Opinion: An investor perspective on the Portland real estate market - August 2018
Taking off my "forever-optimist" broker hat and thinking solely in terms of my real estate investments and future direction, here are my thoughts on the current and future state of the Portland real estate investment market:
The photo above is the view from my apartment window (we are currently renting as we build a new family home). 4 cranes are scattered across the skyline only in this small view of the city, as apartment/office buildings are being built. It isn't a secret that many more properties are also being developed across the metro area. Here are my thoughts on what I'm noticing:
Surplus in High-End apartments
Despite all the construction going on around the city, very few 'affordable' housing units are being built. By 'affordable' I am referring to areas on the outskirts of the city where someone could rent a 2-bed apartment for $1,200 or less. I own 41-units throughout these areas and also know many landlords who have also been able to substantially increase rents with making few (if any) capital improvements to their properties, solely based on housing shortage.
The reason no one is building out there is due to high permit costs and high building costs. I have a few building projects going on at the moment, and I can attest first hand that permit costs are very very high. What a lot of people don't understand is that builders/developers pay for what are called "System Development Charges" (SDC's). These fees are to address the increased strain on public utilities such as roads, sewer system, city water, etc. I currently own a property with the space and zoning to build an additional 10 apartments, and I have been tossing around the idea recently. I am hesitant for the following reasons, see the permit fee estimate below:
The SDC estimates (not the building permits) for 10 residential units is over $250,000! We are not talking trade permits, building costs, land costs, etc. Just fees for added strain on city infrastructure. That number ($25,000 per unit) is insane. What blows my mind even further is that the "parks SDC" is by far the largest fee of all of them! $96,000 solely for the development/maintenance of parks around the city. Now, I am a big outdoors/environment guy, but that fee is absurd. The city is basically saying that it is more expensive to maintain our parks than it is to deal with the increased strain on our roads and water/sewer system.
Developers are the ones footing the bill for all these public works, and most people don't realize that everyone (by proxy) will ultimately cover these items through increased rents and housing costs.
This example (along with the increased cost of labor/building materials) have made it non-profitable for developers to build apartments in areas where they cannot tap into the high rents. All of the cranes you see, are building high-rent properties throughout inner-city locations.
In my opinion we are going to see a lot of pressure on high-end apartment units to reduce prices as the fight over the demographic who can afford high rents intensifies. About half of the 200-unit apartment building I am living in is currently vacant. Before renting here we also toured newly built apartment buildings in the Pearl District that were 100% vacant, having just been built. For a more detailed statistical analysis check out the Kidder Matthews and Barry & Associates reports.
As you can see, we have 44,000 rental units that will be coming to market soon, most of which are inner city locations. The absorption of these units has already been slow, but it will become increasingly so.
I have also noticed an increase of multi-family units on the market throughout downtown and inner-east areas, most of them being older. Despite the fact that these properties may have that 'old-Portland' charm, I would be hesitant to invest in such properties because of the difficulty in competing with these sparkling new units and the amenities they offer.
In my opinion, the city has not done enough to incentivize developers to build enough 'affordable' housing units which has led to over-building of high end apartments. Personally I think it is a good time to get out of this high-end market, and it seems there are other investors who share this sentiment. Yes we are overdue for a recession, markets are at all-time highs (both real estate and stock market), now might be a good time to sell.
It does look like we have plateaued as far as increasing rents for class B and C properties, but historically this has still been a stable market even during tougher economic times. My father was a landlord during the 2007 financial crisis, and I can say from first hand experience that it was 'business as usual'. Sure, multi-family properties were not appreciating like they have these past few years, but vacancy rates were very stable and properties were cash flowing just fine.
Surplus in retail space
I am just now getting into this space, as there is a commercial building I purchased and am in the process of remodeling the property. 5 commercial units on bottom, 4 residential units on top. I have since become more aware of the retail rental market, and have noticed the amount of inventory available is quite high. Even in the apartment building we are living in, the commercial spaces on the bottom have been vacant for quite a while, despite being in a prime location and having some 200 residential units upstairs that can provide a steady clientele base for just about any business.
I have always been under the philosophy that I would never invest in office space (was hit very hard during our last recession) but I'm beginning to see that retail space is also quite competitive. Most new developments in an effort to tap into the hot apartment rental market have also brought to market a surplus of retail space.
Overall, I still believe there are still good investment opportunities in the market on a case-by-case basis, but the overall market forces that have made money for pretty much every property owner, seem to be largely burned out. Rising rates, increased supply, and a large amount of 'in-construction' projects of multi-family and retail spaces are making the high end-end market less attractive to me. This looks like a good time to become as liquid as possible and see how things play out with the absorption of all this new real estate coming to market.
Could this be the peak before the fall? The calm before the storm? I'll let you make your own opinion on that :)
Portland, OR - $8,650,000
9912 NW Wind Ridge Dr
Remarkable 5 years of design & construction delivers PDX's finest home & most dramatic architecture ever to be offered for sale. Award-winning blend of steel & concrete, stunning walls of glass & extensive use of split-travertine exteriors rising 3 stories above the ground. Custom interiors offer precious stone, warm woods, flawless steel work, artistic tile installation & latest technology. Set on 10 acres with equally stunning views.
Listing Agent: Chris Suarez - PDX Property Group
Seattle, WA - $15,000,000
1526 Lakeside Ave S
Privacy and elegance along the shores of Lake Washington! With a sophisticated and timeless relationship to the water, front row views of Mt Rainier and the Cascades and 240 front feet of the lake, this nearly one level home features 4 en-suite bedrooms, a beautifully appointed kitchen and an open floor plan that embraces the indoor/outdoor living, lively water views, and the light. Immaculate grounds and mature landscaping of lush lawns, brick patios and stone pathways convey extraordinary lakeside living.
Listing Agent: Patrick Chinn - Windermere Real Estate
San Francisco, CA - $25,000,000
2626 Larkin St
From the minute you enter 2626 Larkin the inventive and artful work of Architect Sandy Walker and Interior Designer Helga Horner becomes apparent. This is the unique work of art that you have waited for. Timeless and moving, it awaits discovery and to be called home. Contemporary design with timeless European detail. MAJOR FEATURES: Four bedrooms plus an independent au pair/in-law apartment; Five full bathrooms plus three half-bathrooms; Elevator to all levels; Integrated sound system; Venini chandelier designed by Diego Chilo; Lime plaster walls; European white oak floors; Window and doors by Cooritalia; Wine Room; Outdoor patio off kitchen/family room; Terrace off the top floor entertainment room and roof deck.
Listing Agents: Stephen Gomez - GPK Luxury Real Estate, Val Steele - Pacific Union International Inc
Source: San Francisco MLS
Los Angeles, CA - $188,000,000
924 Bel Air Rd
Luxury developer Bruce Makowsky's greatest masterpiece. Located in the confines of ultra-exclusive Bel Air Enclave. The pinnacle of splendor & luxury. 38k sq ft new construction home +17k sq ft of entertainment decks, 2 master suites, 10 over-sized VIP guest suites, 21 luxurious bathrooms, 3 gourmet kitchens, 5 bars, massage studio/wellness spa, state-of-the-art fitness center, 85-foot glass tile infinity swimming pool, 40-seat 4K Dolby Atmos Theater, 4 lane bowling alley/lounge, auto gallery w/ cars worth more than $30mm, 7-person full time staff, over 100 curated art installations, outdoor pop-up theater, 2 fully-stocked champagne/wine cellars, massive candy wall, the most advanced home tech system in the world. Astonishing array of amenities & bespoke items from around the world, 4 meticulously curated levels, indoor/outdoor nirvana enhanced by 270-degree unobstructed views spanning from the mountains all the way to the ocean & the incredible Los Angeles skyline in-between.
Listing Agent: Rayni Williams - Hilton & Hyland, Shawn Elliott - BRE
New York, NY - $88,000,000
ONE VISION, ONE EXTRAORDINARY MANSION IN THE TRADITION OF STANFORD WHITE The house designs of Stanford White embodied the ultimate achievements of The Gilded Age and created an "American Renaissance" in architecture and art. And just like Stanford White, who not only designed a mansion for his clients, but also traveled the world to collect the furnishings they should contain, this owner also traveled the world to collect the finest architectural and decoration ideas, as well as theart and furnishings, to combine the very best of the classical tradition with every modern technological convenience. JAMES ELLSWORTH The entrepreneurial, creative thread began early. Originally commissioned in 1883 for an international silk trader, this house was transformed in 1913 into its present neo-Classical style by William Welles Bosworth for James Ellsworth. Ellsworth flourished in business during The Gilded Age, achieving particular success at the peak of the economic boom between 1890 and 1920. He was a flexible American industrialist moving from one industry to another: he began as the owner of coal mines in Pennsylvania -- the coal town Ellsworth, PA is named after him. He moved into railroads, and in 1907 after the completion of a railway, Ellsworth sold his coal mines to Bethlehem Steel, and subsequently purchased a villa in Florence, Italy, and would become a notable fine art and coin collector. ARCHITECT: WILLIAM BOSWORTH William Bosworth includes among his most famous designs Kykuit, the famed Rockefeller family estate north of Tarrytown in New York, where he worked closely with William Adams Delano and Chester H. Aldrich. Under the auspices of John D. Rockefeller, Jr., Bosworth was commissioned to restore the Palace of Versailles, France, which Rockefeller financed. A century later, the present owner of 12 East 69th Street was influenced by the Palace of Versailles, which receives 3 million visitors a year, a testament to its international draw as a monument to timeless architecture. PERFECT LOCATION Positioned a few houses off Fifth Avenue and Central Park on an exceptional residential, tree-lined block, this mansion is 40 feet wide, 90 feet deep, and features four windows across the front and rear facades providing remarkable light at all times. There is no other renovated 40 foot wide mansion available right now between Fifth and Madison Avenues. SIZE With six levels, it encompasses over 20,000 interior square feet including the 3400sf basement with windows in the front and rear, and approximately 2,650 exterior feet on the roof terrace. FORMAL ENTRY 14-foot ceilings in the entry hall open to a rotunda with 28.5-foot ceilings to the third floor. The great room in the rear of this level spans 40 feet with French doors opening to Juliette balconies and floor-to-ceiling windows. A hidden door off the main hallway opens to the top of an extraordinary double-height library and office which measures 24 feet in height. THIRD LEVEL The formal dining room also extends 40 feet and easily accommodates 40 guests or more at a sit-down dinner. The massive 40-foot-wide kitchen in the front has four windows across and almost every cooking appliance known to a chef. FOURTH LEVEL Two 40-foot-wide bedrooms could be converted to four or more bedrooms. FIFTH LEVEL A massive master bedroom suite with an equally large sitting room and two full baths. Two large dressing rooms one of which is wired as a panic room. Separate guest suite. GARDEN LEVEL Additional entrance from the street for the lower half of the extraordinary double-height library offers private access to the office. This level includes the upper balcony section of the movie theater which seats 12 in red velvet chairs. LOWER LEVEL Saline swimming pool with two saunas and a full bath. The lower entrance to the split-level movie theater is in the rear. ROOF TERRACE Elevator and stair provide access to the terrace which covers the entire roof. TECH HIGHLIGHTS Heated sidewalk for automatic snow removal. Heated Onyx marble floors in the entry hall. Water filtration throughout the house. Exceptional lighting system allows numerous lighting combinations. Security system with cameras. In conclusion, with three of the most remarkable rooms ever seen in a New York mansion, this house is truly An American Beauty, a synthesis of the elegance of the Beaux-Arts themes sifted through an unique American sensibility.
Listing Agent: Paula Del Nunzio - Brown Harris Stevens
$1 million San Francisco loft has a support beam that cuts right through the kitchen ?
Just when you thought you’ve seen it all in San Francisco’s insane Real Estate market, something like this comes along. An 1,185 sq ft loft in Western SOMA district sold for $1,053,000. One thing the listing doesn’t mention? The GIANT diagonal support beam that cuts right through the kitchen.
As a a real estate professional I have never seen anything like it. I can’t figure out why the floor plan wasn’t designed in a way to hide that hideous beam inside a wall or something.
Oh well, the apartment still sold. Based on the listing features, there were plenty of other benefits to overlook the massive eye sore and tripping hazard in the kitchen.
Listing source: boingboing
Portland was set to become the proud owner of Framework. the tallest wood-frame building in the US. This also made it one of the most environmentally friendly high-rise development in the US, but the project was just set on hold. In a new press release, they stated:
"The postponement is a result of changing market conditions over the past two years including inflation, escalating construction costs, and fluctuations in the tax credit market. All have impacted the project’s bottom line."
The building was designed to showcase the innovative nature of mass timber construction at both the street level and city skyline. The structural design is a glulam post-and-beam structure, surrounding a CLT central core, and topped by CLT floor panels and gypsum concrete. There was a lot of buzz surrounding the development and it's sad to see that the economics of it no longer make sense.
The building was designed with 12 floors: 1 retail, 5 office, 5 affordable housing, and 1 roof deck. I am still keeping my fingers crossed on this one, as the concept would fit right in with Portland's eco-friendly culture and the city is definitely in need of affordable housing.
To be continued...
Photo source: LEVER architecture
I will begin by saying that the Portland metro market does not show signs of slowing down. Despite the fact that some homeowners are having a harder time selling their home, some have even contacted met frantically asking what they're doing wrong. Well, nothing in particular. Sales have increased since May, but inventory is still HIGH (see graph above).
So before anyone worries, if your property isn't selling yet, its not a sign the market is slowing down (yet) but more a sign that many property owners are trying to cash in the equity they've built up. Pending sales have dropped off slightly.
What I particularly love about the graph is the visible seasonality of the market, as supply and demand both build up during the summer months and significantly drop off during winter. Despite rising interest rates, summer 2018 seems to be on track with last summer.
We have also had a tick up in median sales price for the month of June. This is a great sign that residential properties are continuing to appreciate! The gap between asking price and selling price has shrunk just like in previous summers.
These statistics are for Multnomah County as a whole and do not include Clackamas or Washington County. The patterns in these respective counties are very similar. Overall, still an amazing time to be in the industry!
Alex Ianos is a Portland area real estate investor and broker