2018 Apartment Investor Newsletter | Oregon & Washington

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Instead of restricting the ability to build more housing, government should be doing whatever is necessary to encourage development. We all have a vested interest in trying to solve the affordability issue. Our hope is that government leaders will look for real long-term solutions, including expansion of the renter voucher program, incentivizing developers instead of penalizing them, and recognizing that our industry is part of the solution—not the problem. As just one example, we’re now 18 months into Portland’s inclusionary zoning program, and the results are dismal. It did not foster the development of more affordable housing; in fact, it’s doing the opposite. The upcoming legislative sessions in Oregon and Washington are likely to be extremely active on housing issues. This month’s election gave Oregon’s Democratic Party a supermajority in both legislative chambers. The result may be more difficulty protecting private property rights in Oregon. We hope 2019 brings a new awareness that all parties need to work together to help solve these complex issues. Demonizing one group vs. another does not bring any real solution. Here’s to building new partnerships AND more housing in 2019!


Development Pipeline


Portland Inclusionary Zoning Update


National Housing Proposals


Multifamily Lending Outlook


Importance of Housing Supply


Tax Roundup for Owners/Developers


November Election Results


HFO-TV & Podcast Update


National Housing Policies


Annual Portland Market Update


News from J.R. Johnson


Regional Market Roundup


Mobile Home Parks


Opportunity Zones


*Source: Multifamily NW Apartment Reports **Source: U.S. Census Bureau

In our summary on the following pages and the accompanying timeline, we take a look at government activity in the housing market.


Interest Rates FLAT




It can sometimes feel as if the City of Portland is churning out new ordinances and draft regulations as fast as they can dream them up. But does this burst of activity translate into encouraging development?

No. of Transactions UP

Portland Adds Regulations



Recent apartment construction has provided some relief for renters. Back in 2015, the vacancy rate for Greater Portland was a low 2.87%. By Fall 2017, it had increased to 4.37%. Today, it’s 4.4%.* In the past year, metropolitan Seattle’s year-over-year rental vacancies have increased from 3.6 to 5.5%.**

City Hall Update

Transaction Volume

Vacancies UP

By Greg Frick, Partner, HFO Investment Real Estate



2019: A Year of Building?


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

CITY OF PORTLAND REGULATION ROUNDUP Adopted 2016 • Inclusionary Housing policy (Effective 2/1/2017) Adopted 2017 • Temporary Renter Relocation Fees adopted Adopted 2018 • Renter Relocation Fees - now permanent • Landlord Registry – mandatory registration effective April 2020 • Unreinforced Masonry Placards and Tenant Notice Requirements – Mandatory in 2019 for privately-owned buildings

SUMMARY Inclusionary Housing.

As of September 25, 2018, there are 345 Inclusionary Housing (IH) units approved and pending since February 11th, 2017. In their February 2018 one-year review of the program to the Bureau of Planning Commission, city staff wrote: “To maintain housing production and housing supply targets identified in the 2035 Comprehensive Plan, the City of Portland would need to start seeing significant increases in land use review and building permit applications over the next six to twelve months to replace development pipeline units that will be delivered to market over the next 18-24 months. “With the understanding that there are challenges to development feasibility due to broader market fundamentals, BPS and PHB, recommend we explore a process to make adjustments or modifications to the Inclusionary Housing Zoning Code and Program requirements.” • Despite the recognition that something needed to be done to increase applications, the city has yet to make adjustments or modifications to the code or requirements. • Back in December 2016, the Portland City Council relied on testimony from Professor George Galster, who assured the council that inclusionary zoning was a wellestablished practice in use widely around the country for more than 40 years. He specifically cited Denver and Minneapolis. The truth was Minneapolis did not have an inclusionary housing requirement, and Denver had one—but it had been repealed. 1

In Progress 2018 • Better By Design requirements • Residential Infill Project – vote slated for 2019 • Tenant Screening Ordinance • Mandatory Unreinforced Masonry Seismic Upgrade Requirements and Timeline – vote slated for 2019 Coming in 2019? • Security Deposit Regulations • 90-day Right of First Refusal to provide the City of Portland and tenants first crack at purchasing an asset before it could be listed for sale.

Landlord Registry

• Voluntary early registration — when filing your 2019 taxes & reporting rental income. • Final year to register — with your 2020 tax returns. On July 26, 2018, the Portland City Council voted unanimously to require landlords to register the addresses of all rental units in the city. The rule kicks in for tax year 2018 – meaning they need to be sent in by April 15, 2019, unless they obtain a six-month extension. Mayor Ted Wheeler decided to make the requirement optional for 2018, so it won’t legally be required until filing in April of 2020. Landlords can be expected to pay a registration fee to pay for the program, estimated to cost $565,000 per year to operate. Tenants groups support the program as a way to require mandatory safety inspections at all rentals along with requisite fees to support pro-tenant programs.

Better by Design

Work sessions are in progress as the Planning and Sustainability Commission prepares final recommendations for the City Council. After some initial drafts, the project staff took written and live public testimony. Work sessions have been held in September and October covering development scale, bonuses, East Portland standards, and street connectivity. A final session in November 13th covered accessibility, building design, and parking. Updates are on the project website at www.portlandoregon.gov/bps/betterhousing.

Includes both Portland Housing Bureau projects and Private Developments (Permit Progress Summary, Portland Housing Advisory Committee Update 09/25/18)


HFO Investment Real Estate • (503) 241.5541 • www.hfore.com

Residential Infill

Unllike similar plans around the country, a recent public hearing in Portland had more people testifying in favor of this plan than against it—and the infill project will be voted on by the City Council in early 2019. The plan would allow for more houses, duplexes, triplexes and fourplexes. Houses could have two Accessory Dwelling Units (ADUs) and a duplex could have one ADU. Structure sizes would be more restricted. Double lots would be required to have at least two dwelling units. Minimum parking requirements would be eliminated. Read more in the latest summary at http://bit.ly/infillpdx.

Tenant Screening Ordinance

Commissioner Chloe Eudaly proposed a controversial tenant screening ordinance, but pulled back her proposal due to opposition from nonprofit housing providers. Press reports indicate she plans to move forward once again after additional consultation with those groups and the city’s Rental Services Commission. The ordinance is eight pages in length, and HFO previously mailed a copy to all owners inside the City Limits of Portland in our database. If you own in Portland but did not receive the newsletter or would like to read it online, please visit: http://bit.ly/ screeningpdx. If you own apartments in the City of Portland, please watch our blog and bi-weekly emails for updates on these pending regulations.

Security Deposits

As rents have risen, cities have begun regulating security deposits more closely. Seattle has been among the most active. Seattle’s regulations prompted many lawsuits between multifamily home owners and the City after the Seattle City Council imposed a limitation on nonrefundable fees to one month’s rent, with a pet fee deposit maximum of 25% of monthly rent. The January 2017 ordinance also requires landlords to allow deposits to be paid in installments over six months. A court recently upheld that Seattle law.

Recently, Portland City Councilor Chloe Eudaly has directed the Rental Services Commission’s work on an even more complex proposal. The draft policy calls for: • Limiting the amount of “last month’s rent” collected as a security deposit to 50% of total monthly rent. • Limiting the amount of a security deposit to the equivalent of one month’s rent if the landlord does not collect last month’s rent. • A landlord may not charge for interior painting except what is necessary to repair specific damage made to a wall beyond ordinary wear and tear. • Defines “ordinary wear and tear” specifically in numerous instances. • Requires the landlord take 3.6% annual depreciation of movable property value into account when charging for repairs. • Requires landlord to provide a list of the current depreciated value of the movable property to the tenant at the time of move-in. • Tenant has a week to complete and submit a condition report noting any damage to the unit. • Requires landlords keep security deposits in an account with or without other security deposit funds that are separate from owner’s funds. The account may be a checking, savings, money market, or client trust account. The landlord must provide the bank institution name and account number in writing to the tenant. Interest accrued must be repaid to the tenant when refunded, less a 5% deduction for administrative costs. • A tenant may request a receipt of the account and interest earned up to once each year. • Outlines notification requirements and termination timelines. • The Landlord must report terminated tenancies to the Portland Housing Bureau on a specific form within five business days. • Failure to comply with any requirements result in landlord liability to the tenant for: • Security deposit • A penalty in the amount of 2x security deposit • Attorney fees and costs Read the September 20, 2018 draft here: http://bit.ly/screeningpdx


“Irony Squared: Inclusionary Zoning Edition” Cityobservatory.org 02/26/2018 by Joe Cortright. Retrieved 09/25/2018.

HFO Sale: Bailey Hill Meadows

70 Units in Eugene, OR • $6.93 million

The Northwest Apartment Investor


Government Activity Timeline 2014

URM Upgrades

Portland 1/2014 City establishes URM Seismic Retrofit project/building policy committee 9/2016 Portland holds hearings on mandatory URM upgrades 10/2016 URM draft requirements released 10/2017 First City Council review of URM Policy 11/2017 Final URM building policy meeting and final draft report 6/2018 After several rescheduled hearings, the Portland City Council votes to work on financing options, timelines and temporarily exempting educational and religious nonprofits. The council decides to take a final vote on seismic retrofitting timeline requirements in 2019 and spins off warning signs/tenant notification for immediate action (see URM Placards/Warnings on next page)


UGB Expansion

Metro 1/2015 Metro decides against expansion of Urban Growth Boundary

Residential Infill

10/2018 Metro anticipated to expand the urban growth boundary by 2,191 acres in Beaverton, Hillsboro, King City and Wilsonville

Portland 7/2015 Project Begins 3/2016 Concept development, council review, public review and hearings 2/2017 Code/Map amendment, discussion draft public review 4/2018 Public review and testimony concluded 7/2018 Planning and sustainability commission review delays vote on increasing homes in single-family neighborhoods until 2019

Housing Emergency Declarations

Portland 10/2015 Portland City Council declares housing emergency; continues extending through 2018 9/2016 City Council reconfirms housing emergency 10/2017 City Council reconfirms housing emergency Vancouver, WA 4/2016 Vancouver Council declares housing emergency for low-income residents

90-day notice for no-cause evictions

Portland 10/2015 Portland approves 90day notice requirements for rent increases and evictions Milwaukie 4/2016 Milwaukie approves 90day notice requirement for no-cause evictions

Milwaukie, OR 4/2016 City Council declares housing emergency 4/2017 City Council extends housing emergency six months Josephine County, OR 11/2017 Josephine County Board of Commissioners asks Governor Brown to declare a two-year emergency

Note: Chart prepared by HFO research based on news reports and data available on the City of Portland website. It is believed to be accurate to the best of our ability. We encourage your independent verification of these facts.


HFO Investment Real Estate • (503) 241.5541 • www.hfore.com


Inclusionary Housing

Portland 6/2016 Concept development 7/2016 Draft code; expert review, community forums

Affordable Housing Bond

8/2016 Discussion draft; outreach to stakeholders

Portland 11/2016 Voters pass $258.4 million levy to create 1,300 units of affordable housing 9/2018 Daily Journal of Commerce reports 647 units either acquired or planned for construction

9/2016 Draft code; input from commissioner 10/2016 Public hearing 12/2016 Council hearing on program and code

Metro 11/2018 Metro proposes $652.8 million bond levy to create/acquire/ renovate housing for 7,500 12,000 area residents

2/2017 Effective Date 2/2018 One year review: 17 projects; 12 market rate + 5 affordable housing projects; 89 Affordable units added in market-rate projects, almost all studios and 1-bedroom units. Zero three- or fourbedroom units were included. 1/2018 5,500 units issued permits in 2017 in City of Portland in projects of 20+ units 9/2018 Through September 24, 2018 Portland received 44 permit applications for projects of 20 units and over for 2,413 units. There are a total of 153 affordable rental units approved and 192 pending.


Security Deposit Policy

Renter Relocation Fee

Portland 2/2017 Commissioner Eudaly begins work on Security Deposit Policy 9/2017 The City has feedback from tenants, advisory committee and elected officials

3/2018 City makes relocation fees permanent and expands to all owners, even those with just one rental unit

10/2017 Proposed policy put on hold pending screening criteria policy completion 8/2018 Commissioner Eudaly announces plans to put policy before Council in September

Tenant Screening Ordinance

9/2018 • City council hearing moved to October • Market rate andlords and affordable housing developers rebel against deposit regulations • Commissioner Eudaly then announces security deposit policy is on hold pending further discussion in October/November

90-day Right of First Refusal

Portland 10/2017 Daily Journal of Commerce reports Commissioner Chloe Eudaly plans to craft a policy giving tenants and the City the right of first refusal on the sale of any rental units


Portland 7/2018 City Council requires Landlords to register all rentals with taxes beginning April 2019; fully mandatory by April 2020

Portland 10/2017 Commissioner Chloe Eudaly begins work on screening criteria policy 8/2018 Commissioner Eudaly announces plans to put policy before Council on September 20th

9/2018 Portland Mercury Reports on Eudaly's plans for 90day notice requirement. Nothing yet proposed.

Landlord Registry

Portland 2/2017 City passes renter relocation fee requirement but exempts landlords of only one unit (about 24,000)

URM Placards/ Warnings

9/2018 • City council hearing moved to 10/18/18 • In addition to landlords, affordable housing developers rebel against screening regulations • Commissioner Eudaly announces screening policy is on hold pending further discussion

Portland 9/2018 City reveals draft building signage deadlines: • 1/1/19: public buildings • 3/1/19: private buildings • 11/1/20: non-profits 10/2018 Placard warning requirements adopted The Northwest Apartment Investor


PORTLAND REGULATIONS (CONT.) 90-Day Right of First Refusal

Commissioner Chloe Eudaly’s Proposed Tenant/City First Right of Refusal Policy In September of 2017, Portland Commissioner Chloe Eudaly was quoted in the Portland Mercury about her plans to propose a new policy “in January 2018” that would allow tenants and the City of Portland the first right of refusal when a landlord decided to sell a property. As described in the media, 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 claimed 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. On September 12, 2018, the Portland Mercury reported once again on Eudaly’s plans for this policy, but did not go into any specifics. No information on her proposal is available from her website. So far, no other members of the Portland City Council have indicated whether they support or oppose Eudaly’s concept.

URM Mandatory Seismic Upgrades

Beginning in September 2016, a City of Portland task force set out draft mandatory seismic upgrade requirements for unreinforced masonry buildings. The city council held its first public hearing in October of 2017. A final draft report was published in November 2017, and, in June of 2018, after several rescheduled hearings, the city council voted to postpone the decision for another year. The Council instructed staff to more thoroughly explore financing options, timelines and the possibility of temporarily exempting educational and religious nonprofits. They agreed to proceed with requiring warning signs on Unreinforced Masonry Buildings.


HFO Investment Real Estate • (503) 241.5541 • www.hfore.com

URM Placards and Tenant Notifications

Two stakeholder committees were formed following the June 2018 council meeting. The private owner group recommended, “…that the City support a public education campaign for building owners and tenants, a voluntary building placarding program to mark retrofitted URM buildings, and an earthquake navigator to assist building owners in navigating the permitting, financing and design of seismic retrofits.” The staff ordinance did not incorporate any of these requests and instead recommended that the city: 1. Require a placard on all URM buildings that have not been retrofitted to prevent collapse in the event of a “major earthquake.” 2. Require URM building owners to notify tenants/ renters through rental agreements that their building is an unreinforced masonry building and unreinforced masonry buildings may be unsafe in an event of a major earthquake 3. Strengthen existing triggers in Title 24.85 requiring seismic retrofits of URM buildings

Placarding and Tenant Notification Requirements

On Wednesday October 10th, the Portland City Council adopted the requirements. The new ordinance requires URM owners to post signs according to the timeline below. The signs are required to be durable 8”x10” placards with 50-point bold font lettering that are posted in a conspicuous location on the exterior at the main entrance stating:

This Building is an Unreinforced Masonry Building. Unreinforced Masonry Buildings may be unsafe in an event of a Major Earthquake. Timeline:

January 1, 2019 - publicly-owned buildings March 1, 2019 – privately owned buildings November 1, 2020 - non-profit buildings • Building owners must notify existing tenants that the building is an unreinforced masonry building, and that unreinforced masonry buildings may be unsafe in the event of a major earthquake. • Every lease or rental agreement entered into or renewed after the timeline for placarding noted above, must contain the above statement.

• Building owners must record an agreement not to remove the placard and acknowledgment of compliance with tenant notification requirements.

Landlord Registry

In July of 2018, the Portland City Council adopted an ordinance requiring all owners of rental properties within city limits to identify rentals in tax returns beginning with the 2018 tax year. The council allowed a one year grace period, or until April 2020, for owners to comply and register their rentals as part of their annual tax return filings.

HFO Sale: Seasons at Farmington Reserve

228 Units in Bend, OR • $45.5 million

HFO PORTLAND MARKET DEVELOPMENT PIPELINE Units Under Construction and Planned Units

Close-In Eastside

Close-In Westside

8,597 Units | 31.10%

North Portland

5,644 Units | 20.41%

Outer Eastside

2,676 Units | 9.68%

Outer Westside

3,047 Units | 11.02%

South Waterfront

3,773 Units | 13.65%

280 Units | 1.01%

Washington (Clark County) 3,630 Units | 13.13%

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

Prospective 15,851 units

Planned 11,982 units

Under Construction 15,665 units

Requested early assistance or design advice

Submitted building permit application

Building permits issued for project

Close-in Eastside Outer Eastside

Close-in Westside Outer Westside

South Waterfront North Portland

Washington (Clark County)

HFO research staff track the total number of all known units currently under construction and planned. Currently, these total 27,647. The chart above was last updated in November 2018. If all of these units were built, the chart shows where they would be located. Source: Newspaper reports, city permit offices, HFO research. Copyright 2018 HFO Investment Real Estate. All rights reserved. Reproduction without permission strictly prohibited.

The Northwest Apartment Investor


Portland IZ Update By Jennifer Shuch, Research Analyst, HFO Investment Real Estate

Inclusionary Zoning (aka Inclusionary Housing)

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.

The Program

Currently, 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.

Effects of Labor Shortage

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 constructionrelated 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.

First Six Months

During the first six months of the program, there were zero applications for large market-rate apartment projects.

First 18 Months

The City of Portland produced an 18-month review of the project in September 2018.


HFO Investment Real Estate • (503) 241.5541 • www.hfore.com

BPS struck an optimistic note in their report, pointing out that the 19,000 units currently in the pipeline represent a four-year 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 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. The program would be capped at $50 million over a 10-year period.

Barriers to Development of Affordable Housing

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 in-migration trends remain strong, it will be wise for citizens and the City Council to continue examining the impact of this policy on multifamily construction in Portland and to remain involved.

Creative Affordable Housing Solutions from Around the Country Despite recent news of a slowdown in rent growth in Portland, residents throughout the metro area continue to struggle to find housing they can afford. But these issues are not unique to this region – around the country, a number of cities are working on ways to increase the supply of affordable units in an effort to prevent displacement and increased rates of homelessness. Seattle, WA

Spokane, WA

Des Moines, IA

Washington D.C.

Portland, OR Nashville, TN Los Angeles, CA Denver, CO

Atlanta, GA

TO THE NORTH: Emerald City Council Retreats Earlier this year, Seattle passed a tax on large employers in the city in hopes of raising $47 million in funding for affordable housing and homelessness services. The tax would have charged businesses with annual earnings above $20 million a flat $275 per worker. Amazon fought back, calling the tax an attack on job creation and immediately halted construction of a new office building. A week later, the Seattle City Council rescinded the tax.

TO THE EAST: The Mile High City’s Successes In Denver, two recent proposals demonstrated the city’s ability to think outside the box. In August, Mayor Michael Hancock successfully argued for an ordinance to raise the tax on marijuana from 3.5% to 5.5% to collect $15 million annually for the city’s Affordable Housing Fund. Hancock said the funding would help build or preserve about 6,000 units per year. The city also launched a pilot program called LIVE Denver, turning 400 vacant luxury units in high opportunity neighborhoods into workforce housing. The City Council approved $1.2 million in funding for the program aimed at keeping rents below 35% of income. Funds will subsidize residents working full time and earning 40-80% of area median income.

TO THE SOUTH: City of Angels Development Incentives The city of Los Angeles is starting to see some success with its Transit Oriented Communities (TOC) program. TOC went into effect in the Fall of 2017, and by July 2018 over 1,000 affordable units were already in the pipeline. The program applies to projects within a half mile of major transit stops and requires developers set aside 8% of total units as affordable housing. In exchange, projects are eligible for density and height bonuses, as well as expedited project review. Meanwhile, California SB 827 which would have forced cities to allow taller, denser development around public transit was defeated 9-4 in April. Housing advocates were successful in getting Proposition 10 on California’s November ballot—the initiative would have ended the state’s ban on rent control but was resoundly defeated.

ACROSS THE COUNTRY: Missing Middle Initiatives A number of cities are also focusing on increasing density to allow for so-called “missing middle” housing in single family neighborhoods. Cities including Washington, D.C., Des Moines, Atlanta, and Nashville are all working on plans to increase neighborhood density in order to keep families in the city. Spokane mayoral candidate Ben Stuckart is even running in 2019 on a platform of eliminating parking requirements and encouraging redevelopment of surface parking lots. In Portland, revisions to the Residential Infill Plan have moved the vote to 2019. Portland’s plan would allow duplexes, triplexes, and fourplexes in single-family neighborhoods. As the City of Portland weighs in on residential infill and re-evaluates its inclusionary zoning requirements, its leaders might benefit from looking to successes and failures in other cities. The Northwest Apartment Investor


Things, They Are A-changing.

An observation by AMF Capital By Steve Wiltshire, Principal, AMF Capital

As we approach the last quarter of a very exciting and active year in the commercial real estate industry, we are reflecting on things that have happened—and the things yet to come. 2018 has seen aggressive multifamily investment activity. After several years of active trading, we are starting to see some challenges ahead. Demand in the local market has been driven by several things. Today’s renters are flocking to the Pacific Northwest in search of solid job growth in the hi‐tech and creative business sectors. They are looking to enjoy the area and also for opportunities to foster new growth in emerging products.

The Years of Growth and Prosperity

Early in the recession, new construction and development were subdued, allowing rent growth to prosper for existing owners and values to increase. This pressure on supply and demand allowed apartment owners to capitalize on that growth. The ability to tap excess equity or to sell at increased values for reinvestment has been the norm for the primary and secondary markets— pushing prices to all‐time highs. This abnormally long period of low interest funding and low cap rates has been a good time for both buyers and sellers—whether selling at low cap rates (higher values) and increasing holdings via refinancing or acquiring new assets and posturing for future rent growth.

Outstanding Debt Growth

According to one publication, the balance of commercial and multifamily mortgage debt grew faster during the first half of 2018 than any semiannual period since 2007. For the first time, outstanding multifamily debt topped $1.3 trillion. The largest share of debt—$631 billion—is held by agencies, GSE portfolios, and MBS. Things are about to change.

10 HFO Investment Real Estate • (503) 241.5541 • www.hfore.com

In Walks the Federal Reserve.

All data points to solid economic patterns across the U.S. Job reports show signs of growth. Wages are moving to more positive territory. Inflationary pressures are balanced. The result: the Federal Reserve delivered on its promise—higher interest rates. The latest spike in yields tells us the markets are finally warming up to the Fed’s projected path. Markets now beginning to believe that future hikes won’t invert the yield curve. As long as the markets don’t run away and overshoot with large spikes in yields or post a massive sell-off in equities, the Fed’s confidence in future rate hikes are expected to solidify. This December, all eyes will once again be on the Reserve Board in anticipation of another hike. If trends continue, we can expect to have a couple more in 2019. At the time I am writing this, we had seen 10-year Treasury rise at a rapid pace to 3.22% in a very short time; in September, the 10-year was at 2.94%—up from 2.46% in January.

A New World

As the new world of rising rates is upon us, we are looking into the impact on commercial real estate lending. Lenders recognize this movement in costs of funds and are passing it along to consumers. The interest rate hikes are resulting in larger down payment requirements for all buyers in the commercial real estate arena in step with the rate hikes. With the increase in equity requirements, one would normally see a change in capitalization rates. Interestingly, this has not yet been the case. With few exceptions, cap rates are still compressed—even as the costs of funds have increased.

Cap Rates and Market Forces

There are two schools of thought when it comes to the

relationship here. The typical relationship between these two forces has been correlated with a rise in interest rates: cap rates must also rise, leading to a decline in values. This has yet to occur in most markets. The other is that cap rates are not necessarily driven by costs of money but rather the availability of capital in the marketplace, cash flow, confidence in the future markets, and the comparison of the investment to an alternative investment vehicle. This is what we’re currently seeing. No matter what your thoughts are on these approaches, the jury is still out on what will occur in the future. In assessing risk, today’s underwriting criteria is certainly focusing on the normal correlation, looking to see more emphasis placed on the first scenario. There are concerns about values in the short term. Loan platforms are stressing cap rates at a higher number, allowing for a more conservative exit strategy. Look for a short-term increase in rates and equity requirements, but a solid value hold due to demand and cash in the marketplace.

Market Changing? Are you unsure about what impact that has on your loan options and investment strategies? As part of your team, AMF CAPITAL works closely with our clients to evaluate, strategize and deliver loans. It’s simple! By understanding the changing markets, we set realistic expectations for our partners, allowing them to plan their strategies more accurately and safely. • Our team is in the market day in and day out. • With over $500,000,000 in closed loans under our belt, • AMF Capital is your source for information and loan success.

Multifamily Remains Relatively Low Risk

Strong property fundamentals and values, high costs of construction, coupled with relatively low mortgage rates and conservative loan guidelines still support and validate the low risk of commercial real estate investments. There are still affordable offsets in rates and programs that can available to these property types today. Steve Wiltshire is principal of AMF Capital. He can be reached by phone at (503) 659-3399 or by e-mail at steve@amfcapital.net.

Expand your team of professionals with AMF Capital. For current rates or a quote, please visit our website at www.amfcapital.net or call (503) 659-3399 for more information.

HFO Sale: Spokane Valley Portfolio

337 Units in Spokane Valley, WA • $32.1 million

The Northwest Apartment Investor


The Importance of Housing Supply By Josh Lehner – Economist, Oregon Office of Economic Analysis

What Lurks Beneath

The economic expansion marches on, and our regional economy continues to hit the sweet spot. Job growth is more than enough to match population gains, and household incomes are setting all-time highs on an inflation-adjusted basis. However, problems remain underneath the surface of the strong economy. Most prominent is housing affordability, or the lack thereof. The good news is housing affordability has largely stopped getting worse over the past couple of years due to the combination of increasing new construction activity and rising household incomes. However, there is no question that affordability is significantly lower than a decade or two ago. Overall, high housing costs are putting upward pressure on local businesses as employees need higher wages to make ends meet. High housing costs also squeeze household budgets, leaving less money to spend on food, clothing, entertainment and all other goods and services.

Lack of Construction Keeps Housing Costs High

The primary driver of today’s outsized housing costs is the fact that the economy has not built enough new homes relative to population growth and household

formation. Strong demand in the face of lackluster supply is a classic recipe for rising prices. These issues are evident across much of the nation and are particularly pronounced in the Pacific Northwest. The Up for Growth National Coalition found that from 2000 to 2015, Oregon underproduced new construction by 155,000 units— equal to nine percent of overall housing stock. The same group found that Washington underbuilt by 225,000 units or 7.5 percent while Idaho fared somewhat better— underbuilding by 3.2 percent (22,000 units).

Filtering: A Misunderstood Process

Thankfully all is not lost. Worsening affordability does not have to be our new normal. It’s true that new construction is always expensive and aimed at the upper third or so of the market. Local residents can be alarmed by high rents and sale prices attached to new construction leading some to erroneously conclude that new construction does not help with overall market affordability. Luckily—this is not the case. The reason is at least twofold: first, high-end demand needs to be met. If it’s not, then high-income households compete with middle-income households for existing homes, helping to drive prices higher. Second, provided that overall demand is met, better affordability is achieved by a process called filtering.

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Filtering is the single biggest mechanism to provide reasonably priced housing for middleincome households, or what is commonly referred to as workforce housing. Over time housing depreciates and becomes more affordable. This does not occur overnight. It is a long-run process. For example, apartments in the Portland region built in the 1970s rented for above average prices in 1980. Those same 1970s era apartments today rent for prices that are below average. Filtering is the single biggest mechanism to provide reasonably priced housing for middle-income households, or what is commonly referred to as workforce housing.

But is The Process of Filtering Enough?

Now, a key question is whether or not filtering alone is enough to achieve better affordability. The answer is no—at least not when there is a supply shortage. Filtering does work, and it does help. However, to the extent that housing is underbuilt, filtering will be slower and take longer because there are not enough units to go around. The linchpin to the filtering process is to continuously add housing supply, particularly in popular and growing cities and regions. If a community builds more housing, they will experience more filtering and relatively better affordability. Let’s segment the current Portland area housing market into three equal parts based on prices. If one examines the most affordable third, or the lowest-priced third of all units, an interesting pattern is revealed that shows filtering in action. Currently, there are as many units in this most affordable third that were built in the 2000s as there are from the 1980s and the 1960s. Why? Because the Portland region built significantly more housing overall in the 2000s; one-third more units than during the 1980s and twice as many as in the 1960s. While 1980s era construction has better affordability overall today— it is 30 years old, after all—the total number of these relatively affordable units is the same as the number built last decade. This is due to filtering. If a community builds more housing, they experience better affordability. While the lack of supply is a problem in today’s market, it is likely to last another generation if the region does not built more housing in the coming years. The wounds of the Great Recession and housing shortage will heal, but they will remain visible. The reason is this: the units that are currently filtering from more expensive to less expensive today are those largely built in the 1990s and

HFO Sale: Binford Garden Townhomes

172 Units in NE Portland, OR • $30.8 million

2000s. Fast forward to the 2030s and the small number of units built this decade means there will be fewer units to filter at that time.

Bridging the Underproduction Gap

One result of seeing stronger construction activity today and in the coming years would be to bridge this underproduction gap, helping to improve affordability for current residents and the next generation. As Up for Growth writes in a recent report, “the housing crisis should be among the most urgent and important social equity issues requiring attention,” given its impact on affordability, and access to economic opportunity combined with the benefits of stronger economic activity and associated higher tax collections funding public services.

People Are Not Going to Stop Moving Here

Given the Pacific Northwest’s strong region economy and high quality of life, the number of households wanting to live here will remain large. We must maintain these strengths while shoring up our weaknesses. In order for all households to live here—not just high income earners—we need to ensure an adequate housing supply EVERY year. This includes all types of housing, including so-called missing middle housing units like duplexes and townhomes which provide myriad benefits, from more walkable neighborhoods to less environmental impact, and a more efficient use of public infrastructure and transit. Worsening affordability does not have to be the new normal; it is a choice. Josh Lehner is the State of Oregon Senior Economist. He can be reached at (503) 378-4052 or via e-mail at joshua.lehner@oregon.gov. The Northwest Apartment Investor


Important Tax Roundup for Multifamily Developers/owners By Chris Robinson, Attorney at Law

Assessors Directed to Assess New Construction As If Stabilized

has changed from the last valuation cycle for newly completed properties with a 1-1-17 valuation date.

County assessors have been directed by the Oregon Department of Revenue to value newly completed income properties, including multifamily, at stabilized occupancy regardless of where the property is in lease-up.

For 2018 assessments being mailed in November, the appeal deadline will be December 31, 2018.

Assessors are starting the income approach assuming 95% occupancy.

The Oregon Legislature passed legislation providing an exemption of newly constructed improvements for up to two years. The requirements are as follows:

Assessors are assuming that concessions are temporary, and in many cases are using rents from the property’s website displaying asking rents -- not effective rents.

1. The property is income-producing;

Assessors are using low expense ratios—failing to recognize that over typical investment period expenses will increase as properties mature. For newly completed properties these are aggressively low in our opinion.

3. There has been no occupancy or income prior to that date; and

For 2018 and 2019 it will be critical to monitor assessors’ valuations as the multifamily investment market

New Construction Exemption Requirements

2. The property is under construction as of January 1 for the year in which the exemption is sought;

4. Construction is expected to take more than one year from commencement. Commencement of construction is normally interpreted to be the pouring of foundation for the vertical building. Demolition and land preparation do not qualify as commencement of construction. The application deadline is April 1 for the tax year in which the exemption is sought. Timing is important to maximize the benefit of the exemption. Development should commence early in the calendar year. If you commence construction late in the calendar year you are not taking full advantage of the exemption. Please remember that this exemption applies to all types of income producing properties.

HFO Sale: Madison @ Sellwood

21 Units in Portland, OR • $8.92 million 14 HFO Investment Real Estate • (503) 241.5541 • www.hfore.com

Christopher K. Robinson is an attorney specializing in property tax issues. He can be reached by phone at (503) 635-9330 or by e-mail at chris@ckrlaw-proptax.com.

November Election

Election day in Oregon involved a number of ballot initiatives, candidates for city councils, state representatives and much more. At the state level, Democrats achieved supermajorities in both chambers of the Oregon legislature.

Here are the results of on races and ballot measures with potential impacts for landlords across the state:

Portland City Council

Candidate Jo Ann Hardesty defeated Loretta Smith to replace Dan Saltzman on the Portland City Council. Hardesty served as an Oregon House Representative from 1995-2001. She secured endorsements from current City Council members Chloe Eudaly and Amanda Fritz, as well as Metro Council President-elect Lynn Peterson and Oregon Speaker of the House Tina Kotek. Her endorsements included Willamette Week, The Oregonian, The Portland Mercury, the SEIU, and the Portland Association of Teachers, among others. Before the primaries in May, Hardesty noted that her knowledge of housing issues was limited, and she named Ibrahim Mubarak, Maxine Fitzpatrick, and Margot Black as her housing advisors. In her housing platform statement, she emphasized the need for more affordable housing throughout the region and stated, “an equitable housing platform must include robust protections and resources for renters.”

Oregon Gubernatorial Race

Incumbent Kate Brown defeated Republican challenger Knute Buehler who serves as State Representative for

District 54 (Bend). In the last legislative session, Brown sought elimination of no-cause evictions. When asked whether Oregon should lift the statewide ban on rentcontrol measures? Brown is quoted as “indicating skepticism” in her response to an Oregonian reporter, saying “My goal moving forward is to ensure we’re using best practices.” The Democrats’ supermajority in both chambers of the legislature will now be able to override any potential veto.

Metro Affordable Housing Bond Measure (26-199)

Portland’s regional government agency, Metro, won approval of its $652.8 million bond measure to the November 2018 ballot. Although Metro has not historically been involved in housing development, it plans to use the money to construct, acquire, and renovate up to 3,900 affordable housing units. The measure is estimated to cost property owners 24 cents per $1,000 of assessed value— about $60 per year for the average metro area homeowner.

Measure 102 – Oregon Constitutional Amendment

The approval of this measure by voters on November 6th changes the Oregon Constitution allowing public bond money to be leveraged with private financing for affordable housing.

The Northwest Apartment Investor




Lend Us Your Ears!

Since beginning our Multifamily Marketwatch Podcast in Early 2017, monthly downloads have grown from 131 to nearly 800. Our podcasts have been heard more than 5,000 times in the past 12 months. Subscribe at your favorite podcast market—including iTunes. With your investment of about 10 minutes each week, we make it easy for you to keep up with the latest industry news.

HFO-TV [youtube.com/user/HFObrokers]

• We’ve produced over 200 videos on topics of interest to multifamily owners • Annual views have increased by 60% since 2014 • Annual minutes watched have increased to more than 40,000 – up 40% over 2014.

HFO Sale: Campus Lofts

43 Units in Olympia, WA • $9.55 million 16 HFO Investment Real Estate • (503) 241.5541 • www.hfore.com

TOPIC: HOUSING UNDERPRODUCTION IN OREGON AND WASHINGTON In this two-part interview, Mike Wilkerson of ECONorthwest discusses the fiscal and environmental impacts of enabling transit-oriented smart growth to address housing affordability. TOPIC: PORTLAND OPPORTUNITY PROJECT We met with Miles Sisk to discuss his upstart project led by PSU students. TOPIC: PORTLAND’S HOUSING CRISIS AND GOVERNMENT RESPONSE Dr. Gerard Mildner, director of the Portland State University Center for Real Estate, offers his insight into housing issues in the Portland, Oregon metropolitan area. TOPIC: PORTLAND’S CENTRAL CITY 2035 PLAN After years of work, the City of Portland adopted a new plan for the Central City. HFO Partner Greg Frick discusses its effect on central neighborhoods with lead planner Troy Doss. TOPIC: DECODING PORTLAND’S RELOCATION FEES In one of our most popular videos of the year, attorney Andy Hahs explains the City of Portland’s relocation fee requirements. Hahs also covers potential issues with a draft City of Portland tenant screening proposal.

National Housing Policies By Jennifer Shuch, Research Analyst, HFO Investment Real Estate

The issue of housing unaffordability is no longer considered a problem exclusive to large coastal cities like New York and San Francisco. As smaller cities like Boise and Spokane are starting to feel the impacts of the slowdown in housing construction during the recession, more lawmakers at the federal level are taking note. As an increasing number of cities grapple with housing shortages, the issue of housing unaffordability has been increasingly in the limelight. At the national level, a number of new policies have been enacted or proposed over the last year that could have a profound effect on where affordable housing is built and how low-income renters will keep a roof over their heads. When the Tax Cut and Jobs Act was passed in December 2017, the most prominently reported change impacting the real estate market was the mortgage interest deduction. The bill lowered the cap on the amount of debt that could be claimed from $1 million to $750,000. But now another section of the bill is piquing the interest of developers and investors: Opportunity Zones (OZ). The new program allowed states to designate census tracts with a poverty rate over 20% as opportunity zones, providing developers and investors significant tax breaks. While some cities, including Austin, TX, have expressed concern that OZ investment will exacerbate displacement in low-income neighborhoods, proponents of the program believe it will bring much needed investment dollars into historically overlooked neighborhoods. In “Regulatory Barriers and Affordable Housing: Problems and Solutions,” the Bureau of Housing and Urban Development argues that restrictive zoning laws, pervasive NIMBYism, and bureaucratic delays are major factors contributing to housing shortages throughout the country. HUD’s assessment coincided with its third attempt at striking down the Affirmatively Furthering Fair Housing rule. HUD Secretary Ben Carson has argued that the AFFH rule is a burden to communities, indicating that his preference is to tie HUD funding to the loosening of zoning codes, rather than the enforcement of fair housing rules requiring extensive documentation.


This year, three US Senators representing states where housing has become increasingly unaffordable have introduced legislation aimed at preventing displacement and helping renters. Senator Kamala Harris of California proposed a tax credit for renters with rents in excess of 30% of income. Families earning less than $25,000 per year would receive a 100% credit on rent paid, while families earning between $75,000-$100,000 annually would receive a 25% credit on rent paid. The benefit would only be available to people whose rents are no more than 150% of Fair Market Rent. While critics argue that a tax credit would not help families afford rent when it is due, proponents believe the proposal represents an important step forward for federal recognition of this nationwide issue. Senator Cory Booker of New Jersey proposed the Housing, Opportunity, and Equity (HOME) Act, which would require that municipalities receiving funds from the Community Development Block Grant program create plans to reduce construction barriers and increase housing supply. Booker hopes his proposal would reduce income segregation and improve social mobility. The HOME act also includes a tax credit for cost-burdened renters similar to the one proposed by Senator Harris. Finally, in September, Senator Elizabeth Warren of Massachusetts proposed the American Housing and Economic Mobility Act, which would raise the estate tax in order to provide billions of dollars for programs that subsidize housing development in rural and lowincome communities. It would also create a competitive block grant program that would require communities to loosen zoning restrictions in order to qualify for grants. Senator Warren specifically aims to help African American families and those households still recovering from the financial crisis by providing down-payment assistance and $2 billion in support for people with negative equity on their mortgages. All three of these bills would face challenges in the Senate, but if Democrats end up with a majority in the Senate after November’s election, housing legislation at the federal level may be more likely to pass.

Evidence Matters (Spring, 2018) Office of Policy Development and Research, U.S. Department of Housing and Urban Development.

The Northwest Apartment Investor


A Confluence of Events Keeps the Market Moving By Cody Hagerman and Rob Marton, HFO Investment Real Estate With rents flattening and vacancies increasing, what otherwise could have been a year of “holding tight” on investment properties was instead a hectic one. As we examine in this newsletter, the combination of increasing market regulation, rising interest rates, and the cost of doing business inside the city limits of Portland are downsides that have pushed some owners to tertiary markets or out of state. Others see the tax law changes, an ongoing influx of residents and continued business expansion as positive reasons to stay the course in a market with prolonged opportunities for building wealth. Since 2013, Oregon and SW Washington have seen the economy gaining steam. In 2017, the metro area saw improvements in wages and income. And, after decades of trailing behind, a recent Census Bureau report indicates that incomes in Oregon are now on par with the national median.

Government Intervention

Continued in-migration, changing demographic preferences, and lack of adequate supply caused Portland (2015) and Vancouver (2016) to declare housing emergencies. Similar declarations were adopted by the City of Milwaukie (2016) and Josephine County (2017). Mayor Wheeler recently proposed—and the City Council agreed—to extend this emergency into 2019. Our political leaders have tried unsuccessfully to rectify the region’s housing shortage through implementation of fees for landlords and developers as a way to circumvent statewide restrictions on rent control. These disincentives may only serve to continue the housing emergency far into the future—although this time they decided to have city staff calculate what benchmarks constitute an end to this ongoing crisis.

Market Vacancy and Rents

The market has begun to see some softening. The Multifamily NW Fall Apartment Reports recorded the area

18 HFO Investment Real Estate • (503) 241.5541 • www.hfore.com

2016 vacancy rate at 3.71%, the fall 2017 rate at 4.37%, and the fall 2018 rate at 4.4%.

VACANCY 10% 7.5%

4.40% 4.37% 4.71%

5.0% 2.5% 0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (Oct.)

Source: Multifamily NW Apartment Report

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%.

RENTS/SQ FT $1.80 $1.62 $1.70 $1.57 $1.60 $1.47 $1.50 $1.40 $1.30 $1.20 $1.10 $1.00 $0.86 $0.90 $0.80 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (Oct.)

Source: Multifamily NW Apartment Report

Institutional Transactions of ($10 million and up)

In 2017, there were 37 apartment transactions priced over $10 million. Through the end of October 2018, there

have been 26 apartment transactions priced over $10 million. In dollar volume, these 26 transactions accounted for almost $1.05 billion in sales. This is slightly below the pace seen in 2017, which saw approximately $1.31 billion in sales volume for institutional sales. As in 2017, many of 2018’s institutional sales to date have been in the suburbs surrounding Portland.


Portland Metro Area permits for 5+ units have risen steadily from a low of 1,007 units permitted in 2009 to 9,979 in 2017, and 7,048 in 2018.* Still, experts say housing has not accelerated enough to meet currently estimated regional demand of 27,000 affordable units.

Inclusionary Housing

Institutional transactions this year include:

• Thorncroft Farms; 340 units in Hillsboro sold for $97.5 million; $286,765 per unit • Tessera; 304 units in Hillsboro sold for $85 million; $279,605 per unit • Axcess 15; 202 units in Portland sold for $66 million; $326,733 per unit • Columbia Trails; 264 units in Gresham sold for $52.3 million; $198,000 per unit • Binford Garden Townhomes; 172 units in Portland sold for $30.8 million; $179,070 per unit • Red Tail Canyon Condos; 78 units in Portland sold for $18.4 million; $235,897 per unit • Vancouvercenter; 84 units in Vancouver sold for $14.5 million; $172,896 per unit • Susan Marie Apartments; 89 units in Aloha sold for $13.2 million; $148,315 per unit

Since Portland’s new Inclusionary Housing requirement went into effect in February 2017, only 36 market rate projects and a handful of affordable projects of at least 20 units have submitted building permit applications. In September, the City published an 18-month review of the program, and reported 362 affordable units in the pipeline within privately financed projects. So far, city leaders appear relatively unconcerned by this drop-off in permitting activity. The City reports that 8,294 pre-inclusionary housing units remain in the pipeline.

12,000 10,000 8,000

Non-Institutional Transactions (under $10 million)

Turning to Portland metro non-institutional transactions below $10 million, we have seen roughly 100 transactions through the end of October that accounted for over $359 million in dollar volume. This is trending slightly above what the Portland market experienced last year.

6,000 4,000 2,000 0



200 150

$1,500 100

$1,000 $500






4,000 Transactions




2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: US Census Bureau

In 2017, 113 transactions in the metro area below $10 million accounted for over $380 million in dollar volume.



3,000 2,000 1,000 0

Pre-IZ vested units (submitted 6/6/16-1/31/17)



Post-IZ vested units

Affordable Units Approved

(privately financed, >20 units)

(including 2 condos)

0 Affordable Units Completed

Source: City of Portland Housing Advisory Commission

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Under $10 Million

$10 Million Plus

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


Transaction Volume

What, me worry?

Governments appear to be adopting policies to resolve the issue of affordable housing but are going in the wrong direction. Experts interviewed this year continue to report The Northwest Apartment Investor


PORTLAND HOUSING ROUNDUP (CONT.) that our housing issue can best be solved by enticing development rather than constricting it. Ironically, we also believe that current city policy will continue to benefit multifamily investors by continuing to shrink the development pipeline and leading to reducing vacancy rates, reduction of concessions, and speedier absorption of new units.

much more tinkering with the free market our politicians will take up—we’re not sure exactly where we’ll end up.

As we have said for the last seven years, the Greater Portland Area’s apartment market is still booming. We’re headed downriver somewhere, but we can’t forsee how

Cody Hagerman and Rob Marton are a partners at HFO. They can be reached by phone at (503) 241-5541 or by e-mail at cody@hfore.com or rob@hfore.com.

But no matter what the market, our top priorities will continue to be providing you with excellent value while collaborating with you on building your legacy over the long-term.

News from J.R. Johnson, Restoration & Contracting Experts About J.R. Johnson, LLC For the last 48 years, J.R. Johnson, LLC has concentrated on delivering the hightest level of craftsmanship work detail and client communication. We place our greatest emphasis on customer service and long-term relationships. Our New Co-Presidents 2018 has been an exciting year for us with Clint Arp and Del Starr assuming roles as new company presidents with over 35 years of combined expereince in Portland’s construction and restoration industry. Clint Arp has been working in the construction and restoration services industry for 15 years. His past experiences include positions as estimator, project manager, division manager, vice president, and now Co-President of J.R. Johnson, LLC. Clint has also worked as a project manager in Property Management, providing him a deep understanding of the client’s perspective. Clint provides training and educational classes on insurance processes and project timelines. His property management experience and advanced certifications in all fields of restoration have led him to become a leading expert in the restoration industry. Del Starr is in his 20th year with J.R. Johnson, LLC and has played a major role in the company’s success and growth. His past experiences include positions as Field Crew, Estimator, Project Manager, Division Manager, and now Co-President of J.R. Johnson, LLC. Del regularly provides client support in both litigated and non-litgated construction defect cases. Property owners look to Del for his expertise when determining proper solutions for building envelope repairs. Restoration & General Contracting Under One Roof A dedicated team has been assembled to demonstrate dedication to J.R. Johnson’s standard of excellence on a daily basis. Our

20 HFO Investment Real Estate • (503) 241.5541 • www.hfore.com

reorganized company—J.R. Johnson LLC—is now a full-service General Contracting and Restoration organization with the ability to manage and maintain all of your construction and repair needs under one roof. The growth of J.R. Johnson, LLC as a leader in the Construction and Restoration industry is a natural evolution of our commitment to the continued training and education of our technicians, foreman, superintendents, estimators and project managers. Community Involvement and Commitment to Sustainability J.R. Johnson LLC gives back to the communities we serve through events and charities and find ourselves enriched by what we learn through service to others. We employ a sustainable approach to all endeavors. The Future J.R. Johnson, LLC is dedicated to satisfaction through excellent work. Our team values your support and strives to exceed expectations in every project we undertake. Remaining rooted in our history, we envision a future of providing our valued clients with the excellent service J.R. Johnson, LLC has delivered for nearly half a century. We look forward an opportunity to serve you or your business associates in the years ahead. Advertorial


Submarkets each tell their own unique story in terms of vacancy rates. Those numbers are averaged into a single overall market rate. Portland metro’s fall 2018 vacancy rate of 4.37% is half a percentage point lower than one year earlier, despite the addition of thousands of new units. Rents and vacancy rates continue to be highest in are generally highest in Northwest Portland (6.3%) downtown (6.1%), and Southwest Portland (5.74%). Vacancy rates are lowest in Troutdale/Fairview/ Gresham (2.87%), Milwaukie (3%), Beaverton (3.54%), and Hillsboro (3.56%). While the Hillsboro submarket reports zero concessions, the NW, SW, and downtown Portland submarkets report that 18-20% of properties are offering concessions. Interestingly, year over year concessions have varied widely, depending on the submarket. A cursory review of concessions dating back to the fall of 2010 indicates that the market quickly reacts to changes in vacancy rates with concessions. The submarket with the most recent continuous history of zero concessions is Hillsboro. Areas with historically low concession rates include Outer SE Portland and the Bend/Redmond area.

Regional Round-Up Washington Tacoma / Pierce County Population City: 209,100 (Up 6.5% since 2010) County: 875,220 (up 10% since 2010)

Tacoma Multifamily Deliveries** 2018: 1,308 under construction 2017: 139 2016: 346

Population Growth

Tacoma is currently the third largest city in the state, but its growth rate is exceeding that of Spokane, and if current trends continue it could become Washington’s second largest city.

Multifamily Construction

The U.S. Census reported that at the end of 2017, median rent in Tacoma was over $1,000 for the first time in the city’s history. Rent per square foot has been steadily climbing in the city over the past few years. According to CoStar, rent as of the end of September 2018 was $1.43 per square foot – up from $1.36 a year earlier.


In March of 2018, Tacoma’s downtown, Hilltop, and the Dome District were among the top 20 fastest gentrifying areas according to Rentcafe. The area’s zip code has seen a number of new museums, hotels, and waterfront improvement projects—resulting in a 103% increase in home values over a 15-year period.

Pierce County Vacancy Rates 2018: 3.6% 2017: 4.9% 2016: 2.8%

Tacoma Area Unemployment Rate 2018: 4.9% 2017: 5.4% 2016: 6.1%

Local Government Update

In September 2018, city housing division manager Daniel Murillo presented the Tacoma City Council with an action plan to deal with the city’s affordable housing crisis. The $70 million plan includes $15 - 33 million to produce 6,000 new units, $10 - 24 million to preserve existing affordable homes, $3 - 4 million for anti-displacement measures, and $3 - 7 million to remove barriers to housing. In April 2018, the City Council passed a 90-day notice requirement for renters evicted because of a substantial rehabilitation or change of use. Over the summer, tenant advocates asked for a just cause eviction ordinance, a 60day notice for rent increases over 10%, a bar to income source discrimination, and $2,000 in relocation assistance to displaced low-income residents. As of August 2018, the City Council had not voted on these measures. *Annualized through 08/18 **Source: CoStar

The Northwest Apartment Investor




Spokane / Spokane County Population City: 220,100 (Up 5.35% since 2010) County: 507,950 (up 7.8% since 2010)

Spokane MSA Multifamily Permits * 2018: 1,096 (est.) 2017: 1,697 2016: 1,740

Rental Rates

The average rental at the end of 2017 cost $886, and the city had seen an average rent increase of $102 since 2016.

Job Market

Spokane has recently seen an expansion in its job market that has been attracting new residents. In September, Spokane County Commissioner Al French estimated that 5,000 to 5,200 new jobs were expected to be created within the next two years. Many will be at a new Amazon distribution facility and at Fairchild Air Force Base.


A number of Washington state legislators are advocating for housing reform and tenant protections, some hoping to cut property taxes through a tax on capital gains to incentivize development.

Spokane County Vacancy Rates** 2018: 1.3% 2017: 2.9% 2016: 1.6%

Unemployment Rate 2018: 5.2% 2017: 5.5% 2016: 6.2%

City of Spokane Zoning and Low Income Housing Activities In February 2018, Spokane passed revisions to city zoning laws to promote development on smaller “infill” lots. Up to 14 homes per acre can now be built, as long as each unit is smaller than 500 square feet.

In July 2018, the Spokane City Council provided $52 million to a public investment plan providing housing for low-income residents, pave streets, and subsidize projects near Riverfront Park. An additional $2 million was earmarked for housing assistance, and money was set aside to set up a risk pool for landlords. The risk pool is intended to help landlords pay relocation assistance and take on the risk of renting to tenants they would not otherwise rent to. The city has set aside $300,000 to roll out an enhanced rental relocation program by 2019, to assist renters who have been priced out of their units. *Source: U.S. Census Bureau **Source: Rundstad Department of Real Estate, University of Washington

Olympia / Thurston County Population City: 52,490 (Up 12.9% since 2010) County: 281,700 (up 11.7% since 2010)

Thurston County MSA Multifamily Permits * 2018: 399 (as of August 2018) 2017: 102 2016: 936

Renter Population

Nearly 54% of households in Olympia are renter-occupied, and 44.2% of residents have a bachelor’s degree or higher.

Multifamily Construction

According to CoStar, approximately 250 new housing units were delivered between September 2017 and September 2018, and another 938 units are currently under construction. The vacancy rate in Olympia was 3.2% as of the third quarter of 2018, down from 5.0% in the third quarter of 2017. This is the lowest vacancy rate the city has seen since the recession.

22 HFO Investment Real Estate • (503) 241.5541 • www.hfore.com

Vacancy Rates*** 2018: 3.2% 2017: 2.7% 2016: 2.6%

County Unemployment rate 2018: 4.4% 2017: 4.9% 2016: 5.7%

Local Government Zoning Changes

In September of 2018, the Olympia City Council approved zoning related changes to encourage so-called “missing middle” housing in single family neighborhoods. It also lowers parking requirements, allowing single-room occupancy buildings to have one off-street parking space for every four rooms. *Source: US Census ***Source: Rundstad Department of Real Estate, University of Washington

Tri-Cities / Benton & Franklin Counties Population MSA: 289,960* (up14.5% since 2010)

Kennewick-Richland MSA Multifamily Permits** 2018: 211 (annualized estimate) 2017: 359 2016: 155

Population Growth

The tri-cities area has seen a growth rates of 51.2% since the year 2000.

Benton | Franklin County Vacancy Rates** 2018: 1.1% (combined) 2017: 3.7% | 1.3% 2016: 2.6% | 0.6%

KennewickRichland-Pasco Area Unemployment Rate 2018: 4.6% 2017: 6.6% 2016: 7.1%

Employment Growth

The Tri-Cities boasted the second highest weekly and hourly wages in Washington, with an average weekly wage of $1,068 and an average hourly wage of $29.67.

Oregon Eugene-Springfield / Lane County Population City of Eugene: 168,916 (up 8% since 2010) City of Springfield: 62,353 (up 5% since 2010) County: 374,748 (up 6.5% since 2010)

Eugene/Springfield Multifamily Permits 2018: 138 (August YTD) 2017: 0 2016: 416


Lane County’s population grew by 6.5% between 2010 and 2017, while the city of Eugene saw population growth of 8% over the same period. In the city of Eugene, 50.2% of housing units are renter-occupied.


Government, education, healthcare, professional services and leisure and hospitality sectors make up more than 50% of the MSA’s total employment. The EugeneSpringfield Metro Area is also home to an emerging technology sector, known locally as the Silicon Shire. A number of local tech companies now boast over 100 employees in the metro area.

Lane County Vacancy Rates** 2018: 1.3% 2017: 2.9% 2016: 1.6%

Unemployment Rate 2018: 4.4% (as of August) 2017: 4.5% 2016: 5.1%

Housing & Local Politics

According to local organizations the Neighborhood Economic Development Corp and Cornerstone Community Housing, Eugene had the nation’s second most constrained housing market in 2017. Since 1999, home prices in Lane County have gone up 73%, while rent has gone up 48%. The city has not passed any legislation that would provide additional protection for renters above what is required by state laws and only recently expanded the urban growth boundary. *Source: Oregon Employment Department

The Northwest Apartment Investor




Population City: 81,780 (Up 9.1% since 2010) County: 217,479 (up 7.0% since 2010)

Medford / Jackson County

Jackson County MSA Multifamily Permits * 2018: 55 (August YTD) 2017: 47 2016: 158


Medford’s population grew by 9.1% between 2010 and 2017, while Jackson County’s population grew by 7% over the same period. Medford homes are renter-occupied. The median income in Jackson County is $46,343.


Between 2012 and 2017, the median home price in Jackson County increased by 49%. In West Medford, the median price rose 103.9% over the same period. As the county continues to grow, housing affordability is

Medford Vacancy Rates** 2018: 2.9% (As of Q3 2018) 2017: 3.1% 2016: 3.3%

Medford Area Unemployment rate 2018: 4.4% 2017: 4.7% 2016: 5.1%

increasingly becoming a problem for local residents. Approximately a third of Jackson County residents spend more than 50% of income on rent. In February 2018, the Medford City Council passed a third of a percent excise tax on major construction within the city. The city plans to give 15% of funds generated by the tax to ACCESS for down payment assistance. 35% will be put toward low income housing projects, and 50% will fund programs that would build housing for residents making up to 120% area median income. *Source: Census Bureau **Source: CoStar

Mobile Home Parks: The Future of Affordable Housing? By Tyson Cross, HFO Investment Real Estate

After years in the shadows, mobile home parks appear to be ready for their turn in the spotlight. As cities struggle to build and preserve enough affordable housing units to keep up with the demand, leaders and advocates have begun turning their attention to what in many cities is the only truly naturally occurring affordable housing option. In an interview with CityLab earlier this year, architect Eduard Khakhmalnikov argued that mobile home parks have gone from a popular housing option for construction and factory workers to a haven for vulnerable groups including women, retirees, and families on a limited income. Approximately 20 million Americans live in

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mobile homes, but many cities have written them out of the zoning code. When park owners sell, many parks get redeveloped into apartments or other more expensive housing options. This can mean that the park residents lose not only the pad they rent but also their homes, which represent a substantial investment but are not as “mobile” as their name suggests. The city of Portland is home to 56 mobile home parks. City leaders are beginning to understand the important role these parks play in the local housing market. In 2016 the Oak Leaf Mobile Home Park on NE Killingsworth was purchased by Living Cully, (continued on page 26)

Quick Guide to Opportunity Zones By Zoee Lynn Powers, Attorney at Law Radler White Parks & Alexander LLP In 2017, Congress created Qualified Opportunity Zones (“OZones”) to encourage long-term, private-sector investments in low-income communities nationwide. In general, the program enables investors with capital gains to receive favorable tax treatment for investing in Qualified OFunds (“OFunds”). OFunds then make equity investments in new real estate projects and businesses located in the OZones (that is, in the low-income communities). Many of the specifics for this new program still need to be clarified by the IRS and consulting with a tax professional is essential. Each Ozone is a low-income census tract which was nominated by the state during a “consideration period” that ended on April 20, 2018. The IRS has now designated OZones in every state, five possessions, and the District of Columbia. Ozone designations stay in place for ten years. Short of action by Congress, they cannot be modified after initial designation. OFunds are corporations or partnerships that self-certify as an “investment vehicle” organized “for the purpose of investing in” qualified property in an Ozone. At least 90% of the assets of an OFund must be invested in new Ozone tangible property in or in a new Ozone “Qualified Business.” For a Qualified Business, “new” means substantially all of its property is acquired after December 31, 2017. For other property, “new” means either that (a) the original use in the Ozone commences with the investment or (b) the OFund or Qualified Business “substantially improves” the property – meaning that capital expenditures on the property in the 30 months after acquisition exceed the property’s adjusted basis on the date of acquisition. OFunds offer investors a way to defer and eliminate some of the tax that the investor would otherwise have to pay on certain prior capital gains (“Eligible Gains”), including gains from the sale or exchange of stock, partnership interests, real estate, etc. The Eligible Gains must be rolled-over during the 180-day period beginning on the date of the sale or exchange creating the capital gain. The investor receives either stock or an interest in the OFund. In contrast to like-kind exchanges, only the amount of the Eligible Gain must be reinvested in the OFund, not all

of the proceeds from the sale or exchange that produced the Eligible Gain. If invested in an OFund, taxes on Eligible Gains may be deferred until the earlier of the investor’s disposition (sale or exchange) of its OFund investment or December 31, 2026 (the “Deferral Period”). Note that the period for which the investment is held (the “Investment Period”) could be longer than the Deferral Period (which will end, at the latest, in 2026), but generally they will be the same. The rolled-over Eligible Gains will be included in the investor’s gross income in the taxable year at the end of the Deferral Period (unless the investment has lost value, then taxes are paid on the fair market value (“FMV”) at the end of the Deferral Period). Any appreciation of the OFund investment will be included in the investor’s gross income in the taxable year at the end of the Investment Period. The basis used for calculating the taxpayer’s gain is calibrated to encourage longer-term investments. For an Investment Period of: • less than five years, the basis of the investment is zero dollars ($0) and all of the Eligible Gain or the FMV at the end of the Investment Period must be included in income. • at least five years, the basis is 10% of the invested Eligible Gain. • at least seven years, the basis is 15% of the invested Eligible Gain. • at least 10 years, the basis is equal to the FMV of the investment on the date it is sold or exchanged (although the original rolled over Eligible Gains will be included at the end of the Deferral Period in 2026). That is, all of the gain attributable to appreciation in value of the investment will be permanently excluded. To illustrate, consider the following example: In 2018, Irvin Investor finds himself with $1 million in capital gain (the Eligible Gains). Irvin formed a limited partnership as his OFund and his attorney made sure the partnership agreement contained appropriate language to be treated as an OFund. Irvin then timely rolled the $1 million into the OFund, which made appropriate investments: The Northwest Apartment Investor


Eligible Gains rolled-over

Investment Period

Total FMV at end of Investment Period

Deemed Basis

Amount included in the investor’s gross income in the taxable year at the end of the Investment Period

$1 million

Fewer than 5 years

$2 million


$2 million (benefits only from deferral)

$1 million

5 – 7 years

$2 million

$100,000 (10% of Eligible Gains)


$1 million

7 – 10 years

$2 million

$150,000 (15% of Eligible Gains)


$1 million

More than 10 years

$2 million

$2 million (FMV of investment when sold)

$850,000 in 2026 and $0 in 2028

Irvin realized a total gain of $2 million – $1m of gain in the original, rolled-over Eligible Gains and $1m in additional gains at the end of the Investment Period. When Irvin initially invested in the OFund, his basis was $0, which preserves the $1m in Eligible Gains. On the fifth anniversary of Irvin’s investment in the OFund (2023), his basis increased by 10% of the Eligible Gain, to $100,000. On the seventh anniversary of Irvin’s investment in the OFund (2025), his basis increased by an additional 5% of the Eligible Gain, to $150,000. When temporary deferral on the initial Eligible Gains of $1m ends on December

31, 2026, Irvin’s basis is $150,000 and Irvin recognizes $850,000 in gain in the 2026 tax year. Irvin’s sale of the OFund investment in 2028, after holding it for 10 years, results in no additional gain to Irvin and no additional taxes to be paid beyond what was required in the 2026 tax year. Zoee Lynn Powers is a licensed attorney in Oregon (admittance in Washington pending) specializing in real estate and land use law. She can be reached by phone at (971) 634-0215 or via e-mail at zpowers@radlerwhite.com.

MOBILE HOME PARKS: THE FUTURE OF AFFORDABLE HOUSING? (CONT. FROM P. 25) St. Charles Catholic Church, and other local nonprofits and faith groups when they learned the park would be sold for redevelopment. Ultimately, the St. Vincent de Paul Society of Lane County purchased the property from the nonprofit groups and is working to rehabilitate the complex’s dilapidated conditions. St. Vincent de Paul expects to replace 10 to 12 homes and replace roofs on others. In all, the expected cost is $195,000 per unit – not a small sum for a park intended to house residents who earn less than 60% of median family income. The situation at Oak Leaf has inspired city leaders to rethink its classification of mobile home parks. In July, the Planning and Sustainability Commission voted 7-2 in favor of creating a new zoning designation for mobile home parks in the city. The City Council will vet the proposal from the PSC and vote on whether to approve the plan. Housing advocates hope that the new park designation will be a hurdle for redevelopment, and prevent displacement of the families who live in the parks.

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City leaders are more cautiously optimistic – they believe that even if the re-zoning is approved, property owners will file claims under the state’s Measure 49 initiative. Measure 49 was approved by voters in 2007 and requires that the state compensate or waive land use regulations if those regulations went into effect after the claimant had purchased the property. Meanwhile, a new study from the Urban Institute based in Washington D.C. determined that the home price index for mobile homes had an average annual growth rate of 3.4% vs. 3.8% for traditional homes. Some values have actually risen at a faster pace for manufactured homes than traditional properties. The Urban Institute report states “Although there are limits to what the data can tell us, the index suggests a need to reevaluate the presumption that manufactured homes do not appreciate at the same rate as site-built homes.” Tyson Cross is a Senior Broker at HFO Investment Real Estate. He can can be reached by phone at (503) 241-5541 or by e-mail at tyson@hfore.com.







TYSON CROSS Senior Broker



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INVESTOR ROUNDTABLE Miller Hall – World Forestry Center (near the Oregon Zoo) Wednesday, January 9th, 2019 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.

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