Page 1



November 2017

The Interesting Times Continue!


By Greg Frick, Partner, HFO Investment Real Estate

City Hall Update


The Portland apartment market vacancy rate reached a low of 2.87% in 2015.* A year ago it stood at 3.71% and this fall it increased to 4.37%. The availability of apartments appears to be increasing due to new product coming to market.

Oregon Taxes and Appeals


HFO-TV & Podcast Update


Our desires as Oregonians are in conflict. We want our urban growth boundary to protect farmland and vistas. At the same time, we want affordable housing. The beauty of our area, which has drawn so many new Oregonians, continues to attract 80 people every day. They have to live somewhere. Yet many of our citizens and neighborhood groups despise change, infill and the impact of density on home prices (story page 18). Rather than work with developers, government leaders have piled on new regulations and expense (story page 15). In a free market economy, the government cannot mandate housing development. As we explain in these pages, it likely won’t succeed by forcing developers to require that 80% of renters in a building subsidize housing for the other 20%.

2017 Oregon Legislative Roundup


Portland in Transition


The Game’s Still Going Strong


Concessions | Submarket Vacancies


Inclusionary Zoning


Slippery Sidewalks a Lurking Catastrophe for Owners


The Cost Impact of Urban Containment in Portland


Development Pipeline


Is the Runway Running Out?


The HFO Team


*Source: Multifamily NW Apartment Reports



No. of Transactions

Interest Rates





Transaction Volume


Vacancies UP

Legislation to allow rent control and end no-cause evictions nearly passed last year. The Speaker of the House plans to resurrect these issues in 2018. This potential expense and conflict can be avoided with the right parties at a negotiating table. If government wants to be involved in housing its citizens, and it should, it must find ways to encourage—not discourage— building. It must work toward making housing development less expensive — not more. You can find donation links to the Equitable Housing PAC and the Multifamily Defense Fund at Stay tuned.

Permits DOWN

According to a Portland Tribune study, development fees and costs imposed by the city of Portland add at least 15% to the cost of every apartment. This is not a policy to increase the amount of housing (story pages 12-13). As affordable housing developer, Rob Justus told attendees of the Multifamily NW fall breakfast: “Too often, government sees private developers as the enemy.”


Government must do better. Our elected leaders must be willing to sit at the table with housing providers to craft real solutions. What we learned this past year in our conversations with politicians, is that they too often rely on inadequate information without researching the facts.

City of Portland Relocation Fee Ordinance 4


HFO Investment Real Estate LLC • 2424 SE 11th Ave • Portland, OR 97214 • (503) 241.5541 •

City Hall Update Portland’s mayor will be busy over the next few months. On his agenda are several initiatives that could impact developers and apartment owners alike.

Housing State of Emergency and Relocation Assistance Continuation

In October, the Portland City Council voted to extend the Housing State of Emergency by 18 months, and to continue the renter relocation fee ordinance for six months. The Housing State of Emergency was declared in October 2015, and extended in 2016. The city hopes to make some of the emergency measures permanent, including zoning exemptions for homeless camps. Mayor Wheeler has also pledged to introduce a permanent replacement for the relocation ordinance by December 6th. The rule, originally expected to sunset in October 2017, requires landlords to pay a sum of $2,900 to $4,500 to renters facing a rent increase of 10% or higher, or a nocause eviction. The Joint Office for Homeless Services and the Portland Housing Bureau are now required to develop criteria for lifting the Housing State of Emergency within the next 18 months.

URM Policy

To ensure Portland’s preparedness for an eventual earthquake, the City Council’s goal is to require seismic retrofitting for unreinforced masonry (URM) buildings. To date, the city’s proposals require that building owners pay for upgrades out of pocket, as financial institutions have been proven unwilling to finance these retrofits. Owners have lobbied the city to provide some source of financing, and argue that the costs are prohibitive; many of these historic buildings could end up being demolished. Portland is home to over 1,600 URM buildings. Groups such as the Masonry Building Owners of Oregon understand the necessity of making these buildings more structurally sound. The City Council was originally scheduled to review the policy on October 19th, but the URM Policy Committee has since issued a new report. The policy separates buildings into four different classes, based on the building’s use. Class 1 includes “critical facilities” such as power stations and water facilities,


HFO Investment Real Estate • (503) 241.5541 •

ON THE AGENDA: • Extension of the Housing State of Emergency & Relocation Assistance Ordinance • Finalization of the Unreinforced Masonry (URM) Policy • Adopting the Central City 2035 Plan • Consideration of a Proposed Tenant & City of Portland First Right of Refusal

Class 2 includes schools, Class 3 includes buildings with over 10 occupants that are not critical or being used as schools (e.g., multifamily), and Class 4 includes buildings with fewer than 10 occupants. In the original proposal, Class 3 buildings had to undergo an assessment within five years, and perform significant upgrades within 10-15 years. After setting these timelines, the City was informed by many building owners that they are unable to secure funding to perform these expensive upgrades. In its final report, the city acknowledged that if building owners are forced to bear the brunt of costs without assistance, tenants will likely face higher rents. Tenants would also have to relocate during the retrofitting process, which would be especially difficult for residents of affordable housing units. Due to the lack of funding options currently available, the URM Policy Committee declined to set timelines for when upgrades must be completed. The URM Policy Committee surveyed California cities with mandatory-upgrade policies, and found that demolitions were highest in cities that failed to offer a practical financial assistance program. While the city has identified tax exemptions, rehabilitation grants, urban renewal funds, and FAR transfers as possible sources of money, the upfront costs of retrofitting are high and some URM buildings do not qualify for such programs. Retrofits cannot be completed while tenants remain in the building, so apartment owners would be liable for relocation fees associated with no-cause evictions in Portland. Those fees range from $2,900 to $4,500 per unit, and could add substantially to the cost of a seismic retrofit. Affordable housing advocates and owners such as Central City Concern have asked for an exemption from the policy. A new program called PropertyFit, administered by Prosper Portland, the Energy Trust of Oregon, and Multnomah County would provide 30-year loans for seismic upgrades. The program’s reach and effectiveness has yet to be determined.

Seismic Risk URM Class 1 Public Utilities URM Class 2 Schools & Churches URM Class 3 Most Apartments URM Class 4 Some Apartments

– Step 1 – ASCE 41 Assessment

– Step 2 – parapet, cornice and chimney bracing and wall to roof attachment

– Step 3 – All bearing and exterior wall to floor attachments and outof-plane wall strengthening

– Step 4 – Seismic upgrade completed

3 years



10 years - all retrofits complete

3 years

10 years


20 years*

5 years




Not Required




*Buildings owned by religious non-profits without access to tax benefits or state grants need only complete steps 1 and 2 until additional financial support is identified.

Central City 2035 Plan

The Central City 2035 Plan is an ambitious agenda set by the City of Portland to determine a city land use and transportation policy that will support increasing population. It is part of the larger 2035 Comprehensive Plan, and covers myriad planning elements including building heights, density, transportation, river views and usage, job growth, and zoning. The project’s goals include increasing the density of the central core of Portland to reduce car usage and increase “urban vitality.” A central goal of the project is to increase central city resilience to future economic downturns and to serve vulnerable communities. The City Council also hopes to increase the number of jobs located in the Central City area. Though the area designated as the Central City only covers 3% of

the city’s land, the Council believes it can accommodate 30% of the region’s growth by 2035. They believe the area could include 38,000 more households, and 51,000 more jobs. They also aim to decrease car traffic and boost the central city’s walkability, bike and transit access. The City Council plans to hold hearings to discuss the plan on December 6th, 2017 and January 18th, 2018. The final vote will likely be held in March 2018.

Tenant/City of Portland First Right of Refusal Policy

Commissioner Chloe Eudaly has proposed a 90-day first right of refusal before a property can be sold. That proposal would include 60 days for tenants, followed by 30 days for the City of Portland. (See story on page 14.)

OREGON TAXES & APPEALS Oregon’s 2017 property tax values have been certified and mailed. The deadline to appeal your tax statement in Oregon is December 31, 2017. Since the 31st falls on a Sunday, the deadline is technically January 2nd, 2018. Your tax statement should contain a notice of the actual filing deadline.

Notes Regarding New Construction •

For any multifamily owners contemplating new construction, the abatement must be applied for prior to April 1, 2018 for the 2018-19 tax year.

For newly completed construction, an allocation is made between land and improvements. Assessors have been undervaluing land. By appealing and seeking an increase in the value of the land you have an opportunity to decrease the residual value of the improvements (the ratio to which the change property value is applied). In Multnomah County, the multifamily change property ratio has dropped from about 39% in 2016 to roughly 33% for 2017. While the assessment ratio has dropped, values have increased on a per-unit basis. It’s critical to review the equity of the value for newly completed construction. This can result in a significant reduction in taxes. The Northwest Apartment Investor


City of Portland Ordinance on Relocation Assistance By Andy Hahs, Bittner & Hahs P.C.

On February 2, 2017, the Portland City Council unanimously passed an amendment to its renter protection ordinance to add mandatory relocation assistance. The ordinance was amended in July and again in August, and was renewed for another 18 months on October 4th. Landlords are required to pay tenants relocation assistance if: •

The landlord issues an end-of-tenancy termination notice or fails to renew a fixed-term lease upon substantially the same terms (does not require tenant demand for payment); or Increases the rent by 10% or more in a 12-month period and the tenant makes a demand for payment of the relocation assistance.

The ordinance applies only to dwelling units located within the city limits.

Termination notice. If the landlord issues a termination notice without cause (which includes a landlord declining to renew a fixed-term lease on the same basic terms except for rent), the landlord must pay relocation assistance not later than 45 days prior to the termination date. Rent Increase. If a landlord issues a rent increase notice

of 10% or more in a 12-month period, and the tenant, within 45 days after receipt of the increase notice, gives written notice that they want to be paid the relocation assistance, the landlord must pay relocation assistance within 31 days after receiving the tenant’s notice. The


HFO Investment Real Estate • (503) 241.5541 •

tenant then has six months to either vacate or repay the relocation assistance. A notice that conditions the renewal or replacement of an existing fixed-term tenancy on paying increased rent or associated housing costs is subject to this ordinance.

Amount of Relocation Assistance.

The amount of relocation assistance depends on the size of the unit:

$2,900 for a studio or single room occupancy

$3,300 for a one-bedroom

$4,200 for a two-bedroom

$4,500 for a three-bedroom or larger

Exemptions. The new ordinance does not apply to: 1. Week-to-week tenancies; 2. A landlord who temporarily rents out their principal residence during the landlord’s absence of not more than three years; 3. Tenants who occupy the same dwelling unit as the landlord; and 4. A landlord who owns only a single rental dwelling unit in the City of Portland.

Expiration Date. The ordinance expires on April 4, 2019,

unless the housing emergency declared by the Council is extended by a new vote, or the Council elects to make it permanent, which, as indicated on October 2, would happen prior to the end of 2017.


Following are some questions we have already received and our best guidance:

Q. How do we determine if a rental unit is within the City of Portland?

A. Do not rely on street addresses or zip codes. Refer to the map of the city boundaries, which can be found at article/51672. Only areas within the incorporated city are subject to the ordinance.

Q. A tenant is charged $1,000 rent, $50 pet rent, and $100

flat monthly utility charge (not based on usage) per month. What is the maximum increase that does not trigger the ordinance?

A. 9.9% of $1,050 = $103.95. The 9.9% allowable

Q. Does the ordinance apply to a “for-cause,” 24-hour or

increase is based solely on “rent.” Utility charges are not “rent” and they do count towards the total amount of increase for purposes of triggering the relocation assistance.

A. No. The ordinance only applies to a “no-cause” end

Q. Do utility charges that are based on usage count

non-payment of rent termination notice?

of tenancy notice, or to the refusal of a landlord to renew or replace a fixed-term tenancy that lacks an automatic month-to-month roll over provision on substantially the same lease terms, aside from rent.

Q. If a landlord offers to renew a fixed-term lease, and any

one of the options (including the MTM option) involves a rent increase of 10% or more, and the tenant timely demands payment, does the ordinance apply?

A. Yes. The ordinance applies to any rent increase of

10% or more, even if the tenant has the option of accepting a lower increase under a fixed-term option.

Q. May the landlord rescind or reduce the rent amount,

or rescind a termination notice, to avoid paying relocation assistance?

A. No.

towards the calculation of “rent” or “associated housing costs”?

A. No. Utility charges that are based on usage are not

considered “associated housing costs” and are not counted towards the amount of an increase unless the rental agreement is being changed to add utility charges the tenant was not previously paying.

Q. If a landlord offers to renew or replace a fixed-term

tenancy (that does not contain an automatic monthto-month rollover provision) with a rent increase of less than 10%, but does not offer a MTM option, and the tenant does not accept the new fixed-term, must the landlord pay relocation assistance when the fixedterm expires and the tenant is required to leave?

A. No. If the landlord has offered to renew or replace a

fixed-term agreement with “substantially the same terms except for the amount of Rent or Associated Housing Costs,” the amount of increase is less than 10%, and the landlord has not issued a “no-cause” termination notice, no relocation assistance is due on the automatic termination of the fixed-term rental agreement. (continued on page 6)

HFO Sale: Latitude • 210 Units in Happy Valley • $58 million The Northwest Apartment Investor




Lend Us Your Ears!

Since beginning our Multifamily Marketwatch Podcast in late February 2017, monthly downloads have grown from 131 to over 300. Our podcasts have been heard over 1,700 times this year. Subscribe at your favorite podcast market—including iTunes. We make it easy to keep up with the latest industry news.

Thanks for Watching

Since launching HFO-TV in 2011, we’ve produced over 170 videos on topics of interest to multifamily owners just like you. Here are some annual November-October 12-month comparisons: Views: • 2014-2015: 4,926 • 2015-2016: 6,245 • 2016-2017: 6,330

Minutes watched: • 2014-2015: 26,307 • 2015-2016: 33,756 • 2016-2017: 34,027


TOPIC: OREGON’S ECONOMY We talk about Oregon’s most recent economic and demographic trends with the state economist Josh Lehner. TOPIC: AFFORDABLE HOUSING DEVELOPMENT Developer Rob Justus lets fly with his thoughts on why local governments will never be able to build enough affordable housing. TOPIC: MULTIFAMILY BY DESIGN Although it’s been flying mostly under the radar, the City of Portland’s latest planning department activity to control what multifamily developments will look like is getting a big push this winter. HFO partner Greg Frick dives into the details with City Planner Bill Cunningham. TOPIC: MULTIFAMILY DEVELOPMENT TRENDS At HFO’s October Roundtable event, Expert Real Estate Consultant Jerry Johnson offered his take on future of multifamily development in the region. TOPIC: OREGON’S RENT GUARANTEE PROGRAM You probably didn’t know it, but the legislature approved a fund to pay some incentives and offer financial assistance to landlords when they rent or lease to individuals who have graduated from a tenant education program. We get the details from Oregon Housing & Community Service spokesperson Ariel Nelson.


HFO Investment Real Estate • (503) 241.5541 •

Q. For a tenant with a Housing Choice Voucher (Section

8), does the 10% trigger on rent increases apply only to the tenant portion of the rent or to the stated rent?

A. The 10% trigger is based on the stated rent. The

ordinance does not mention vouchers or the tenant’s portion.

Q. If a tenant requests a pet, can the landlord require the tenant to pay additional rent?

A. Yes, however, relocation assistance is triggered

whenever rent is increased by 10% or more in any 12-month period inclusive of any increases in rent such as pet rent and tenant timely demands payment.

Q. At the end of a six-month fixed-term tenancy, the landlord offers to renew with a 9.9% rent increase. Will relocation assistance be due if the tenant timely demands payment?

A. It depends on if the rent was increased at the

beginning of the currently expiring six-month rental agreement. The 10% increase trigger is based on all increases during the preceding 12 months. If the rent was increased on the last renewal and the current offer is an additional 9.9% increase, then relocation assistance will be due if the tenant timely demands payment.

Q. What is the penalty for failure to follow the ordinance? A. The tenant can recover the relocation assistance amount PLUS a penalty of up to three months’ rent, attorney’s fees and court costs.

Q. What is the penalty for a tenant who is paid relocation

assistance after a rent increase of 10% or more and then fails to repay or vacate within six months of the payment?

A. There is no penalty under the ordinance. If the

rental agreement requires the tenant to comply with all laws, the landlord can issue a “for-cause” termination notice to terminate the tenancy and sue the tenant to recover the relocation assistance.

AndyHahsisalicensedattorneyinOregonandW ­ ashington specializing in real estate and l­andlord-tenant law. He can be reached by phone at (503) 445-4302 or via e-mail at


Miller Hall – World Forestry Center (near the Oregon Zoo)

Wednesday, January 10th, 2018 • 11:30 am - 1:30 pm

Due to the constantly changing landscape at state and local government levels, our final roster of speakers has yet to be selected. Capacity is extremely limited and like last year, this free event will be completely full. Advance registration is required. John W. Mitchell is slated to present his economic update.

RSVP today!

E-mail or call (971) 717•6326

Sponsored in part by: HFO Investment Real Estate • (503) 241.5541 •


2017 Oregon Legislative Roundup

The biggest news from the 2017 Oregon Legislative Session was the failure of attempts to end a statewide ban on rent control and to end no-cause evictions. The work done by the rental housing associations, More Housing Now, the Equitable Housing PAC and the Multifamily Defense Fund were the linchpin in keeping a lid on those efforts. Unfortunately, Oregon House Speaker Tina Kotek promises to resurrect these issues in 2018. Donate at

INCREASING HOUSING SUPPLY AND AFFORDABILITY HB 2066 – Affordable Housing Tax Credit Effective October, 2017 Extends the affordable housing lenders tax credit and increases the cap. The Housing and Community Services Department may certify qualified loans if the total credits attributable to all eligible qualified loans do not exceed $25 million (previously $17 million) for any fiscal year.

HB 2377 – Affordable Housing Property Tax Exemption Effective October, 2017 Authorizes a city or county to adopt an ordinance or resolution granting a property tax exemption to newly rehabilitated or constructed qualified multi-unit rental housing. Allows property tax exemption for up to 10 consecutive years. While not specifically referenced in the measure, ORS 308.701 defines “Multi-unit rental housing” as: “(a) residential property consisting of four or more dwelling units” and; “does not include assisted living facilities.”


HFO Investment Real Estate • (503) 241.5541 •

HB 2724 – Rent Guarantee Program Effective July 1, 2017 Creates a rent guarantee program in the Housing and Community Services Department, where incentives or financial assistance may be paid to landlords under specific circumstances when they rent or lease to graduates of a qualifying tenant education program. Examples of such payments include costs for unpaid rent, evictions, and property damage, up to certain limits. To be eligible for the program, tenants must receive training by HCSD on the guidelines to achieve and maintain a successful tenancy, among other eligibility requirements. Participating landlords are required to collect metrics, including length of tenancy, reason for termination, amount of unpaid rent and damages, and to provide a report to HCSD before receiving financial assistance.

HB 2912 – Affordable Housing Land Fund Effective January 1, 2018 Establishes the Affordable Housing Land Acquisition Revolving Loan Program with $3 million and directs 40% of the loans to go to organizations operating home ownership programs for low-income households.

HB 3175 – Local Innovation and Fast Track Housing Program Effective June 6, 2017 Modifies the definition of low-income households for those renting and owning residential housing in the Local Innovation and Fast Track Housing (LIFT) program. The LIFT program awards subsidies to developers building affordable housing for low-income households in Oregon

with a focus on rural communities and communities of color. LIFT applicants are eligible for a maximum $38,000 subsidy per affordable housing unit offered to residents earning at or below 60% of the area median income. Habitat for Humanity frequently uses programs like LIFT to help low-income families achieve home ownership.

SB 1051 – Housing Development Effective July 7, 2017 (application review after July 1, 2018) Requires local jurisdictions to review and make decisions on permit applications for qualifying affordable housing inside of the Urban Growth Boundary (UGB) within 100 days. Requires cities and counties to approve application if clear and objective development standards for “needed housing” are met. Expands definition of “needed housing” to include affordable housing and housing on land zoned for residential use. Cities and counties must allow at least one accessory dwelling unit (ADU) for each detached single-family home in areas zoned for single-family. Affordable Housing Funding: •

$25 million in lottery bonds for the preservation of affordable housing – a $20 million increase in bonding from the 2015-2017 authorization.

$80 million in state-backed bonds for affordable housing development via the Local Innovation Fast Track Housing Program (LIFT).

SB 769 – Social Security Number Confidentiality Requirement

Provides that person may not dispose of, or transfer to another person for disposal, material or media that display Social Security number unless person, before disposing of material or media, makes Social Security number unreadable or unrecoverable or ensures that person that ultimately disposes of media or material makes Social Security number unreadable or unrecoverable.

HB 2140 – Seismic Risk Disclosure Requirement

Requires seller of real property to disclose seismic risk in seller’s property disclosure statement.

HB 2511 – Electric Vehicle Chargers Effective June 20, 2017 Authorizes residential tenants to install and use electric vehicle charging stations on premises for personal, noncommercial use. Declares charging station to be personal property of tenant unless otherwise negotiated between parties. The measure establishes that the tenant is financially responsible for the costs associated with permits, installation and maintenance of the charging station, and the cost of electricity associated with the charging station. Charging stations must be installed and removed by a licensed, journey-level electrician. Tenant must maintain liability insurance policy in an amount not less than $100,000 that includes coverage of the charging station.


Landlords may:

SB 311 – Property Tax Exemption Allowed for Seismic Retrofits

• Require a tenant to submit an application before installing a charging station.

Authorizes city or county to adopt ordinances or resolutions providing property tax exemptions to commercial, industrial and multifamily buildings built before January 1, 1993, that will be seismically retrofitted, for period not to exceed 15 years.

• Require the charging station to meet the architectural standards of the premises. • Impose reasonable charges to recover costs of the review and permitting of a charging station. • Impose reasonable restrictions on the installation and use of the charging station, provided the restrictions do not: (a) significantly increase the cost of the charging station; or (b) significantly decrease the efficiency or performance of the charging station.

HB 2944 – Housing Choice Landlord Guarantee Program Operative as of August 1, 2017 Limits landlord assistance under program to damages awarded in judgment following hearing in which landlord proves amount of damages. Repeals requirement for tenant to repay Housing Choice Landlord Guarantee Program for assistance paid to landlord. Provisions apply to claims for financial assistance based on judgments entered on or after operative date. Source: Oregon Rental Housing Alliance, Ticor Title and HFO research

The Northwest Apartment Investor


Portland in Transition

Our region is far from over; there is no “Next Portland.” By Josh Lehner, Oregon Office of Economic Analysis

The Portland metro area is in a state of transition. The apartment boom and neighborhood changes in the urban core are highly visible. Residents see and feel the shift. However, the economic changes run even deeper. Over the past decade, Portland’s high-wage job growth, household income gains, and rising levels of educational attainment have been transformational. Portland has pulled away from its former economic peers. Even so, Portland has yet to catch the nation’s upper tier. Such gains are undoubtedly good but come with some societal growing pains. Regions and economies are always evolving. But for some, Portland is now unrecognizable from its past. Thus, efforts exist to find the nation’s “Next Portland” – the newest up-andcoming metro area. But Portland’s growth and appeal are far from finished. The future remains bright. None of the most commonly cited Next Portland contenders compare even reasonably well to the real thing—each lacks an important ingredient or two.

Wage Growth and Educational Attainment Increases New Census data reveals the Portland region’s astonishing growth since 2007. Among the nation’s 100 largest metros, Portland ranks 5th best in both highwage job growth and educational attainment increases. Today, 40% of Portland’s working-age population holds a college degree. Portland’s six percentage-point increase over the decade is over twice the typical gain.

Income Gains and Lower Poverty Rate Importantly, economic growth has translated into income gains and improved well-being in recent years. This has

10 HFO Investment Real Estate • (503) 241.5541 •

not always been the case. The region’s poverty rate is now lower than before the Great Recession. Though large racial disparities remain, whites and communities of color have both seen improvements. Additionally, median household income is now nearly 9% higher than before the Great Recession, after adjustment for inflation. The typical large metro has not recovered its losses. These gains place Portland’s rising income as the 4th best since 2007. Portland now has the 19th highest median household income among the large metros. In 2007, Portland ranked 32nd highest.

Regional and Statewide Economic Strengths The region’s high quality of life and strong economic foundation drive some of this growth. Portland excels at apparel and design, food and beverage, and semiconductors. Oregon’s strengths also include renewable energy, wood products, and unmanned aerial vehicles. The region likewise boasts old-school assets in terms of its geographic location and infrastructure for air, rail, and water.

Portland’s Status as Talent Magnet However, Portland’s most important strength is its ability to attract and retain talent. Only a few metros see such strong migration rates among young college graduates. Portland stands with the Bay Area, Denver, Raleigh, Seattle, and Washington D.C. These metros tend to have higher levels of educational attainment, higher incomes and a major research university. Portland has kept pace and it has made up a little ground. Portland now ranks 16th highest for the share of working-age residents with

a college degree. In 2007 Portland ranked 27th highest. In recent years there has also been a clear shift toward scientific, technical, and medical degrees.

Affordability has stopped getting worse Unfortunately, a strong regional economy and high quality of life comes at the cost of housing. The demand to live in the area outstrips supply. Like other growing regions, Portland has built fewer homes than necessary in the past decade—worsening the problem. Improving incomes in recent years have helped somewhat. As apartment construction catches up and rents more slowly increase, additional improvement in housing availability is likely. Ownership remains a huge challenge. There is still the issue of displacement of lower-income households toward the suburbs. Such households have not yet left the Portland region in substantial numbers as has occurred in other high-cost metros.

Why There’s Really Nothing Like Portland As Portland transitions, some look to find the nation’s “Next Portland.” Typically hard-to-define concepts like cultural cachet or the strength of the local hipster scene determine the contenders. While subjective measures matter when choosing where to live, they remain in the eye of the beholder. Across standard socio-economic measures, all of the most commonly cited Next Portland contenders fail in at least one important way. In order to truly be the Next Portland, each will have to overcome these deficits.

HFO Sale: Heatherwood

264 Units in Gresham • $51 million

of the Next Portland contenders have a smaller share of such jobs than Portland, except for Missoula, MT. The most important thing contenders share with the real Portland is poor housing affordability. Costs are already high compared with local incomes. The exceptions are Pittsburgh, and possibly Boise. For most areas, housing is likely a major hurdle to becoming the Next Portland.

Our Closest Contenders

Portland Still Far From Being “So Yesterday”

Boise and Salt Lake City come the closest to matching Portland’s economic and population growth. These metros also have relatively young populations. However, internal dynamics drive much of Salt Lake City’s demographics. Boise attracts young families, but few root-setting individuals. Boise also lags considerably on high-wage job growth. Both have average or below average rates of educational attainment for a large metro area.

“Old Portland” may be dead, as Willamette Week diagnosed, but it is clear the region is far from over. Portland’s high quality of life and strong regional economy remain—for now. Efforts must be made to ensure their continued success. That said, Portland is transitioning. These changes run deeper than the built environment. The region’s advantage and outlook largely rests on its ability to attract young, skilled households. Historically this has been no problem. However, affordability issues can eventually stall growth, and increase displacement. The region’s biggest long-run challenge is its ability to ensure an adequate housing supply. This includes options within existing neighborhoods, those close to transit, and new suburban developments.

Conversely, Portland, Maine and Pittsburgh look a lot like Portland, Oregon in terms of educational attainment. Both see net out-migration among people in their rootsetting years. Their age profiles, along with Asheville, NC, resemble a retirement community. That said, young migrants are now moving to Asheville in greater numbers. But art, design, and entertainment occupations in Asheville are half of that seen in the real Portland. All

Josh Lehner is the State of Oregon Senior Economist. He can be reached at (503) 378-4052 or via e-mail at The Northwest Apartment Investor 11

The Game’s Still Going Strong By Tyler Johnson, HFO Investment Real Estate It feels like we are in the 8th inning of a baseball game and the closer is warming up in the bullpen. The ballgame could end soon, or it could go a few more innings. Over the past few years, multifamily investors looking to score in one of the nation’s strongest apartment markets have poured capital into the Portland area in 2017. And for good reason: Oregon and SW Washington have seen the economy gaining steam since 2013. The metro area has seen improvements in wages and income in 2017, and a recent Census Bureau report indicates that incomes in Oregon are now on par with the national median—after decades of trailing behind.

Government Intervention in Market Dynamics

Continued in-migration, changing demographic preferences and lack of adequate supply have caused cities on both sides of the Columbia to declare a housing emergency. Our political leaders have tried unsuccessfully to rectify the region’s housing shortage through implementation of fees for landlords and developers, to circumvent statewide restrictions on rent control. These disincentives may only serve to continue the housing emergency far into the future. Mayor Wheeler recently proposed—to City Council agreement—to extend this emergency into 2019. This time, they decided to have someone calculate the benchmarks of what must happen to formally end the emergency.

The market has begun to see some softening. The Multifamily NW Fall Apartment Reports recorded the area 2015 vacancy rate at 2.87%, the fall 2016 vacancy rate at 3.71% and the fall 2017 rate at 4.37%.


7.5% 4.37% 3.71%





$1.60 $1.50


$1.40 $1.30 $1.20 $1.10 $1.00 $0.90 $0.80

Market Vacancy and Rents


Rent per square foot has continued its upward climb, although at a slower pace than recent years. Multifamily NW data indicated 2017 year-over-year rent increases of 6.37%.

$0.86 2008






Source: Multifamily NW Apartment Report

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Multifamily NW Apartment Report

12 HFO Investment Real Estate • (503) 241.5541 •



Institutional Transactions of ($10 million and up)

In 2016 there were 51 apartment transactions priced over $10 million. Through mid-October of this year, there have been 26 apartment transactions priced over $10 million. In dollar volume, these 26 transactions accounted for over $717 million in sales. This is well below the pace seen in 2016, which saw over $2.27 billion in sales volume. Many of 2017’s institutional sales to date have been in the suburbs surrounding Portland.

Institutional transactions this year include:



Brentwood Estates; 295 Units in Springfield sold for $40.5 million; $137,288 per unit Heatherwood Apartments; 264 units in Gresham sold for $51 million; $193,181 per unit

Turning to Portland metro non-institutional transactions below $10 million, we have seen roughly 90 transactions through mid-October that accounted for over $273 million in dollar volume. This is trending slightly below what the Portland market experienced last year. In 2016, 143 transactions in the metro area below $10 million accounted for over $450 million in dollar volume. The slowdown in transactions can be attributed to slowing rent growth, potential changes to landlordtenant laws, record-breaking construction activity, and a shrinking supply of apartments for sale.


Non-Institutional Transactions (under $10 million)

Inclusionary Zoning requirement went into effect in February, only two market rate projects with over 20 units have submitted for land use review. As of the sixmonth review of the program, only five market rate projects and six affordable projects of at least 20 units had submitted building permit applications. So far, city leaders appear unconcerned by this drop-off in permitting activity, citing a pipeline of approximately 19,000 units.

6,000 4,000

(Thru Aug 2017)

Latitude Apartments; 210 units in Happy Valley sold for $58 million; $276,190 per unit Riverwood Apartments; 167 units in Grants Pass sold for $15.15 million; $90,718 per unit Cedars Portfolio; 162 units in Spokane sold for $12.45 million; $76,851 per unit Willowbrook Apartments; 112 units in Beaverton sold for $15.025 million; $134,151 per unit Red Sunset; 104 units in Gresham sold for $15.35 million; $147,596 per unit Evergreen Townhouses; 86 units in Springfield sold for $10.965 million; $127,500 per unit The Habitat; 85 units in SW Portland sold for $15.3 million; $180,000 per unit Uptown at Lake Oswego; 47 units in Lake Oswego sold for $10.1 million; $214,893 per unit

2,000 0



2015 2016 2017

Source: US Census Bureau



4,000 3,000






200 150




466 Pre-IZ vested units

(submitted 6/6/16-1/31/17)

Post-IZ vested units

(privately financed, >20 units)

0 Units Submitted for Land Use Review Market rate projects >20 units

$2,000 $1,500




$500 $0


2009 2010 2011 2012 2013 2014 2015 2016 2017 Under $10 Million

$10 Million Plus



Transaction Volume

Source: CoStar Multi-Family 10+ Units – Portland Metro Area


Permits have risen steadily from a low of 1,007 units permitted in 2009 to an estimated 9,900 in 2017. Still, experts say housing has not accelerated enough to meet anticipated demand. Since Portland’s new

Nervous in the Dugout

As we have said for the last six years, good feelings are still flowing in the Portland apartment market — but it can sometimes feel like we’re stuck in an extra inning. The players in the dugout are starting to feel a little nervous. With political uncertainty and finger pointing at all levels of government, no one knows just when this ballgame will end. Tyler Johnson is a partner at HFO Investment Real Estate, now celebrating its 18th year in business. HFO has brokered over 24,300 units valued at $2.4 billion throughout Oregon and Washington. Tyler works with both private market and institutional clients and can be reached directly by phone at 971-717-6336 or e-mail The Northwest Apartment Investor 13

Concessions and Submarket Vacancy Rates Greater Portland’s 20 submarkets each tell their own unique story in terms of vacancy rates. Those numbers are averaged into a single overall market rate that remains low. It’s interesting to dive a little deeper into the numbers and explore how each of these submarkets is doing. Rents and vacancy rates are generally highest in downtown, Northwest Portland, and close-in NE and SE. Vacancy rates are lowest in outer NE, Beaverton, Aloha and Oregon City. Some of these outer submarkets offer concessions despite low vacancies while many downtown submarkets offer no concessions despite having the highest rates. As vacancy rates rise, particularly in Portland’s central core, we have begun to see more owners offering concessions to prospective tenants. This is happening most often with recently opened high-end luxury apartment buildings that contain a high number of small studios and one-bedroom units.

Highest Concentration of Concessions

The lower end of the rental market continues to see low vacancy rates. Special deals are found mostly for units

with rents of over $1,000 per month. According to the Multifamily NW fall 2017 Apartment Report, the Portland submarkets with the highest percentages of buildings offering concessions to renters are Southwest Portland (15.22%), Northwest Portland (11.24%) and Tigard/ Tualatin/Sherwood (10.26%). Submarkets not reporting incentives include Hillsboro, Lake Oswego, Clackamas and Outer SE Portland. Notably, the submarkets with the highest number of buildings offering concessions all have vacancy rates above 5% for studios. The Tigard/Tualatin/Sherwood submarket has an overall vacancy rate of 4.55%, and an extremely high 11.71% vacancy rate for studios. Despite a low 3.6% vacancy rate in Oregon City, over 9% of buildings there are offering incentives – down from 12.5% six months ago. The second highest submarket vacancy rates are in NW and SW Portland. Both areas have increased their incentives. Six months ago about 8.5% of the buildings had incentives. NW Portland has seen a 3% increase in incentives; incentives jumped 7% in SW Portland.

Chloe Eudaly’s Proposed Tenant/City First Right of Refusal Policy According to press reports, Portland Commissioner Chloe Eudaly plans to propose a new policy by January 2018 that would allow tenants and the City of Portland the first right of refusal when a landlord decides to sell a property. As described, the policy would allow a tenant or group of tenants 60 days to put together an offer. If they fail to do so, the City of Portland would have 30 days to submit an offer. If the city opts out of making an offer, the seller would then be able to market the property openly.

Eudaly’s office claims her proposal is based on a similar law in Washington, D.C. However, the D.C. law differs in these three respects: • It gives tenants an opportunity to make an offer competitive with any third-party offers received within 45 days of notification of a pending sale. • It does not impose a 90-day delay on the marketing of private property. A 90-day delay would be detrimental for owners participating in a 1031-exchange, who are subject to federally mandated timelines set by the IRS. • It does not give the District of Columbia a right to purchase the property. So far, no other members of the Portland City Council have not indicated whether they support or oppose Eudaly’s concept as pre-flighted in the local media.

14 HFO Investment Real Estate • (503) 241.5541 •

Inclusionary Zoning In December 2016, the City of Portland approved a mandatory citywide inclusionary zoning (IZ) policy, which went into effect February 1st of this year. Many developers made sure to submit projects to the city prior to that deadline; January experienced a notable rush of permit requests. Since February, permit activity has dropped off a cliff. The Daily Journal of Commerce reported in September that during the first six months of the program there were zero applications for large market-rate apartment projects. The city is working to determine if the drop off is a result of the new policy or due to other factors. Portland’s IZ program applies to all developments with 20 or more dwelling units. It requires 20% of units be set aside for households making less than 80% median family income ($58,650 for a family of four). Incentives offered by the city to offset the costs include a 10-year property tax exemption and CET exemption on affordable units, and a density bonus of 3.0 Floor Area Ratio. Developers can also choose to set aside 10% of a building’s units for families making 60% of medium family income in exchange for additional incentives. College dorms, nursing homes, and similar group living facilities are exempt from the inclusionary zoning requirement, if they have a shared kitchen facility. Permit applications skyrocketed in the months prior to implementation, but have since fallen off a cliff. In December and January alone, the city’s developers applied for permits for 5,900 units. Since the inclusionary zoning law went into effect, no new market rate projects with over 20 units have been submitted for land use review. As Portland’s rent growth has begun to slow at the higher end, the city needs to continue to bring thousands of units online each year to meet the demand. If development activity continues to slow down, the city will likely find itself amid another housing shortage. According to the Portland Tribune, the Central City of Portland is expected to see a population increase of about 37,500 people by 2035. A drop off in development activity at a time when vacancy rates are still relatively low could lead to a worsening housing shortage in the near future. When the IZ requirement went into effect, developers expressed concern that their projects would not pencil out despite the incentives offered by the city. A massive labor

shortage in the construction industry has led to increased costs and expanded timelines for development projects. During the recession, many construction companies went out of business. By some estimates, there is a shortage of 10,000 construction-related contractors in Oregon. Other factors adding to project costs are rising interest rates and Portland’s 1% construction excise tax, which went into effect in 2016. These factors raise the cost of apartment construction before the required subsidized units are factored in. Prior to the law taking effect, Kurt Creager of the Portland Housing Bureau stated that he expected developers to be able to absorb the cost of affordable units if they achieved the highest possible rents in their market rate units. With rent growth beginning to flatten, developers, investors and banks are wary of this assumption. The Bureau of Planning and Sustainability (BPS) recently released its 6-month review of the IZ program. BPS struck an optimistic note in their report, pointing out that the 19,000 units currently in the pipeline represent a fouryear supply of new housing. They also note no increase in developers submitting 15- to19-unit projects for parcels that could support higher densities. Tyler Bump, the senior economic planner for BPS, said he will not worry about diminished supply unless the pipeline falls below 10,000 units. However, only 5,000 of the 19,000 units in the pipeline have received building permits. It is likely that not all the projects will be built, especially with a growing shortage of skilled construction labor. Material costs have also been increased alongside the cost of labor, raising the possibility that some projects submitted before February will no longer be feasible if the city’s approval process takes longer than expected. Behind the scenes, the city now appears to realize that inclusionary zoning will not produce the anticipated affordable units. They are acutely aware that the 19,000 units vested prior to February would produce 3,000-4,000 affordable units if they were subject to IZ requirements. According to the Daily Journal of Commerce, the Housing Bureau is working on a program that would allow projects vested prior to IZ taking effect to apply for a 10-year property tax exemption in exchange for opting in to inclusionary housing. (Story continued on page 17.) The Northwest Apartment Investor 15

Slippery Sidewalks a Lurking Catastrophe for Owners By Ted Stark, Senior Vice President, USI Insurance Services January was Portland’s coldest winter since 1985, and the corresponding “snowpocalypse” left some areas with over 20 inches of snow. With winter just on the horizon, now is the time for property owners to understand their obligations and take steps to mitigate their risks in the case of a major ice or snow event this winter. While laws vary from state to state, in Oregon, the obligation to clear snowy and icy sidewalks and property access points rests solely on the home or property owner. This means the property owner can be held liable for anyone who slips or falls on snow- or ice-affected property. This risk increases dramatically if the property is an apartment complex, condominium or duplex. As a rental property owner, I’m concerned with protecting my investments from the legal repercussions of a preventable injury happening on my property and aim to mitigate such risks. Here are a few things you can do to protect your tenants and their guests from injury, and yourself from legal risk. First, review your standard lease. Does it have a clause that details the process of the responsibility of snow removal, and make it clear where the responsibility lies? Have a lawyer who specializes in real estate review the lease to be sure you’re protected.

Second, consider consulting a good attorney to help you understand the laws in your area. Some cities have specific regulations regarding snow removal. The City of Bend requires all property owners to clear snow from sidewalks bordering their properties. This process must be completed within 24 hours in noncommercial areas and within six hours in commercial areas. Failure to follow the regulations can result in fines and penalties, not to mention potential injuries and insurance costs. Familiarize yourself with state, city, county and HOA regulations and you will remain out of trouble.

In Portland, the law requires an owner to clear sidewalks and driveways across pedestrian paths of snow and ice despite time limitations. The Portland Bureau of Transportation (PBOT) recommends creating a three-foot-wide path. They also suggest posting advisory signs for the potential of falling snow or ice. Their website also states that owners are required to clear away any snow berms left in driveways and entrances by city snow plows, and to pile it away from the street and public rights-of-way.

Committed to Excellence in Each Service We Provide USI helps companies and individuals with comprehensive employee benefits solutions, commercial insurance and risk management consulting, retirement plan services, executive benefits and personal risk services. Contact us for a consultation, at: 503.224.8390 or online at to see how we can help. ©2017 USI. All rights reserved.

16 HFO Investment Real Estate • (503) 241.5541 •

Third, what’s your plan for removal? Do you intend to hire someone to do the removal, or do it yourself? What areas on the property are most prone to being unsafe? Surveying the property in advance of snow or ice will better prepare you for what to expect during winter conditions. Having an executable plan will also help in the event of inclement weather. Remember that if you hire a third party to clear the snow, they too will be busy and hampered by road conditions. Keep an eye on the clock to be sure you can meet your timely removal obligations. Advertorial

If you intend on doing the snow removal, consider and prepare for the dangers of the task. Overexertion, dehydration and frostbite can result from a lack of proper precautions. Layered clothing, frequent breaks and hydration are just a few safeguards for anyone removing snow to complete the process safely. While last year’s storm was unlike anything Portland has seen in decades, it’s possible this year’s winter may blow through with similar snow, ice and rain storms. The final step in preparing for winter is to be sure you have a solid insurance policy. Review your policy for coverage in the event of a winter weather injury. Get a handle on your worst-case scenario benefit; if your plan doesn’t offer the coverage you’d like—adjust it now. It will be one less thing for you to worry about when the first snowflakes fall. Ted Stark is Senior Vice President at USI in Portland. He also owns and manages three rental properties. He can be reached at or 503-295-9399.

INCLUSIONARY ZONING (CONT. FROM PAGE 15.) The program would be capped at $50 million over a 10year period. The construction of affordable units under Portland’s IZ program depends on the willingness of developers to build projects in the city. The city is reliant on private developers to invest in a market with substantial barriers that make construction projects costlier than they would be elsewhere. If developers begin to look less favorably on Portland, we will fail—not only in our goal of providing affordable units, but to provide any units at all. As inmigration trends remain strong, it will be wise for citizens and the City Council to continue our examination of the impact of this policy on multifamily construction in Portland and to remain involved in the process.

As the owner or manager of a multifamily property or apartment building, you likely have personal experience with how quickly a property can deteriorate without regular maintenance. The elements, previous owners or tenants, and even the original construction can work together to increase the necessity for immediate repairs. That is why J.R. Johnson, Inc. is always available for emergency assistance to property owners and managers. With over 40 years of experience in providing repair and restoration services, J.R. Johnson, Inc. is dedicated to ensuring that your residents are healthy, and your investment is maintained long into the future. From an emergency burst pipe, to construction defects, to deck renovations, J.R. Johnson, Inc. will devote itself to providing the highest quality, and least invasive, repair and restoration of your property. J.R. Johnson, Inc. has provided experienced emergency and construction repair services since 1970. They are available at any time of day or night to assist with disaster, fire, or water damage, biohazard cleanup, mold removal and remediation, and contents recovery. J.R. Johnson, Inc. also provides building envelope and construction defect repairs if construction deficiencies are discovered, and is additionally available for planned capital improvements from updating interiors to cohesive exterior conversions. As one of the first construction companies to specialize in repairs to buildings with construction defects, J.R. Johnson, Inc. has developed a reputation as an industry leader dedicated to efficient and skillful renovations and repairs. “I am very impressed with this whole operation and commend the workers of the job they are doing,” wrote a recent client, adding that the team was “very polite, professional, and quick.” The specialists at J.R. Johnson, Inc. understand that construction and maintenance is often stressful for all residents, and will work with you to ensure the process is communicative and unobtrusive as possible. Contact the team at J.R. Johnson, Inc. at (503) 240-3388, or visit their website at to view portfolio pictures of actual repairs and restorations, read more about services, and complete a contact form. Advertorial

The Northwest Apartment Investor 17

The Housing Cost Impact of Urban Containment in Portland, Oregon By Gerard C.S. Mildner Portland, Oregon’s urban growth boundary (UGB) has been an iconic policy for the urban planning profession in the past 40 years. The boundary is an element of an urban containment system to promote farm and forest protection and encourage the development of dense, walkable urban spaces. In these physical terms, the policy has been quite successful. Rural areas of the Willamette Valley remain productive farmland, specializing in wine, fruits, hazelnuts, nursery plants, and other agricultural products. And Portland’s downtown is recognized as a well-designed urban core, with numerous greenspaces and parks and revitalized downtown and urban neighborhoods. At the same time, housing prices and rents in the Portland metropolitan area have risen at rates significantly above the rate of inflation, with the City of Portland declaring a housing emergency. Oregon’s landmark land use regulations have been side-tracked in recent years by a layering of local regulations that have reduced housing production and created a regional housing crisis.

Development of Portland’s UGB Under the State of Oregon’s land use planning system, all cities within the state are mandated to have urban growth boundaries to contain its residential and commercial activities. Cities are required to analyze the capacity of their urban growth boundaries on a regular basis to ensure that 20 years’ worth of population and employment growth can be maintained within these boundaries. Starting in the early 1990s, development within the Portland region accelerated and housing costs and land costs began to increase. Circa 1995, the Portland metropolitan region achieved average housing prices that, for the first time in history, exceeded the national average for urban areas. Spurred by policies promoting economic development, Washington County attracted major investments by Intel and other information technology firms.

18 HFO Investment Real Estate • (503) 241.5541 •

Simultaneously, the region engaged in a process to produce a long-term development plan, known as the 2040 Growth Plan. In the language of the debate, citizens were told that the region faced a choice of “growing up or growing out.” The region could continue with previous policies to provide generous amounts of land for low-density fringe development (i.e., “growing out”), or it could minimize the need to expand into exurban farmland by promoting higher density inside the UGB (i.e., “growing up”). Ignoring for a moment the pejorative language represented by the “growing out versus growing up” choice (who doesn’t want to be a grown-up?), a conscious decision was made to seek future growth within the existing urban growth boundary, rather than two available options: (1) promoting the development of satellite cities, or (2) promoting continued low-density development along the fringe of the urban growth boundary. The Portland-area regional government, Metro, implemented a long-standing policy known as the “Metropolitan Housing Rule” which encouraged all jurisdictions within Metro’s boundary to set aside land for a variety of housing types. As a result, much of the development in the 1990s included a mix of single family housing and multi-family units. Therefore, most jurisdictions have residential zoning that can accommodate mid- and high-rise construction, provided the demand for those products exist. Throughout the 1990s, Metro made small UGB expansions, satisfying the desires of individual property owners, developers, and jurisdictions. State rules mandated that any urban growth boundary expansion must focus on the protection of high quality farmland to preserve the agricultural economy. Since 1980, the area inside Portland’s UGB has expanded by 10%, while the population of the metropolitan area has grown by 78%.

Impact of the Great Recession Like most metropolitan areas, Portland experienced significant economic dislocations resulting from the Great Recession of 2008. Portland was one of the last metropolitan areas to experience a decline in home prices, but the decline was quite severe. The average existing home price in the region declined from $311,700 in July, 2007 to $223,000 in January, 2011. The decline in home prices led to a precipitous slump in housing production, particularly in the suburban counties of the metropolitan area. Housing production in the fourcounty region (including Clark County, Washington) averaged 14,000 units per year in 1990-2007. By 2009, housing production fell below 4,000 units. While the total number of housing units produced has risen in recent years, the average for the last four years is 12,000 housing units per year. When comparing population growth to housing production, there is an absence of about 50,000 housing units due to the recession. Between 1990 and 2007, 67% of housing production in the four-county region came in the form of singlefamily homes. This fell to 62% in 2008-12, when housing production was depressed, and further dipped to 47% single family units in 2012-16, when overall housing production had recovered. The rising demand for apartments has led to significant rent increases which have made Portland one of the fastest appreciating rental markets in America. Those market conditions have led to considerable turmoil in city and state housing policy [see preceding articles in this newsletter]. One of the ironies of the shift from a housing market dominated by single family construction in the suburbs to multi-family construction in the central city is the widespread appearance of a housing construction boom. In fact, the region has experienced a 15% decline in housing production. The dearth of single-family construction on the urban fringe has gone largely unnoticed in the local press. Few residents are aware of the 15% overall decline in housing production.

Metro’s 2015 UGB Decision Within this context, Metro made a 2015 evaluation of the capacity of its urban growth boundary and its possible need to be expanded. Under its evolving procedures, Metro produces a population forecast, estimates the demand for employment land and residential land, measures the availability of land inside the UGB, and determines if the UGB should expand to meet the deficiency.

With that forecast in hand, Metro computes a Housing Needs Analysis to determine the number of housing units needed over the next 20 years. A similar process determines the amount of employment land needed. Metro’s 2014 Urban Growth Report determined that the region had 10,400 surplus acres for multifamily construction, 10,300 surplus acres for single family construction, and 990 surplus acres for industrial land to meet 20 years of population growth. As a result, no additional acreage was required within the UGB for housing development or employment growth. The problem with the 2015 MetroScope model is that land for development capacity, as represented by permitted zoning, was assumed to be buildable. Development at higher density levels requires high rent levels, which often exceed market rents in the location of the apartment buildings. Since zoning entitlements in much of the relatively low-income, low-rent neighborhoods of east Portland are quite generous, there was development capacity to handle the expected additional population growth expected over the next 20 years. In that sense, Portland’s generous zoning entitlements acted as a sponge to soak up whatever population and housing demand that Metro’s demographic forecasters threw at them. To their credit, Metro’s planners estimated the housing prices and apartment rents needed to reach those development targets. They anticipated that average rents in the Portland region would need to rise by 37% in inflation-adjusted terms in 20 years to justify the higher costs of development. Factoring in a 2.5 percent annual inflation factor, this would mean that rents would rise by 124%—more than doubling their current levels. Home prices would rise even faster in Metro’s estimation—148% in 20 years. To assess what that level of appreciation would mean, I’ve arrayed the median gross rent in the Portland metropolitan area in 2009 against 21 other US metropolitan areas, selected for their size and location.

HFO Sale: The Cameron

83 Units in Portland • $23.45 million

The Northwest Apartment Investor 19

AVERAGE METRO RENT, 2009 $1,400 $1,200 $1,000 $800 $600


St. Louis


Salt Lake City














New York

Los Angeles

San Diego




San Francisco


for this region. Economic development agencies in the region routinely recruit Bay Area software firms, citing that while Portland may not have the same cultural or climate amenities of California, our housing is one-third less expensive and we’re a short airplane flight away. Put differently, a software firm in the Bay Area can convince some of their engineers to move to Portland, knowing that the engineer can afford to buy a nice house.

The zero-expansion result in 2015, and the incongruous housing emergency established by the City of Portland, left many planners, economists, and public officials at Metro highly unsatisfied. Staff and consultants refined the MetroScope model for the next round of UGB decisions, using a simplified pro-forma modeling sub-routine. In the revised model, several distinct development archetypes have been modeled in terms of the returns earned by the developer.

With the rent and price increases anticipated by Metro’s 20-year plan, that value proposition evaporates. If rents in Portland rise by 37% above the rate of inflation for apartments elsewhere, the large discount relative to the California cities vanishes. The engineer in Silicon Valley won’t readily accept a move to Portland, and our competitors in Denver, Phoenix, Salt Lake City, and Austin will win those firm relocation opportunities.

In the diagram above, we find that rents in the Portland region fall somewhere in the lower half of the distribution, competing with large metropolitan areas such as Chicago and Dallas, and west coast competitors like Phoenix, Denver, and Salt Lake City. More significantly, Portland area rents are substantially below those in the major cities in California, such as San Francisco and Los Angeles, which are important sources of employment growth

PROJECTED AVERAGE METRO RENT, 2035 $3,000 $2,500 $2,000 $1,500

20 HFO Investment Real Estate • (503) 241.5541 •


St. Louis


Salt Lake City













New York

Los Angeles


San Diego




San Francisco


In practice, the strategy of absolute containment of the region’s population is likely to result in reduced job opportunities and slower economic growth. Workers will require compensation for accepting jobs in a high cost, modest amenity region. If firms cannot achieve significant cost savings from locating in Portland, expansion will occur in other cities—our mountain state competitors, cities in Texas or cities in the Southeast such as Atlanta and Charlotte. Children who grow up in the Portland area will more likely move to those cities to find employment, creating what I call the “Santa Barbara Effect.”

feel richer, but the resulting increase in home equity won’t matter until they retire and move to Arizona or Nevada. The brunt of the transition to Metro’s policy to appreciate real property assets will be felt most harshly by the poor, who don’t own property. Lowincome households have been shown to be losers in regions that constrained spatial expansion in the face of population growth pressure.

Our city will remain a nice place with amenities, but it won’t be a dynamic place where new employment and technology are developed. Homeowners might

Gerard Mildner is Associate Professor, School of Business at Portland State University. He can be reached via e-mail at You can find the complete version of this article online at realestate/center-for-real-estate-quarterly.

HFO PORTLAND MARKET DEVELOPMENT PIPELINE Units Under Construction and Planned Units

Close-In Eastside 30.92%

Close-In Westside

8,179 Units


Outer Eastside 5.96%

1,577 Units

6,000 5,000 4,000 3,000 2,000 1,000 0


Outer Westside 16.34%

Percentage under construction and planned

Close-in Eastside Outer Eastside

North Portland

5,445 Units

1,415 Units

South Waterfront 2.32%

613 Units

Washington (Clark County)

4,322 Units


4,901 Units

Units under construction and planned

Close-in Westside Outer Westside

South Waterfront North Portland

Washington (Clark County)

Prospective 13,657 units

Planned 14,731 units

Under Construction 11,721 units

Requested early assistance or design advice

Submitted building permit application

Building permits issued for project

HFO research staff track the total number of all known units currently under construction and planned. Currently, these total 26,452. The chart above was last updated in November 2017. If all of these units were built, the chart shows where they would be located. Source: Newspaper reports, city permit offices, HFO research. Copyright 2017 HFO Investment Real Estate. All rights reserved. Reproduction without permission strictly prohibited.

The Northwest Apartment Investor 21

Is the Runway Running Out? by Kenneth McBride, McBride Capital

At a recent conference in Los Angeles, we sat down with some of the nation’s largest lenders and investors in commercial real estate. Not surprisingly, everyone wanted to discuss the seemingly never-ending economic recovery, and how much time remains in the current cycle. The length of the current cycle has many worried that the glory days may be coming to an end, but their worries are primarily based on the cycle length, and not the fundamentals of the market.

Demand is outpacing supply

It gets worn out, but real estate may be the best example of the relationship between supply and demand. It was estimated that 350,000 new units need to be delivered nationally each year to satisfy demand. This year roughly 300,000 units will enter the market, leaving a 50,000 shortfall. There are many causes for the lack of equilibrium. However, much of it can be attributed to the labor shortage. Hardest hit were markets such as Houston where natural disasters occurred earlier this year. Additionally, developers are having a harder time making proformas work with the increased cost of labor, supplies, SDC charges, and bearing the impact of rent control. The lack of supply will keep an upward pressure on rents for non-rent controlled units.

Low Interest Rates & Low Inflation

Another sign that would point to an economic slowdown would be the rise of interest rates and inflation. We entered 2017 with the 10-year treasury at 2.45% after an abrupt increase in November due to the election. The Fed has raised the benchmark interest rate twice, unemployment is hitting all-time lows, the 10year treasury has settled at 2.30% and everyone is left wondering when inflation will join the party? For now, a low interest rate environment and low inflation will keep things moving in the right direction.

Migration patterns will help Portland

Institutional investors are shifting their market strategy. Current trends show significant domestic out-migration from the six largest metropolitan areas, which has investors slightly more bearish in these markets. They are much more bullish on the next 30 largest MSA’s, which

22 HFO Investment Real Estate • (503) 241.5541 •

are experiencing the largest domestic in-migration. These markets boast diversified economies, strong job growth and more favorable cap rates. If we can house the newcomers, they should continue to look to Portland for the foreseeable future, keeping gas in the tank for multifamily real estate.

Returns will be tempered

Over the past seven years we’ve experienced a significant increase in rents, coupled with depressed cap rates. The resulting returns have made this one of the strongest cycles of all time. While there is no cliff in sight, many investors are preparing for the slowdown that will inevitably come. The trend on the institutional side is to secure properties with lower leverage to take advantage of better pricing and shield their assets from potential vacancy over the next five years as the onslaught of new product comes on-line.


The consensus among investors and lenders is that rents and valuations will continue to increase, but at a decreasing rate over the next two to three years. While all those who survived the last downturn may already be bracing themselves, the next downturn is expected to be shallower with a quicker recovery. We are always available to discuss options available for your property that take advantage of opportunities to reduce the interest rate and/or provide advantageous terms. Ken McBride is the President and CEO of McBride Capital and can be reached by phone at (503) 624-5800 or via e-mail at


CODY HAGERMAN Partner Cody brings over 25 years of multifamily investment sales and advisory experience. Cody’s advice is sought out by national, institutional and regional ownership groups to advise and execute on dispositions, acquisitions or strategic positioning. He has built a reputation as one of the best apartment brokers on the West Coast.

JACK STEPHENS Senior Broker Jack has over six years of experience in multifamily investment real estate. In 2013, Jack was recruited from a national commercial real estate firm to join HFO. Jack consistently receives raves from clients for his responsiveness and communications.

Donna Brunner

Director of Operations

GREGORY FRICK Partner Greg has over 25 years of multifamily sales and advisory experience in Oregon and Washington. Greg is one of the region’s most respected brokers. His level of repeat business is a testament to the value he brings to each transaction.

TYSON CROSS Senior Broker Tyson followed his passion into commercial real estate where he worked as a property manager for 350,000 square feet of medical office space. His experience in operations, finance, project management and negotiations have transferred well into multifamily investment sales and advisory services.

LEE FEHRENBACHER Broker For seven years, Lee has been following the commercial real estate market closer than most local experts. Prior to joining HFO, he was a reporter for the Daily Journal of Commerce, where he wrote hundreds of articles on Portland’s real estate market.

Aaron Kirk Douglas Mary Beth Christopher

Marketing Director • CCO

TYLER JOHNSON Partner Tyler brings over 14 years of experience in multifamily brokerage to HFO. His extensive network of clients include some of the country’s largest institutional and private equity ownership groups. Investors across the country remain loyal to Tyler, due to his client-service philosophy, ability to navigate complex transactions with ease and his relentless work ethic.

Property Analyst/ Underwriter

ROB MARTON Partner Rob has had over 16 years of experience working exclusively on apartment sales in Oregon and Washington. Rob’s expertise and experience in selling core and tertiary assets—ranging from 20 unit properties to several hundred unit portfolios—sets him apart from other brokers, largely due to his relationships with clients.

TODD TULLY Broker Todd has six years of experience in commercial real estate. His work in retail and multifamily areas has included a wide variety of assignments, including research, construction administration and safety compliance.

Rober Stigile

Transaction Coordinator

ADAM STATON-SMITH Broker Before joining HFO, Adam spent six years at Nike where he managed retail store openings and activations both domestically and abroad including Shanghai, Amsterdam, London and Cabo San Lucas. Adam also worked for seven years as project lead for Nordstrom.

Jennifer Shuch Research Analyst

Tien Nguyen

Graphic Designer

The Northwest Apartment Investor 23

From the entire HFO team

Happy Holidays! Passion • Collaboration • Specialization

HFO Investment Real Estate (503) 241.5541 •

HFO Fall 2017 Newsletter  
HFO Fall 2017 Newsletter