PORTLAND ECONOMY & REAL ESTATE MARKET

The Portland economy and real estate market are clicking on all cylinders right now.  All you have to do is read The Barry Apartment Report Spring 2016 edition to realize just how good we’ve got it:

  • Unemployment at 4.3%
  • Job growth at 3.2%
  • Population growth at 1.6%
  • Portland-Salem Consumer Price Index at 1.2%
  • Apartment values up 10 to 20% in 2015
  • Apartment income up 4% to 7% in 2015
  • Apartment vacancies at 3.5%

Life is good.  Isn’t it?  It’s so good that there are days that I pinch myself to see if I’m living in reality or some make believe world.

But how is the rest of the U.S. real estate market doing?  You may be thinking, “Why should I care?” The answer is simple: You should care because sometime in the not too distant future we will follow down the same path.  In some instances we’re already doing so but we have yet to feel the full affect of the nascent trend.  The Portland market is not an island unto itself that is unaffected by the rest of the country.  So Portlandia and the Pacific Northwest in general will inevitably follow.

FIVE GROWING REAL ESTATE TRENDS

So what’s going on?  There are some interesting trends happening even as we speak:

  1. Chinese Money Flooding U.S. Residential Real Estate Market – For good or ill the nouveau rich from China are investing in high end U.S. homes.  They prefer locations that are primarily on the west coast (think San Francisco & Vancouver, BC) but they are beginning to spread out geographically.  Here’s an interesting tidbit:  In 2015, one in 14 homes in the U.S. valued above $1 million was purchased by Chinese nationals.
  2. Over 2,500 Big Box Stores Projected to Close in 2016 – Chain retailers facing increased competition from online shops like Amazon.com have decided that they can’t compete.  They are cutting their losses by closing their least competitive stores.  Some examples are:
    • The Office Depot – 400 stores
    • WalMart – 154 stores
    • Walgreens – 200 stores
    • Barnes & Noble – 223 stores through 2017
    • Sports Authority – 140 stores
    • Macy’s – 40 stores
    • Sears/KMart- 128 stores
  3. Multifamily Market Begins to Moderate – I know it’s hard to believe but apartments in other parts of the country are beginning to moderate.  Look at some of these first quarter 2016 results:
    • Vacancy rates are up 10 basis points to 4.5%.
    • Large market rents are either declining or remaining stable while rents nationally increased overall 0.5% over the prior quarter.
    • Net absorption was 30,838 units, the lowest quarterly total since the 3rd quarter of 2012.
    • REIS expects vacancy rates to continue to rise for the remainder of 2016 ending 40 to 50 basis points higher than 2015.
  4. U.S. Housing Market is Beginning to Slow Down – Home sales in Portland are very strong, with not enough inventory for those wanting to buy.  But the national housing market shows a completely different story:
    • The home ownership rate has dropped to 63.7% in 2015 compared to 69.0% in 2004.  That’s a huge drop.
    • The home ownership rate has declined significantly in spite of mortgage rates at historic lows.
    • New U.S. home sales fell 1.5% in March over the previous year.
    • Subrprime mortgage originations are on the rise again.  From January to October of 2015, Americans took out 312,000 subprime mortgages, an increase of 28% over the prior year.
  5. Commercial Property Sales Down Significantly in 1st Quarter 2016 – Transaction volume declined in the first quarter for all property types except for apartments.  Sales volume totaled $32 billion in March, down 39% compared to a year ago.  However, the price of commercial properties only fell slightly.  It appears the market is reaching a tipping point where buyers are beginning to balk at the asking prices sellers are offering.  Sales volume is still good (3rd highest quarter ever) but when compared to the peaks of 2015 sales are down.

While the real estate market in the Pacific Northwest is rosy, the national picture shows a different story.  So what does this mean for us? How should we respond to these growing trends?  First of all, there’s no need to panic.  The world is not coming to an end.  While things are hopping in our neck of the woods we should begin preparing for a future slowdown in the economy and in commercial real estate.

THREE STEPS FOR PREPARING FOR A POSSIBLE SLOWDOWN

  1. Now’s the time to sell that property you don’t want to get stuck with during the next economic cycle.  You know the property.  In spite of a hot real estate market, for whatever reason, it’s not really performing as well as it should be.  It’s time to unload that albatross around your neck.  I believe in the Greater Fool Theory.  Sell that loser of a property to an investor who is a greater fool than you are. Now’s the time.  Prices are fantastic.
  2. If you haven’t already done so, it’s time to refinance your properties with modestly leveraged debt at historically low interest rates. Call me today (503 614-1808) for a free no-obligation loan quote.
  3. And finally, sock away some additional cash to help you through the slow down.  Cash in the bank solves all sorts of problems and makes life a whole lot easier.

Sources: The Barry Apartment Report, Spring 2016; Chinese Cash Floods U.S. Real Estate Market, by Dionne Searcey and Keith Bradsher, November 28, 2015; Sears, Walmart, Target & Others That Have of Will Close Stores in 2016, www.time.com, by Alicia Adamcyzk, April 22, 2016; For Multifamily Market, Moderation Reigns Supreme in 2016, by Bull Realty, blog.thebrokerlist.com, April 30, 2016; Commercial property sales fall sharply in first quarter, www.scotsmanguide.com, April 201, 2016; 4 Signs That the Lights May Be About to Go Out in the Housing Market, Mauldin Economics, by Tony Sagami, March 23, 2016.