Some industry professionals say costs of system development charges in Portland are trending upward, and that the situation is starting to shape the face of their business.

“They’ve been too high and they continue to escalate and the city believes that to fill the gap of lower building permits they’ll just keep raising fees, and it makes it harder for anybody to make anything pencil,” said Robert Black, associate vice president of real estate investment firm .

Black added that SDC costs are increasingly hindering many of the developers he works with.

In 2008, city officials updated the methodology used to create SDCs, which are one-time fees assessed to new developments to cover a portion of the cost to provide services such as parks, transportation and sewer. Since Jan. 1, 2009, the city has adjusted its fees four times, though not always higher.

Riley Whitcomb, manager of the SDC program for Portland Parks and Recreation, said the city increased SDCs in two stages since 2009 to recover 75 percent (up from 25 percent) of growth costs. The fees are adjusted every July to reflect market rates, and the past two adjustments have resulted in slight decreases; they’re not likely to rise again, he said.

But Sam Rodriguez, vice president of development for in Portland, said SDC hikes represent the brunt of a 102 percent increase since 2007 in the amount of municipal fees he must pay to get a project off the ground.

From 2007 to 2011, Rodriguez said he has seen the total price of municipal fees for his projects increase from $6,678 per unit for the Tupelo Alley project in Northwest Portland, to $13,200 per unit for the Savier Street Flats in the Pearl District. While total fees for the 188-unit Tupelo Alley were approximately $1.26 million, total fees for the 179-unit Savier Street Flats were $2.36 million.

Rodriguez said he appreciates that those fees help pay for necessary services, but he said that current levels are doomed to generate at least one unintended consequence.

“The only (project) that you can get financed today is the most expensive – the property that will serve the highest piece of the market, the top crust of the market,” he said. “That represents about 15 to 25 percent of the market that can afford these units.”

That’s because investors today, as a result of recessionary risk adjustments, are interested only in investments able to produce greater yields, Rodriguez said. As project costs climb, so will rent charges for tenants so that profit margins are attractive to investors. And the projects that provide those yields, he said, are upscale multifamily developments.

With developers going after those projects and affordable housing agencies focusing on low-income opportunities, Rodriguez said he believes workforce housing will be shunted.

“The effect is going to be that you’re going to have a flight to the suburbs of that middle bunch, that middle group,” he said. “You’re going to have the top end and the bottom end living downtown and nothing in the middle.”

According to the Portland Housing Bureau, the median family income for a family of four is $73,000, and the maximum rent that family can afford is $1,898. Last fall, the Metro Multifamily Housing Authority said rents in Portland rose 8 percent from the previous year and that the average rent for a two-bedroom, two-bathroom downtown dwelling was $1,585.

Black said he also saw an urban housing hole looming for the middle class and identified SDCs as a primary culprit.

“The city is not being a partner in the stimulation of development,” Black said.

But Nick Fish, a Portland city commissioner, said it is a delicate balancing act when it comes to adjusting SDCs.

“Whenever new units come online, we have to account for the impact on our infrastructure, and if we don’t cover those costs through development, then they are simply shifted to the general fund, which of course is being cut as we speak,” he said.

Fish said SDCs and tax increment dollars from urban renewal districts are the two main funding sources for the parks bureau’s budget.

According to the bureau’s website, Portland is expected to gain 70,000 residents and 100,000 employees by 2020.

“The community has made it very clear they want to see underserved areas addressed, that parks deficient areas get their fair share of parks and green spaces,” Fish said.

Fish also is head of the Portland Housing Bureau and said approximately 15,000 low-income households in the city are underserved by the market. He acknowledged that while numerous programs exist to address that need, fewer programs exist to spur workforce development.

“It is true that it is sort of the stepchild here because it is not housing that we subsidize in the same way we subsidize affordable housing and it is not housing that pencils out the same way as the high-end market housing,” he said.

Robert Ball, principal of , said SDCs clearly play a role in how projects pencil out.

Astor Pacific recently paid $2.5 million in city permitting fees for its 177-unit Parker Apartments building planned in the Pearl District.

Ball said he budgeted for those fees and that he was happy to pay them, so long as they worked for his project.

“It works, but I am up against the line,” he said. “I’m battling the … metrics (that) the people who finance the project look at.”

Ball also said he thought that, with construction costs fairly static, reducing SDC costs would impact development.

“If the costs were lower I think definitely more projects would be built,” he said. “There’s no doubt about that and it would impact our ability to build – any developer’s ability to build – in neighborhoods where rents are less.”

Rodriguez said he would like to see improvements to SDC exemption programs like the Portland Bureau of Transportation’s Transit Oriented Development Property Tax Abatement, which he said is difficult to navigate.

Fish said his door is open.

“I’d be happy to talk to anybody that has a concern,” he said.

The post Developers balk at higher municipal fees appeared first on Daily Journal of Commerce.

Creston Homes is planning to start construction next month on a 71-unit apartment project at Southeast 20th Avenue and Morrison Street in the Buckman neighborhood. In contrast to the company’s project it started recently near the Hollywood Theatre, the Buckman Court Apartments will be a small, infill effort.

Creston Homes project manager David Mullens said that although the market for apartments is thriving, the company is being cautious. That kind of approach makes sense, brokers say, in light of the economic collapse in the last few years.

Several of Creston Homes’ projects in the past few years – such as one at 1516 N.E. Hancock St. in the Irvington neighborhood – have simply added small pockets of density. The firm seems to have a steady stream of projects, and vacancy in the local apartment market is below 3 percent; however, Mullens chose his words carefully.

“There are some niche opportunities that have come up, but I am not ready to say that now is the time to go and build apartments,” he said. “We’re trying to do what we do and do it quietly.”

One of Mullens’ concerns is that the apartment market looks so good that it will be overbuilt by the time many new projects open. Brokers, however, say that scenario likely won’t occur.

“The concern of overbuilding is being able to have rents be viable (to cover project cost) by the time a product comes on the market,” principal broker Beth DuPont said. But “there really is a lack of strong inventory coming on the market.”

That doesn’t mean that market growth won’t make an impact, Vice President Robert Black said.

“There are a lot of proposed infill sites going through permitting on the east side. None are significant enough in size to cause an oversupply; they may just keep rental growth at bay,” Black said. “Right now rents are growing really fast.”

Creston Homes likes small parcels ready for redevelopment, Mullens said. The Hollywood Apartments are being built on a long-vacant site, and the Buckman Court Apartments will replace two duplexes and a recording studio. Neighbors are glad to see new construction, he said.

“There was a prior development attempt on the site by the prior owner, but he ran into the economic times,” Mullens said. “There are thousands of projects like that all over Portland.”

The market being targeted by Creston Homes is one that will absorb mostly one-bedroom and studio apartments approximately 300 to 500 square feet. Comparable units will be in the new Buckman Court Apartments.

“The term ‘workforce housing’ has been used over and over again,” Mullens said. “This kind of fills that gap for people that are either in health care or service positions around town. They just don’t want a big place to live.”

DuPont said that Portland’s east side is likely to gain more of these small apartments.

“I think there’s always a place in the market for a smaller infill apartment project that’s a little more recession-proof,” she said.

Creston Homes is in the process of securing demolition and construction permits for the Buckman Court Apartments project. If everything goes according to schedule, Mullens expects construction to start in late January 2012 and last for 12 to 14 months. He said Creston has some other projects in the pipeline; however, he wouldn’t discuss them.

The post Portland builder wary of booming apartment market appeared first on Daily Journal of Commerce.

Statistics released recently by the local real estate industry indicate Portland’s apartment and condominium market may be the first sector in the metro area to turn around.

The city’s multifamily vacancy rate was 4.1 percent for the second quarter of 2010, down almost an entire percentage point from the first quarter of the year, .

It’s the first time in two years that rental rates have risen. But before anyone will consider the uptick a full recovery, local brokers say there needs to be more job growth and some new projects in the pipeline.

“These are great indicators that things are moving in the right direction, but seeing those numbers grow – or at least sustain through the fall and winter – will be the truly telling sign,” said Robert Black, associate vice president of NAI Norris, Beggs & Simpson.

Black added that even though unemployment has remained high this year, positive in-migration, distrust in homeownership and accustomation with the recession have boded well for the multifamily market. According to Portland State University’s Population Research Center, the city is gaining approximately 21,000 people a year.

“People were doubling, and sometimes tripling up in apartments throughout the recession, and that is starting to change,” Black said. “There has been a reset on both lifestyle expectations and expected earnings, so renters now feel comfortable going out and finding their own place.

“But in order for these renters to continue renting, there needs to be more jobs.”

The positive rental trends are helping close the gap between those looking to sell multifamily properties and those looking to buy, according to Black. While the year-to-date volume of sales is down 36 percent from a year ago, the deals that are getting done aren’t distressed sales, like most of the transactions over the past two years, he said.

One example is Tupelo Alley. The 188-unit apartment complex on North Mississippi Avenue last month sold for $38.7 million to Behringer Harvard Holdings, Texas-based a real estate investment firm.

“This was a great deal for us,” said Tom DiChiara, managing director for Trammell Crow, which developed and sold Tupelo Alley. “It was a fair price … and I think it’s an indicator of more market-level deals to come in Portland.”

Many of those deals might be driven by out-of-town investors. Gary Winkler, managing broker for Winkler & DuPont Apartment Brokerage, said Portland’s decreasing vacancy rates are helping boost the attractiveness of the area’s multifamily market.

“Tupelo Alley is a sign that there is a good institutional market out there, but it isn’t very deep yet,” Winkler said. The deals being made are for properties in good locations and with good occupancy, and not just low prices, he said.

While existing inventory could help attract those investors – Opus Northwest, for example, earlier this month put the 322-unit Ladd apartment tower on the market – DiChiara said any long-term improvement in the local multifamily market will be dependent on new projects starting to replace the inventory that’s been sold. Trammell Crow would love to start more neighborhood projects like Tupelo Alley, but financing constraints and a lack of available land are making it nearly impossible, he said.

“There is a shortage of supply, especially for the medium-priced stuff,” DiChiara said. “And there just isn’t anything in the pipeline from Trammell Crow, or from anyone else around town.”

None of the three real estate professionals have heard of a new project in sight, but agree that there probably should be if vacancy rates stay low. Even 70 percent of the 3,000 units delivered to downtown over the last four years are occupied, even though it is the only overbuilt submarket in Portland, Black said.

While Black remains optimistic about multifamily in Portland, he is going to proceed with caution until employment picks up and some projects are started. But if the trend continues, he believes there could be widespread change.

“Multifamily usually outpaces other markets,” he said. “So if we continue to see a turnaround here, we could see one across the board.”

The post Multifamily market shows signs of improvement appeared first on Daily Journal of Commerce.

Last Friday, Oregonian reporter Jeff Manning wrote an on the development firm Opus Northwest putting , a 322-unit downtown apartment complex, on the market.

When the apartment complex actually sells, which shouldn’t be that long according to the few real estate professionals I have talked to around town, it will be very telling of the current state of multifamily in Portland. The questions until it is sold are: is it a distressed asset that just has to go? Or is it a product of the multifamily investment market heating up in Portland?

That won’t be known until the building is purchased, but it will be the best indicator of the market. From what I’ve heard, there are a lot of institutional investors out there that are looking to purchase in Portland.

When all is said and done, if Opus recoups its investment on the Ladd Tower, in my opinion, it will mark the first sector of the development industry that has actually hit recovery mode. And according to Robert Black, vice president of NAI Norris, Beggs & Simpson, multifamily usually sees the effects of real estate cycles before any other sector.

My point is that despite this lull period where everyone is only remaining optimistic to keep their sanity, I think we are finally seeing some quantifiable results of a recovery.

The fact that it is summer, a period when activity notoriously picks up in Portland, and the possibility that Opus might only be putting this on the market because the company is upside down on it, could refute this statement I just made. But it is really nice to see some actual deals accompany that optimism.

The post Ladd Tower sale an indicator of multifamily market appeared first on Daily Journal of Commerce.

Last Friday, Oregonian reporter Jeff Manning wrote an on the development firm Opus Northwest putting , a 322-unit downtown apartment complex, on the market.

When the apartment complex actually sells, which shouldn’t be that long according to the few real estate professionals I have talked to around town, it will be very telling of the current state of multifamily in Portland. The questions until it is sold are: is it a distressed asset that just has to go? Or is it a product of the multifamily investment market heating up in Portland?

That won’t be known until the building is purchased, but it will be the best indicator of the market. From what I’ve heard, there are a lot of institutional investors out there that are looking to purchase in Portland.

When all is said and done, if Opus recoups its investment on the Ladd Tower, in my opinion, it will mark the first sector of the development industry that has actually hit recovery mode. And according to Robert Black, vice president of NAI Norris, Beggs & Simpson, multifamily usually sees the effects of real estate cycles before any other sector.

My point is that despite this lull period where everyone is only remaining optimistic to keep their sanity, I think we are finally seeing some quantifiable results of a recovery.

The fact that it is summer, a period when activity notoriously picks up in Portland, and the possibility that Opus might only be putting this on the market because the company is upside down on it, could refute this statement I just made. But it is really nice to see some actual deals accompany that optimism.

The post Ladd Tower sale an indicator of multifamily market appeared first on Daily Journal of Commerce.