Puget Sound and Portland/Vancouver: 2014-15 Top Economic Market Drivers, Part 2 – Portland/Vancouver

Puget Sound and Portland/Vancouver: 2014-15 Top Economic Market Drivers, Part 2 – Portland/Vancouver

 



In Part 1 of this two part series on the 2014-15 top economic market drivers in the northwest, I covered the Puget Sound market; primarily these three forces: Amazon’s growth, Chinese investors, and Boeing’s 777X contract. Part 2, (written and researched by the HFO team) covers the top economic market drivers in 2014-15 in the Portland/Vancouver market. 





Part 2. Portland/Vancouver – firing on all cylinders. 


By Lee
Fehrenbacher, with research by Tyson Cross, Cody Vaz, Matt Reynolds and Chris
Wang.
With more breweries, handlebar mustaches and abnormally tall
bicycles per capita than most cities in the nation, Portland is no stranger to colorful
stereotypes. Infamously, it’s the place where young people go to retire.
But
increasingly, Portland is becoming a popular destination for investors as well.
In 2014, buyers pumped some $1.3 billion into the local multifamily real estate
market. Stereotypes aside, there are very tangible reasons why – population, employment
and economic growth being chief among them. And while it’s true that Portland
has become something of a mecca for the young, they’re hardly moving here to
retire.
The demographic shift:
In a 2012
study, researchers at Portland State’s Population Research Center found that
Portland (along with Seattle) was one of only two of the 50 largest U.S. metros
that had consistently been a top destination for young college-educated
migrants over the past 30 years. That’s important because young, highly
educated citizens bring new ideas and resiliency to an economy.
In Portland,
millennials make up roughly 32 percent of the population – a proportion similar
to populations in major metros like Seattle, San Francisco, Los Angeles and
Phoenix, according to the U.S. Census Bureau. Additionally, nearly 44 percent
of Portland’s population over the age of 25 has a bachelor’s degree or better –
15 percent higher than the national average.
Far from
retiring, Portland’s young college-educated population not only participates in
the workforce at a rate comparable to the national average, but a large number
of these Portlanders are entrepreneurs – approximately 9 percent reported being
self-employed between 2008 and 2010, as compared to an average of 6 percent among
the nation’s 50 largest metros, according to PSU’s 2012 study.
PSU’s
researchers attributed Portland’s young “brain gain,” in part, to the region’s
efforts over the past three decades to, “manage its growth in a more
sustainable way, and promote a vibrant ‘urban fabric.’” United Van Lines made
a similar assessment this month when it identified Oregon as the nation’s top moving destination for the second year in a row.
“Unique
amenities such as outdoor recreation, arts and entertainment activities, and
green space protection likely continue to propel Oregon to the top of the list
for the second straight year,” the company reported.
The same
could be said for Portland specifically. With city plans dedicated to mass
transportation, bicycle traffic and green space, Portland’s amenity rich urban
neighborhoods have become a major draw for people around the nation. In fact, Portland
has almost become attractive to a fault.
Employment gains vs. population growth:
Between
January 2011 and August 2014, the Portland metro added 84,875 jobs – outpacing
the 64,500 jobs lost during the recession by 20,375, according to a recent report, by
the Portland Business Alliance.
Most of
those jobs have come from local service sectors (education, health care,
professional and business services, and leisure and hospitality) in lieu of
traded sectors (manufacturing, construction, and trade and transportation),
which tend to bring in more outside dollars. Nevertheless, the trend is
undoubtedly positive and it’s hard to miss the prominent names of Intel,
Nike,
Boeing,
and Oregon Health Sciences University,
among others, next to the word “expansion” in business headlines. Portland’s
tech start-up scene is also providing a healthy boost to the local economy, as
evidenced here, here, and here.
Additionally,
the Portland Business Alliance reports that the Portland metro – largely thanks
to Intel and the electronics/semiconductor industry – ranked third in the
nation last year for gross metropolitan product (GMP). But here’s the caveat –
job growth is not keeping up with the population.
The Portland
Business Alliance also reports that Portland’s employment per capita has been
declining for more than a decade. In 2000, there were approximately 0.53 jobs
for every person living in the metro area; by 2013, that number had dropped to
0.47. It’s not that the number of jobs is declining; it’s that the population
is growing faster.
“One of the
issues that we fight with is because we are attractive to the young creative
class – the millennials – is people come here without the jobs and then they
find the jobs,” Jerry Johnson, a principal at Johnson Economics, told me
recently. “So we always have a lot of labor force available. It’s hard to get
the price pressure.”
With more
people competing for a limited number of jobs, wages in the Portland metro have
had a hard time recovering from the recession. The Portland Business Alliance
reports the median household income is still $4,408 below pre-recession levels.
Eventually, that will put downward pressure on rising apartment rents but for
now the population boom – coupled with the recessionary slow-down in
construction and subsequent pent-up demand for housing – has made Portland’s
rainy climate appear a lot brighter to multifamily investors.
Apartment sales:
Through fall
2014, vacancy throughout the Portland metro area continued to hit record lows
with an average of 3.6 percent – 0.21 points higher than vacancy in the spring,
but still well below standard industry performance expectations of 5 percent,
according to Multifamily NW. As such, rents increased 11 percent over the
previous year to an average rate of $1.22 per square foot. Pierce-Eislen
expects the trend to continue.
In its 2015
forecast, the apartment analytics provider predicts Portland rents will grow by
another 8.5 percent this year – the fourth largest increase in the nation
behind Denver, San Francisco and the east end of the Bay Area, and a full
percent higher than projected rent increases in Seattle. With a comparatively
lower cost of entry, Portland’s strong fundamentals are providing investors
from larger markets and enticing reason to chase yield locally.
Last year,
investors spent approximately $1.3 billion on multifamily properties in the
Portland metro area – outpacing the previous peak of roughly $1.2 billion in 2007.
Of that activity, just 28 institutional deals valued at $10 million or more
accounted for the overwhelming brunt of sales volume – approximately $1.02
billion. The majority of sales, 141, were valued below $10 million and
accounted for just $226 million.
That doesn’t
mean that smaller properties aren’t fetching large offers – HFO is aware of at
least two vintage properties in the core under 20 units that are garnering more
than $140,000 a door. By contrast, the median sales price per unit in 2014 was
$96,645 – a 24 percent increase over 2013.
The development question:
Given the
hot conditions of the Portland apartment market, it’s not surprising that
development activity has erupted.
In addition
to the mid-rise apartment buildings being built in nearly every nook and cranny
of the city, at least five 15-story-plus high rise buildings are now currently
under construction. Others are in the works. According to a recent report from
the Oregon Employment Department, permits for more than 7,000 apartment units
were issued to developers in the Portland metro last year – more than double
the level of activity seen in 2009, 2010 and 2011.

Johnson
Economics predicts the Portland market will see another 7,000 units in each of
2015 and 2016, and that’s generally expected to put upward pressure on
vacancies and downward pressure on rising rents. That pressure likely won’t
begin to be felt, however, until the end of this year, and with interest rates at
historical lows – at least for the time being – Portland’s strong fundamentals
will continue to make the market a favorite for apartment investors in 2015.
HFO Investment Real Estate specializes in multifamily brokerage sales and advisory services for commercial real estate investors and apartment owners throughout Oregon and Washington. Build your legacy at http://www.hfore.com