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 :)