively low cost of living, in addition to diversified job prospects and many opportunities for outdoor activities.

So, where are the renters living? Many of them are doubling up in apartments, moving in with family, or renting single-family homes. Though Portland unemployment decreased slightly in June, to 11.6 percent, renters are still concerned about job security and layoffs, so they are taking steps to save money.

Some tenants are choosing to purchase homes. Median home prices are down 13.8 percent from this time last year, interest rates are extremely low and first-time home buyers can claim an $8,000 federal tax credit.

Landlords are doing everything they can to attract the few active renters in the market. Concessions today in certain submarkets are sizable, including up to two months of free rent on a 13-month lease for some new properties in the downtown area. Renters looking for new places to live are shopping around for the best deals. Existing tenants also are looking for bonuses to extend their leases.

The submarket that everyone is following is downtown. It has seen a building boom over the past five years, and with the condominium market softening at the end of 2007, developers looked for conversion options for proposed projects and those under construction.

What resulted was one of the largest deliveries of new units the market has ever seen. About 2,030 new units have been added to the Central Business District since February 2008, according to NAI Norris, Beggs & Simpson research, with another 450 units under construction and expected to become available between fall 2009 and spring 2010.

This may seem like a large number, but there’s a reasonable explanation. From 2003 to 2007, more than 1,500 existing apartment units in the Central Business District were converted into condominiums. This loss of rental units helped drive the surge in the district’s apartment market, and when the new units began arriving in early 2008 the CBD experienced historic rental rate growth and vacancy below 3 percent.

If history is our guide in estimating demand for apartments in the Central Business District, it will take time to absorb the new product. But once the market stabilizes, in about 24 months, vacancy will tighten and rent growth will return, since there will essentially be no building in the remainder of 2009 and 2010.

Vacancy in the suburban markets is increasing, but because so much construction of the past few years occurred near the city’s core, those units will be in good position when tenants become more active. When this happens, the suburbs will likely be under-built, driving demand and pushing rental rates back up to 2008 levels and beyond.

Multifamily investment sales have been seriously affected by the recession. Through July, the Portland-metro area has seen approximately $137 million in apartment sales this year, according to data gathered from CoStar, a commercial real estate information company. That figure was approximately $656 million for January to July 2008. This equates to a nearly 80-percent drop in sales.

2008 was a record year for apartment sales, and one critical component to the sales volume was the number of institutional sales, defined as sales valued at $20 million and above. In 2008, there was $380 million of institutional sales, while thus far 2009 has produced just one transaction above $20 million. When institutional transactions are omitted, the volume in 2009 compares more favorably, at about 43 percent of the volume in 2008.

Despite the impact of the recession on the apartment market, Portland is in a good position to rebound. In fact, U.S. News & World Report recently named Portland and its commercial market one of the 10 cities “primed for a real estate recovery,” due to its green economy and overall economic health.

Robert Black is an associate vice president who specializes in multifamily investment sales at NAI Norris, Beggs & Simpson, a real estate brokerage and asset/property management company. Contact him at 503-223-7181 or rblack@nbsrealtors.com.

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