Portland Economy, Multifamily Housing Easing into “˜Soft Landing’
By Caitlin Jones & A. J. Johnson
8 min read
A metropolitan area that focuses on quality of life, Portland, OR, is atypical of the rest of the country. While recession is gradually creeping into the local economy, the impact is far more manageable than other comparable urban areas in the U.S.
“We are at a relatively flat line compared to other places,” said Vince Ciotti, regional advisor to Oregon Housing and Community Services (OHCS), the state low-income housing tax credit (LIHTC) allocating agency. “Our housing prices went up slower and they are coming down slower,” he noted. “We are not having those 20-50% declines that you see in some places. We have had closer to 8-10% declines. We didn’t make as much money when people were making it, and we are not losing as badly on the other end.”
Nevertheless, the Portland area is still seeing some challenges, including with regard to new LIHTC development.
Growth Market
Portland, Oregon’s largest city, had a population of 568,380 as of July 2007, a 6.9% increase since July 2000. Meanwhile, the Portland-Vancouver-Beaverton OR-WA MSA, which includes parts of seven counties, grew to 2,159,720 residents as of July 2007, according to a report by Portland State University’s Population Research Center. The city of Portland is mostly in Multnomah County, with small parts in Washington and Clackamas Counties.
Intel is the major employer in the Portland metro area, with 16,000 employees. Another 1,200 technology companies also call the area home. The Portland area is also the main or regional headquarters for sports apparel makers Nike, Adidas, and Columbia Sportswear, and has major steel and aluminum manufacturers as well.
The local unemployment rate was 5.6% in September 2008, nearly one point higher than a year earlier, although down from 6.1% in August.
According to a report by Columbus, OH-based Red Capital Group, Portland area job growth during the first quarter of 2008 slowed to 12,700 new jobs, a 1.2% increase over the prior quarter. This paled against 18,200 new jobs added in the fourth quarter. Red Capital forecasts a further slowdown in job growth through year-end, but a pick-up of 2.9% in 2009. A more pessimistic forecast by the brokerage firm Marcus & Millichap predicts 8,000 local job losses in 2008 by year-end.
Median household income in the Portland area in 2005 was above $49,000.
The Portland market has seen a falloff in home construction and home prices. The median home sales price was $267,000 in September 2008, some 11% below the peak of $300,000 in August 2007. This decline ended the home price appreciation of a few years ago that had put downward pressure on conventional rents. As a result, rents and vacancy rates for conventional apartments have held fairly steady. Marcus & Millichap said the local overall multifamily rental vacancy rate was 5% as of 6/30/08, compared to 4.7% a year earlier, and forecasts a slight uptick to 5.1% by year-end. The firm said average overall multifamily asking and effective monthly rents were $817 and $761, respectively, as of 6/30/08, each up 5.8% from a year earlier. It predicts further rises to $834 and $775 by year-end 2008.
Witten Advisors, LLC reported effective rents rose by 5.5% for the Portland area in the 12 months ending 6/30/08, the sixth largest increase among the 45 U.S. major metro it tracks.
Tax Credit Market
The Portland metro area, and particularly the city, has been a popular location for LIHTC projects in Oregon.
An analysis of online data from Oregon Housing and Community Service, on all LIHTC projects awarded 9% and 4% credits from 1989 through the spring 2008 funding round, shows that 133 (30%) of the total 441 awards made for projects throughout Oregon were for deals in the city of Portland. These Portland projects accounted for 39% by dollar amount of the $139.6 million in total LIHTCs awarded statewide. Portland city deals accounted for 24% by number and 31% by dollar amount of the total 9% credit awards statewide; for 4% credit awards, the city’s share was 43% and 59%, respectively. The Portland projects contain 12,033 units, nearly 40% of the 30,238 total units statewide.
As for developer demand for housing credits in Oregon, in the spring 2008 funding round four applicants requested $1.5 million in 9% LIHTCs; three received awards totaling $1.1 million. In this fall’s funding round, 20 applicants have requested $9.2 million; $3.7 million is available. In addition to the federal LIHTC, OHCS allocates the Oregon Affordable Housing Tax Credit – $8 million is available this fall.
OHCS’ Vince Ciotti said the supply of, and renter demand for, LIHTC units has stayed fairly constant the last five years. He noted multifamily rental housing generally softened briefly about 21/2 years ago. “The market weakened a bit because lots of people were using sub-prime loans to buy houses, and we had a vacancy issue in some of the suburban markets,” Ciotti noted. “Demand has been constant over the last five years for city projects.”
Riad Sahli, of REACH Community Development, Inc., an active local LIHTC developer, sees increasing demand for tax credit apartments because of the decline in home ownership. “With home ownership rates continuing to fall off, we see more people turning to rentals,” he noted.
Monika Elgert, in the West Coast headquarters office in Portland of the syndicator Enterprise Community Investment, Inc., expects local demand for tax credit units to continue and perhaps increase. She also pointed out, “There is a strong commitment to housing at the city level.”
Challenges
One immediate challenge to developers seeking to undertake new LIHTC projects in the Portland market is finding tax credit equity – a thorny problem shared by many developers nationwide.
According to Sahli, “from an investor perspective, there has been a major tightening in the last 12 months and more so in the last three months. We started noticing it a year ago when Fannie and Freddie exited from the tax credit markets. Deals then started falling apart because traditional seekers of tax credits didn’t need them.”
Julie Garver, of Innovative Housing, Inc., another active local nonprofit LIHTC developer, said demand for tax credit units in Portland is high. But she added current housing credit prices “make it unfeasible to do projects. You can’t get the prices and there is not enough gap financing to build new projects, and investors want new, big projects.”
Additional challenges are the lack of developable sites for new LIHTC projects in the Portland area, and the relatively high cost of land relative to development costs, according to Portland-based appraiser/consultant Mark Bryant, of Cushman & Wakefield of Oregon, Inc.
The state has a unique “urban growth boundary” law, administered in the Portland area by an entity called Metro, which effectively restricts sprawl and new development beyond a certain point around each municipality by limiting access to utilities as well as police, fire, and school coverage. Ciotti said the impact on Portland has been to make development within the city of Portland very desirable, and development outside relatively undesirable.
Another challenge to new LIHTC development in the Portland area is the fact that projects with tax credit rents pegged to 60% of the area median income (AMI) generally aren’t viable. Bryant said the greatest demand is for units for households from 30% to 50% of AMI.
According to Bryant and Ciotti, LIHTC rents pegged to 60% of AMI often compete with conventional market rents. Ciotti indicated a 9% deal at 50% of AMI is “doable and desirable” in any of the Portland submarkets ripe for new LIHTC development. “At 60% AMI those deals don’t make sense,” he noted.
For example, for a two-bedroom unit, the typical monthly LIHTC rent in the tri-county area, according to OHCS, is $763 for a unit pegged to 50% of AMI compared to a typical conventional market-rate rent of $864. If pegged to 60% of AMI, the typical LIHTC rent would be $916 – above the typical conventional apartment rent of $864.
Said Elgert: “Once you start looking at housing above 50% of AMI, you start getting fairly close in some areas to where [the] market-rate housing [rent] is.”
Ciotti said there is wide variation in market-rate rents in the Portland market. He noted market-rate rents are highest in the downtown Pearl District. “The further you go from the heart of the city, the lower the rents,” he added.
According to FY 2008 income estimates by the U.S. Department of Housing and Urban Develop-ment (HUD) for the Portland-Vancouver-Beaverton OR-WA MSA, the annual income limit for a four-person household is $33,950 for a family at 50% of AMI, and $40,740 for a family at 60% of AMI. These income caps – and the maximum LIHTC rents derived from them – haven’t changed the past four years.
Garver said there’s a strong need locally for workforce housing and for rental housing affordable to households making up to 100% of AMI. “You have a huge segment of the population that is falling apart,” she noted. “These people can’t buy a house, rent an apartment, and secure a new job.”
Garver noted that while there are excellent opportunities for LIHTC rehab projects in Portland, tax credit investors aren’t interested. “Lenders in general and tax credit investors aren’t really thrilled about rehab right now,” she said, saying they prefer new construction deals.
Ripe Submarkets
Those interviewed reported that submarkets in the Portland metro area ripe for additional LIHTC development include the Central City, close-in Northeast (Portland)/Lloyd Center, close-in Southeast (Portland), East Multnomah County, the Southeast metro area (Milwaukie, Gladstone, Clackamas County), Beaverton, Gresham, Tigard, Hillsboro, Oregon City, and Wilsonville.
Bryant noted good areas outside the Central Business District are peripheral areas with good mass transit available, especially proximity to the light rail system. The city itself has excellent public transit systems.
– James T. Berger
