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Opinion: Rental Housing Providers are Leaving Portland

May 12, 2023
Authors: Lee Fehrenbacher
Publishers: Portland Business Journal

We often hear a familiar refrain in our brokerage office when my colleagues and I talk to rental housing providers about their investment plans in Portland.

“I’ll look at anything outside of the city of Portland … better yet, anything outside of Multnomah County.”

I can’t tell you how many times I’ve heard this statement in the past year from investors nationwide. Their feedback is consistent, as are their concerns. Investors are re-evaluating whether the City that Works pencils out in the face of growing homelessness, crime, increasing governmental regulations, and one of the highest tax rates in the country. Unfortunately, many are deciding it does not.

Last year, according to one local 1031 exchange company, of the 207 transactions totaling $220 million in Portland-based sales it saw come through its office, only 35 investors accounting for just $55 million reinvested their proceeds in Portland. Statewide, the same accommodator saw $435 million of $900 million in total sales exit Oregon via 1031 exchanges. Popular destinations were Washington, Florida, Arizona, and Idaho, in that order.

A recent Oregon Housing and Community Services analysis identified a need for 554,000 new units statewide over the next 20 years. As a result, Oregon Governor Tina Kotek is proposing an ambitious public investment to spur the production of 36,000 new units annually.

Despite the need to build more housing, Oregon’s legislature seems more focused on penalizing rental owners instead of helping to speed up production and encourage investment. Oregon’s newest rent control measure—SB 611, which caps rent increases to 5 percent plus CPI, but no more than 10 percent in a year—along with Ballot Measure 26-238, which will be on the May ballot and would create a 0.75 percent capital gains tax in Multnomah County—are two of the most recent efforts giving investors pause.

That is a problem because, besides the well-documented need for more housing, Portland needs continued investment in its existing, aging housing stock.

According to Costar, Portland has about 4,300 apartment buildings, which account for nearly 130,000 units. Of those buildings, 68 percent were built before 1980, which means most of Portland’s rental properties have plumbing, electrical, and other building systems that are approaching or have exceeded 50 years of age and are nearing the end of their useful lives.

Additionally, monthly costs for things like utilities, admin, and taxes (which our office has seen an increase of as much as 9 percent year over year, depending on a property’s location and local levies) are increasing, and operating an apartment community cost-effectively is becoming increasingly complex – especially for smaller communities with fewer income-producing units to share expenses. More than 76 percent of apartment properties in Portland are smaller than 30 units.

Take, for example, a 7-unit apartment building HFO sold late last year in close-in North Portland. The property had fallen into severe disrepair. None of the units had been updated significantly since it was built in the late ‘60s, the electrical panels were potential fire hazards, and one of the roofs and the main sewer line needed to be replaced entirely.

Rents at the property were more than 25 percent below market. There is no way the previous owner could have afforded the capital improvements desperately needed at the property with the income it produced. Moreover, with current interest rates and the proposed legislation being considered by the legislature, it’s hard to imagine how a new owner could even afford to purchase the property today.

Budgeting for a project like that in today’s market is challenging enough. Making plans in an environment where legislators continually dictate what rental housing providers can charge and what they must pay—SB 608, SB 611, and Ballot Measure 26-238, to name a few—makes investors question whether Portland, Oregon, is a place they want to do business.

Portland is an amazing city. Access to the great outdoors, vibrant food culture, and friendly, open-minded people make it great.

Unfortunately, more and more rental housing providers are deciding it’s not worth the risk.

Lee Fehrenbacher is a senior broker at HFO Investment Real Estate, specializing in multifamily investment properties in Oregon and Washington.

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