Q: How as the multifamily market played out this year?
A: The 2011 year-to-date data shows 71 apartment transactions involving complexes of five to 50 units, four transactions of 51-100 units, and nine transactions with buildings containing more than 100 units.
This is up from last year, and I predict we will have approximately a 25 percent increase in transactions this year from 2010 with a strong fourth quarter. Portland has been a top apartment market in the nation with low vacancy rates averaging 3.34 percent and annual rental increases averaging 9.5 percent. With new construction of apartment units down about 90 percent from past averages, the demand is strong and will be for years.
Q: What pricing does the Portland area command now and how will prices change in 2012?
A: The 2011 data shows an average sales price per unit of $71,650, up from $69,065 in 2010.
I believe the market will continue to see a slight increase with price per unit and price per square foot for 2012. Investors’ returns based on current rents, also known as capitalization rates, remain low but increased to an average of 7.17 percent currently.
This should remain relatively low but increase 200-400 basis points. However, the rising rents and back revenue from water utility bills will keep the net operating income increasing into 2012.
There will be more new construction of class A units, which will have a premium price if sold. The close-in city core properties will always hold their value for well-managed buildings with good tenants. Even with a rise in the cap rate, these properties should remain high in terms of price per unit pricing.
Q: How will the apartment market unfold in 2012?
A: There should definitely be an increase in number of transactions. However, the bulk of these transactions are buildings of five to 85 units. This will continue to lead the volume as more single investors and owners are transitioning into more buildings or moving their equity through an exchange sale into a larger building.
With the interest rates remaining low, savvy apartment owners are deciding to sell and exchange as opposed to refinancing. The most notable trend will be a shrinking gap between “ask” and “bid” prices. Currently, for 2011, it is a 6.15 percent difference. For the transactions we handled in the third quarter this ask/bid gap was about 2 percent.
Q: Are certain parts of the Portland area in higher demand than others?
A: The core of downtown and close-in surroundings are always in demand for the investor looking for better neighborhoods. These buildings usually reflect pride of ownership and remain well priced. The tenant mix is strong with limited turnover and higher rents. Apartment investors and owners of these buildings usually have higher equity in these properties or own them debt free.
However, there is quite a bit of volume in the outer city limits due to the lower price per unit and higher cap rates. These investors are looking for more opportunity to obtain higher returns by improving the property. Most investors are looking for a cap rate above 7 percent. The seasoned investor with the ability to rehabilitate buildings by improving their condition and management will continue to search for distressed properties with higher cap rates.
Q: What types of buyers will step up to the plate in 2012, and why?
A: Most of the market is local single owners and I believe they will reposition their portfolio with selling and exchanging into larger or better located buildings to take advantage of the low interest rate market.
So far in 2011, there have only been six out-of-state first-time buyers in Oregon. That means that more than 95 percent of the transactions were made by local investors. With 13 percent of the transactions in 2011 being cash purchases, I believe we will see a slight rise in these cash buyers if more properties are showing more deferred maintenance and are owner managed.
Q: Are landlords investing less in renovations since the recession started?
A: I don’t believe so, as you will always have the owners that choose to spend less and owners that understand the valuation to the buildings with keeping quality higher. You will see more sales in 2012 by owners that have more deferred maintenance. These buildings typically sell for less not only due to the condition but because there is a lack of record keeping with the income and expenses. When properties in a neighborhood are getting nicer, it puts pressure on apartment owners who were reluctant to improve their buildings.
Article written by Joseph Chaplik for the Portland Business Journal’s 2011 Commercial Real Estate Services Guide. Joseph Chaplik is the President & Principal Broker for Joseph Bernard Investment Real Estate.