The Portland area apartment market, like the national market, has drawn great benefits from weakness in the single-family sector as former owners ousted by foreclosure, stringent lending standards (despite low mortgage interest rates) and uncertainty over the future of home values have served to augment the demand for rentals that result from job and population growth. Given the cyclical nature of real estate, however, it seemed inevitable that at some point the single-family market would bottom-out and that recovery, from whatever depths and however slowly, would ensue. That recovery, both locally and nationally, now seems to be underway. The question then arises with respect to future of those components of demand diverted from the ownership sectors. Marcus & Millichap’s third quarter 2012 report on the local market gives the topic clear voice: “operators in the Class A sector are concerned that residents with more established credit and income levels will likely enter the single-family arena as the Portland housing market shows signs of recovery.”
The slowdown in net absorption reported by Reis could be an effect, to one degree or another, of these unfolding trends. Following 1,920 units in 2011, the market-rate net absorption total for the first half of 2012 was just 515 units, accompanied by no new supply. (With 162 units arriving on line, July followed with absorption at 109.) Vacancy ended the latest quarter at only 2.2%, down 20 basis points for the period, down 130 year-over-year and the lowest rate on Reis’ books for this market in more than 30 years of coverage. Accordingly, the very tightness of the market could be contributing to the declining absorption numbers. Rent growth, in any case, has been favorable but less than dramatic. At $871 and $833 per month, the second quarter asking and effective averages were up 1.0% and 1.3% for the period and were up 1.6% and 2.7% year-to-date following last year’s respective increases of 2.2% and 3.9%. The extreme tightness of the market and the slow response on the part of developers have kept it secure and likely assure its near-term (or longer) prospects.
The next question, accordingly, concerns the near-term future of development. Not surprisingly, it is again heating up. While the firm’s September report on individual construction projects anticipates the delivery of only 420 market-rate units in a handful of small projects in 2012, a total of 1,868 such units (including deliveries pending for the remainder of this year) were underway per report date. Among the latest major starts was the September groundbreaking of the 367-unit Bridgeport Apartments in Portland. Sidetracked in 2008 by the recession, the $70 million project, started earlier by Trammell Crow Residential as The Bridgeport Alexan, has been taken over by Mill Creek Residential Trust LLC, according to the Portland Business Journal. Also from Mill Creek is the 179-unit Savier Street Flats at Savier and NW 23rd Avenue, Portland. Reis cites a June 2013 completion date. While the increase in development is significant, and additional units wait in planning and proposal stages, the market does not appear to be endangered by oversupply.
With new supply numbers increasing, Reis expects the vacancy rate to level off—but only at about 2.0%. Gains of 3.6% and 5.0% are projected for the average asking and effective rents for the year all told. Larger gains should follow in 2013 as the market stays tight.