The Portland MSA rounded out 2018 with 72 multifamily transactions in Q4, the highest number of transactions since Q2 2016, which had 79. While the average ($163k) and median ($156k) price per unit decreased by $30k and $4k, respectively, over the quarter, they are in line with expectations for the year. The momentary drop in overall per unit value was more likely caused by the quality of assets traded than a rise in cap rates.
Rising interest rates from the Federal Reserve Bank was expected to raise mortgage rates about 25 basis points, but over the quarter, mortgage rates actually declined, putting less pressure on cap rate increases, which appear to be stable for the time being. Occupancy remains healthy, although remains at 94.5% for the third quarter in a row. Until demand ticks up, potentially late-2019 or early-2020, rents will remain near the $1.50 PSF mark for the region. Another factor influencing investment sales of real estate assets is investors rebalancing their portfolios as stocks drop significantly in value. While the decision to unload real estate assets to properly allocate institutional investment portfolios, it appears that many funds are making the decision to maintain their larger proportion of real estate assets because of their relatively more reliable stability and safer potential for long-term appreciation. Something to watch for in the coming quarters will be how portfolio managers decide to treat the real estate in their portfolios, depending on the macro changes in the economy and imminent 2020 Presidential election.
The largest drop in occupancy across the region was studio apartments in Clackamas County, followed by studio apartments in Clark County. In all unit types, the city of Portland saw 0.6% increase in occupancy; 1-bedroom and 2-bedroom units had stronger occupancy growth than studio and 3-bedroom units, 0.8% and 0.7% versus 0.5% and 0.2%, respectively. Rent growth, however, was stronger for studio and 3-bedroom units than 1-bedroom and 2-bedroom units, 2.6% and 1.8% versus 1.4% and 1.7%. This could be a sign of Portland studio rents matching 1-bedroom rents in many cases or potentially the increasing size of renters on the market. Overall rental growth in the city of Portland was 1.8% over the year.
After Multnomah County (520 units), Washington County (354 units) had the highest number of units deliver in Q4 2018. Studios continue to make up the predominant unit type in new construction. Fifty-nine percent of units delivered in Multnomah County were studios and 47% in Washington County were studios. This is likely a response to the trend of young, single people moving to Portland for its outdoor lifestyle and mild climate. As the people who remain in Portland mature, it will be interesting to see how multifamily development changes its allocation by unit type. While homeownership is on the horizon—even for Millennials—there will be an intermediate stage before the mortgage and after the studio.