Filed under: General, MMHA, MMHA Apartment Report, NARPM, Property Management, Uncategorized | Tags: Chris Hermanski, MMHA, MMHA Apartment Report, Portland Metro Apartment Market, Property Management, rentals
By Mark D. Barry, MAI and Phillip E. Barry, Real Estate Broker
The Landlord Times Metro - November 2010 - Vol.14 Issue 10
Forecast For Balance of 2010 and 2011
So where is our apartment market going in the balance of 2010 and 2011? Our thoughts are as follows:
Portland Economy:
The recovery is limping along as we enter the fourth quarter of the year, and is coming at a time when many of the benefits of the government stimulus spending are wearing off. The US economy needs 200,000 jobs per month to bring the unemployment rate down. No one expects that to happen in the near future. In addition, low interest rates, which can encourage borrowing to spur economic growth, are already at near zero. The Oregon Office of Economic Analysis expects that there will be job losses in 2010, and that employment will not reach pre-recession levels until mid 2014.
Apartment Construction:
One thing you won’t have to worry about in the balance of 2010 and into 2011 will be apartment construction. 2010 will be the slowest year for apartment construction in our adult lifetime. There will be some government sponsored urban projects, but that’s about it. I expect we will see permits for 600 to 1,000 new units in 2011.
Apartment Vacancies, Rental Rates, and Income:
The balance of 2010 and first part of 2011 will be a time to concentrate on keeping your tenants happy, and holding on to what you have. Apartment vacancies should remain in the range of 3.5% to 4.5%. But, income will remain flat in the first half of 2011. Looking beyond mid 2011, apartment income should rebound quickly once the economy turns around. There will be a shortage of apartments by 2012.
Apartment Values:
Apartment values have stabilized in YTD 2010. We expect that apartment values will remain stable in the balance of 2010 and into 2011 due to low interest rates, low vacancies, and fairly stable apartment income despite some increasing expenses. When the economy improves, everyone expects apartment income to increase. The real concern is that interest rates will also increase in cap rates. Expect to see typical cap rates of 6.50% to 7.75% for B and C suburban apartments, and 5.75% to 7.25% for more urban properties in 2011. Don’t expect any property tax relief in the 2010-2011 tax year despite a decline in values, and expect to see continued increases in utility costs.
Apartment Sales Volumes:
In 2009 and YTD 2010, we have seen the lowest level of apartment sales activity over the last decade. We have nowhere to go but up. The next two years will be a far better environment for apartment sales. This will be due to owners getting better educated on values, some capitulation on the part of sellers, motivated sellers who need the funds, sellers motivated by possible increases in capital gains, and buyers who sense that we are close to bottom. We are seeing a two-tiered market. There is good investor demand and often multiple offers for well performing, well kept apartments in stable locations, and institutional apartments. However, there are have been more workout and foreclosure appraisals over the last nine months than any time since the early to mid 1980′s.
CONCLUSION
The recent job figures show that we are not yet there on any positive employment news. We expect the balance of 2010 to be lackluster, with some limited signs of recovery in the first half of 2011, but no real recovery until mid 2011 and 2012. Apartment construction will be at record lows, which will help in maintaining low apartment vacancies. We expect apartment income to remain flat for the rest of the year, with modest increases beginning in mid 2011. There will continue to be a two-tiered market, with good demand for performing well-kept and well-located assets, but some overhang of poorly performing assets in marginal locations, with most of these being owner managed. We all like to think that the economy has hit bottom. However, the most recent data seems to point to an anemic recovery at best in the balance of 2010 and into 2011. It is likely that we will have to wait until mid 2011 and 2012 for any significant recovery.
Mark D. Barry, MAI, is a real estate appraiser specializing in apartment appraisals in the Portland area. He has completed over 5,000 apartment appraisals since starting as a fee appraiser in 1983. He has a BA from the University of California at Berkeley, and an MBA in Real Estate from American University in Washington, D.C.
Phillip E. Barry is a real estate broker with Joseph Bernard Investment Real Estate, and specializes in apartment sales in the Portland metropolitan area. He is a graduate of Oregon State University.
Filed under: General, MMHA, MMHA Apartment Report, NARPM, Property Management, The Landlord Times, Uncategorized | Tags: Chris Hermanski, MMHA, MMHA Apartment Report, NARPM, Portland Metro Apartment Market, Portland OR, rentals
By Mark D. Barry, MAI and Phillip E. Barry, Real Estate Broker
The Landlord Times Metro - November 2010 - Vol.14 Issue 10
In late 2009, there were high hopes that our economy had hit bottom, and would be well on the road to recovery by this time. However, the recovery has slowed down in both the US and Portland, and is losing steam. Issues impacting the Portland economy are high unemployment, lackluster private sector hiring, the 9% across the board proposed state budget cuts, slow single-family sales, and Oregon now having the third highest rate of foreclosures in the country. So just what is happening here with the apartment market as of October 2010?
Portland Economy
Good news of late includes IBM announcing that they will add 600 jobs in Beaverton, Daimler announcing they will continue manufacturing trucks at their Swan Island plant, Greenbrier adding 260 jobs, and Vestas deciding to move forward with a $66 million headquarters project in the Pearl. However, we have actually lost 7,500 wage and salary jobs since January 2010, and our employment rate is 10.2%.
Apartment Construction
2010 will go down as the slowest year for apartment construction since the early 1960′s. Permits have been issued for just 460 apartment units in the four county metro area for 2010 through July vs. an average of around 4,000 units per year for the previous ten years. Apartment construction is dead!
Apartment Vacancies, Rental Rates, and Incomes
Apartment vacancies are reported at 4.0% in the fall 2010 MMHA Apartment Report. The average rent per Sq. Ft. of $0.91 is exactly where it was a year ago in the fall 2009 survey. Apartment vacancies are low to normal in most areas, with only Wilsonville and E. Vancouver showing apartment vacancies over 6.0%. However, our analysis of YTD 2010 operating statements shows that the income at most apartments is basically flat, with slightly more properties showing a decline in income that an increase. The biggest problem impacting landlords is tenants who have lost their jobs and who are forced to move.
Apartment Expenses
We are amazed at the rapid acceleration of expenses in recent years. Property taxes in Portland are up around 4.5 % percent per year over the last four years, while utility cost increases have gone up around 10% per year. In addition, our area had a huge construction boom from 1965 to 1980, and we are amazed at how high the overall repair and maintenance costs have gotten for these properties. With a flat income, expenses up around 10% in two years, net income is down by 5% to 8%.
Apartment Values
A flat income, some increases in expenses, and higher cap rates have impacted apartment values in recent years. Cap rates showed a noticeable increase in the second half of 2009 in comparison with the first half. Co Star figures show a 7.38% median cap rate for the second half of 2009, and a 7.01% median cap rate for the YTD 2010. Our analysis shows a decline in value of 10% to 20% from the peak in late 2007 and early 2008. However, apartment values have firmed up and been stable over the last year. The median price per Sq. Ft. for YTD 2010 is virtually identical with the second half of 2009.
Apartment Sales Volume:
YTD 2010 has continued to be a challenge for apartment brokers, though there was a noticeable improvement in the second and third quarter. There have been 61 apartment sales for $215.1 million in the first eight months of 2010 vs. 81 sales for $281.8 million on 2009. Apartment sales volume averaged $800 million per year from 2003 to 2008, and thus the 2010 sales volume is off by around 60%. However, 2010 will be a better year for apartment brokers that 2009, with sales volume and the number of transactions up by around 15%.
Next – PART II: Forecast for Balance of 2010 and 2o11
