Parallel to many other multifamily markets in the recent four months, Portland, Oregon, has seen a rise in cap rates, rent growth deceleration, and lower transaction volume. Although there is a slowdown in the overall market, Oregon offers the last affordable place to live on the west coast, attracting investment and new residents from California. The Portland MSA attracts over 30,000 new residents annually; last year, 14% of net in-migration was from Californians.

The team at Rockval collaborated with Adam Smith, Senior Broker at HFO Investment Real Estate. Smith has been with HFO for nearly six years, focusing on multifamily family investment sales ranging from $1 - $20 million. HFO's team covers the entire Oregon market and throughout southwestern Washington.

"There has been a significant softening in the market, but we are observing a recovery as rates begin to decrease." - Smith

Portland's investment sales remained robust through Q4 of 2022, totaling $825 million but have taken a large step back going into Q1 of this year, with investment sales volume falling 80% quarter-over-quarter. Proving that investors are continuing to remain wary of prolonged inflation and higher interest rates. Cap rates have increased nearly 100 basis points YOY, with multifamily assets trading between 5.25% and 5.50%.

Eugene and Bend are two markets that have also benefited from the migration out of California. Eugene, home to the University of Oregon, has been able to maintain lower cap rates comparatively because of its strong student housing market. As of January 2023, the median securitized cap rate in Eugene was 4.53%, while Portland was 5.34%.

Annual effective rent growth decreased from 13.5% in Q1 2022 to 5.5% YOY in 2023. The average occupancy rate is 95%, with average effective rents at $1,763. Even though annual rent growth has returned to normalcy, growth is expected to be maintained over the long term due to the major lack of housing.

Legislation Hurdles

Portland's inventory primarily consists of smaller properties between 20 - 60 units, with 75% of the ownership consisting of "mom-and-pop" operations. It is very rare to see a +200 unit complex being transacted or developed, as HFO's average deal size is around $7 million. Smith explains how the strict development regulations have stifled construction and will result in further tightening of the market over the next few years.

"The city estimates needing to produce 295,000 additional units by 2040 to accommodate current and future population demands. To meet that goal, the city would need to see an average of 17,000 new housing units built each year — more than five times the current production rate." - OBP

State and local legislation pose a significant challenge for multifamily investment sales, with new proposed rent control laws restricting landlords from increasing rent by more than 5% plus inflation and a cap of 10% annually in Oregon. While the 2023 limit on rent increase is 14.6%, some tenant advocacy groups have voiced their dissent. Passing such bills as Senate Bill 611 will stifle the new construction pipeline and limit the out-of-state money that invests here in Oregon. That being said, supply-constrained markets are always safe investments due to high demand.

Re:Cap Key Takeaway

The thing that stood out during our conversation with Smith was his advice to investors. As an investor conversing with a broker, it is vital to give feedback on every deal. Even if the deal isn't what you looking for, give the broker a reason why. For example, the cap rate is too high, the wrong neighborhood, or construction type.. the more data points you give back to your broker, the more deals will come across your desk.

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