1. real estate
2. apartments

PORTLAND, OREGON
MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE
RED Capital Group | 1Q15 | May 2015
1Q15 PAYROLL TRENDS AND FORECAST
PAYROLL JOB SUMMARY
Total Payrolls
1,085.7m
Annual Change
31.8m (3.0%)
2015 Forecast
31.4m (2.9%)
2016 Forecast
24.8m (2.2%)
2017 Forecast
18.4m (1.6%)
2018 Forecast
14.1m (1.2%)
Unemployment (NSA)
5.3% (Mar.)
OCCUPANCY RATE SUMMARY
Occupancy Rate (Reis)
96.7%
17th
RED 50 Rank
Annual Chg. (Reis)
-0.1%
RCR YE15 Forecast
95.4%
RCR YE16 Forecast
95.2%
RCR YE17 Forecast
95.6%
RCR YE18 Forecast
95.9%
The Portland payroll work force continued to expand at a significantly above average pace as establishments hired at a 31,800job, 3.0% annual rate during the first quarter, up from 4Q’s
28,700-job, 2.7% performance. Accelerated growth was primarily
attributable to faster hiring in electronic equipment and semiconductor manufacturing, health care and government, which collectively added 10,200 (3.3%) workers year-on-year, up from 4Q14’s
6.700-job, 2.2% gain. Constructive growth was observed in every
industry sector with the exception of colleges and universities,
where headcounts fell at 900-job, -6.9% y-o-y rate during 1Q15.
The seasonally-adjusted series also recorded vigorous growth,
showing an 8,700-job net pick up during the January-March
1Q15 ABSORPTION AND OCCUPANCY RATE TRENDS
Tenant demand was moderately stronger during the winter quarter
as renters occupied a net of 371 vacant units, according to Reis, up
from 305 during the previous quarter. On the other hand, absorption was down materially from the comparable periods of 2013 and
2014 when Portland households net leased an average of 723 units.
Net supply totaled only 378 units during 1Q15, however, and average
occupancy held steady at 96.7%, immaterially lower than the
96.9% 20-year high recorded during the third quarter 2013.
Axiometrics surveys of larger, stabilized same-store properties
recorded a 96.1% average occupancy rate, up 30 basis points
sequentially and 30 bps y-o-y. Axio data indicate that class-C
properties maintained the highest level of occupancy, adding 40 bps
RED 50 Rent Change Rank
19th
RCR YE15 Forecast
3.1%
RCR YE16 Forecast
1.9%
RCR YE17 Forecast
2.1%
High occupancy notwithstanding, rent trends decelerated during the
winter quarter. Average effective rent increased 3.9% year-onyear, down sharply from 4Q14’s 4.5% performance and the smallest
advance recorded in nearly four years. Rent trend weakness was
largely confined to the Northwest Portland submarket. This submarket, which encompasses Downtown, the Pearl District and
contiguous areas of intensive new property development, saw rents
actually decline -0.1% sequentially, thereby trimming the y-o-y
metric to only 2.1%, equal lowest with Beaverton. These data suggest that supply already is exerting downward pressure on rents.
RCR YE18 Forecast
2.3%
Axiometrics data paint a more optimistic picture. According to this
Mean Rent (Reis)
$933
Annual Change
3.9%
TRADE & RETURN SUMMARY
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
RCR specified a payroll forecasting equation using six lags of the
dependent variable and lags of U.S. payroll growth and S&P500
returns to achieve a 97.9% adjusted-R2. This model produces a
forecast of steadily moderating payroll job growth, influenced by
comparable declines in U.S. hiring and weaker, although positive
equity returns. To be specific, the model forecasts a 2.7% y-o-y
advance in 4Q15, followed by comparable 4th quarter metrics of
2.0%, 1.4% and 1.2% in 2016, 2017 and 2018, respectively. In each
case the Portland result is about 50% faster than the U.S. mean;.
sequentially to 97.4%. Class-B occupancy also increased 40 sequentially (to 96.2%), while class-A properties continued to battle
the impact of new supply, holding steady at 94.5%. Absorption of
new units appeared to slow down during the winter quarter, falling
to about 9 units per property/month from 16 during 4Q14.
RCR’s occupied stock growth model achieves a 93.8% ARS using
payroll and home price growth and lags of rent and inventory as
independent variables. Inventory growth has the largest coefficient,
and that’s a good thing as supply pressure promises to be intense.
Demand will nearly keep pace, however; allowing occupancy to
recover to about 96.0% following a supply-driven 150 bps decline
to the 95.2% area projected by the end of 2016.
1Q15 EFFECTIVE RENT TRENDS
EFFECTIVE RENT SUMMARY
$5mm+ Sales
period. Although the advance was moderately slower than 4Q14’s
9,000-job surge, it represented the sixth largest one quarter gain
posted since 2000, and second largest of the current recovery.
12
$256.7mm
4.6%
$130,044
Expected Total Return
5.7%
RED 46 ETR Rank
35th
Risk-adjusted Index
3.83
RED 46 RAI Rank
33rd
series, Portland same store rents increased at a 7.7% y-o-y rate,
up from 7.5% in the prior period. This was largely a class-B and
class-C phenomenon as gains recorded in these segments reached
8.5% and 7.7%, respectively. By contrast, class-A rents advanced
only 4.9%, largely due to slower growth in suburban areas.
The RCR Portland rent model employs payroll and occupied stock
growth and a lag of inventory growth as independent variables to
reach a 93.8% ARS. The model interprets recent deceleration in
the Reis series as a predictor of further slowing in the future. The
model forecasts rent progress to decline to 3.1% in 4Q15 and to less
than 2% by YE16 before recovering moderately in the out years.
1Q15 PROPERTY MARKETS AND TOTAL RETURNS
Buyers remained active in the Portland market, consummating 12
transactions valued at $5 million or greater during the winter
quarter for gross proceeds of $256.7 million. These metrics
compare to 13 transactions valued at a total of $373.2mm during
the prior quarter. The decrease in proceeds was attributable to
the older average age of the properties in the mix. A preponderance of assets traded during 1Q15 were lower cost 70s- and 80svintage suburban garden projects. Moreover, no higher priced
urban mid-rise or high-rise assets were exchanged.
Cap rates gravitated to the 5% to 6.75% range. Newer vintage
garden properties generated going-in yields at the low end of this
range, while class B– and C assets traded in the 5.75% - 6.75%
area. The most recent benchmark trade for class-A properties
took place in December when a 4-story, 2008-construction Beaverton complex was priced to an approximate 4.5% initial yield.
RCR elected to reduce the generic cap rate for Portland class-B+
assets by 15 bps to 5.35% to reflect the strong interest among
investors for Pacific Northwest properties. Using this level, a
terminal cap rate assumption of 6.0% and model derived occupancy and rent forecasts, we estimate that Portland investors may
expect to achieve a 5.7% unlevered five-year total return. This
ranks only 35th among the RED 46, constrained by our forecast
for sluggish rent growth after 2015. Volatility is about average,
giving rise to a similar risk-adjusted index, ranked group #33.
MARKET OVERVIEW | 1Q15 | PORTLAND, OREGON
Portland Occupancy Rate Trends
RED 46 AVERAGE
PORTLAND (REIS/RCR)
Average Occupancy
97.0%
Source: Reis History, RCR Forecasts
96.7%
97.0%
96.5%
95.6%
96.0%
96.0%
95.2%
95.4%
95.5%
95.9% 95.9% 96.5%
95.5%
95.0%
95.0%
94.5%
94.5%
94.0%
94.0%
2012
2013
2014
2015f
2016f
2017f
2018f
2019f
1Q20f
Portland Absorption and Supply Trends
Units (T12 Months)
Source: Reis History, RCR Forecasts
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2012
ABSORPTIONS
COMPLETIONS
2013
2014
2015f
2016f
2017f
2018f
2019f
1Q20F
Portland Cap Rate Trends
Average Cap Rate
7.0%
6.5%
Source: eFannie.com, RCR Calculations
PA CI F I C R EGI ON
6.0% 5.5% 5.8%
PORTLAND
6.0%
5.8%
5.3%
5.8%
5.8%
5.3%
5.3%
5.5%
6.1%
6.0%
5.0% 4.6%
4.9%
5.0%
4.5%
4.0%
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
NOTABLE TRANSACTIONS
Property Class/Type
(Constr.)
Approx. Date of
Transaction
Total Price /
(in millions)
Price /
per unit
Estimated
Cap Rate
The Belmont (Northeast Portland)
A / MR (2008)
15-Dec-2014
$42.3
$343,902
4.5%
Jory Trail at the Grove (Wilsonville)
B+ / GLR (2012)
25-Jan-2015
$59.0
$182,099
5.0%
Sunnyside Park Apts. (Milwaukie/Oregon)
B- / GLR (1986)
8-Feb-2015
$14.1
$83,304
7.5%
Element 170 (Beaverton)
B+ / LR (2014)
24-Feb-2015
$39.0
$159,836
5.0%
B- / GLR (1980)
25-Mar-2015
$48.8
$120,074
5.2%
Property Name (Submarket)
Commons at Redwood Creek (Beaverton)
RED Capital Research | May 2015
MARKET OVERVIEW | 1Q15 | PORTLAND, OREGON
Portland Effective Rent Trends
Sources: Reis, Inc., Axiometrics and RCR Forecast
YoY Rent Trend
8%
8%
RED 46 AVERAGE
PORTLAND AXIOMETRICS SAME-STORE
PORTLAND (REIS/RCR)
7%
6%
5%
7%
6%
5%
3.9%
4%
3%
2.0%
2%
3.1%
2013
2014
2015f
4%
2.3% 3%
2%
1.9%
1%
2012
2.3%
2016f
1%
2017f
2018f
2019f
1Q20f
Portland Home Price Trends
Source: S&P Case-Shiller and FHFA Home Price Indices and RCR Forecasts
YoY Growth Trend
25%
U.S. FHFA HPI
PORTLAND S&P C-S HPI
PORTLAND FHFA HPI
20%
25%
20%
15.1%
12.4%
15%
15%
10.0%
14.9%
10%
5.8% 10%
5%
5%
7.6%
0%
0%
-5%
-5%
2012
2013
2014
2015f
2016f
2017f
2018f
2019f
1Q20f
Portland Payroll Employment Trends
Source: BLS, BEA Data, RCR Forecasts
YoY Growth Trend
4%
4%
3.0%
3%
2.7%
3%
2.0%
2%
1.4%
1.2%
1.4% 2%
1%
1%
0%
0%
US GDP GROWTH
-1%
2012
2013
2014
US JOB GROWTH
2015
2016
2017
PORTLAND JOB GROWTH
2018
2019f
-1%
1Q20f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been
independently verified or accepted by RED Capital Group. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information
gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED Capital Research | May 2015
MARKET OVERVIEW | 1Q15 | PORTLAND, OREGON
SUBMARKET TRENDS (REIS)
Effective Rent
Submarket
Physical Vacancy
1Q14
1Q15
Change
1Q14
1Q15
Change
Beaverton
$869
$888
2.1%
2.8%
3.3%
50 bps
East Gresham
$755
$788
4.3%
0.8%
0.6%
-20 bps
Milwaukie / Oregon
$796
$822
3.2%
1.9%
1.2%
-70 bps
Northeast
$959
$988
3.0%
3.9%
5.4%
150 bps
Northwest
$1,222
$1,248
2.1%
5.3%
6.2%
90 bps
Tigard / Oswego
$883
$970
9.8%
2.7%
3.1%
40 bps
Vancouver
Metro
$862
$899
4.3%
3.9%
3.8%
-10 bps
$898
$933
3.9%
3.2%
3.3%
10 bps
Portland 5-yr Compound Annual Rent Growth Distribution
1.00%
9.6%
45
3.50%
82.3%
8.1%
40
35
30
Portland
25
Minimum -1.67%
Maximum 6.69%
Mean
2.21%
Std Dev
0.930%
Values
10000
20
15
10
5
5%
4%
3%
2%
1%
0%
-1%
0
FOR MORE INFORMATION ABOUT RED’S RESEARCH CAPABILITIES CONTACT:
Daniel J. Hogan
Director of Research
djhogan@redcapitalgroup.com
+1.614.857.1416 office
+1.800.837.5100 toll free
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