René Nelson with Pacwest Commercial Real Estate and Zoe York, MAI Appraiser with Duncan and Brown, discuss vacancy and rent trends for multifamily properties in the Eugene–Springfield area. They help investors by looking at undersupply, rising rents, and trends in new construction.
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René Nelson: I’ve read recently that vacancy is around 3.4 percent and the 12-month average rent growth is around 4.8 percent, almost 5 percent for rent growth where historically it’s been a little slower, 2.8 or 3 percent. Can you give me your perspective on that?
Zoe York: The historic long-term rent growth over the last 10, 20, 30 years has been more like 3 percent per year. That’s a pretty standard average rent growth. What we’ve seen since coming out of the recession, 2014 to the present, has been about a 30 percent to 40 percent rent growth during that time, which is well above the historic average of 3 percent, but we also tend to forget that during the recession (from about 2009 through 2013), we saw really stable rents—almost no growth, and in some cases we saw rent reductions during that timeframe.
Realistically over the last 10 years, we still have been pretty on pace with the historic average of around 3 percent, but it’s been really sizable in the last couple of years, which has been perking up the general market in terms of observing the rent growth because it’s been 30 or 40 percent just in the last couple of years. We really are on pace with historic rent growth, but just in the last couple of years the magnitude of growth has a been a lot more than that historic average.
Is the Eugene/Springfield area under-supplied?
Zoe York: Our vacancy right now is about 3 percent market-wide. We have some lower vacancy in areas like Springfield, where there’s less supply. I’d say just based on my observation that Springfield has been as low 1 and 2 percent in most of the properties that I’ve surveyed whereas the market overall has been about 3 percent.
René Nelson: The property that was delivered this last year on Amazon was about 115, 117 units; I heard it rented up in the first month to about the 60 percent level. To me shows that we’re still under-supplied.
We are definitely still under-supplied in our market and even though we’ve seen a lot of new construction happening over the last five years, and even over the last 10 years if you consider campus, we’ve had continual population growth even during the recession and we don’t have a great land supply in Eugene/Springfield. While it might seem like a lot of construction to folks watching the construction pop up around town, on a supply and demand level, we have had continual population growth and we have not kept pace with the demand for housing in our area.
Vacancy Rates versus Rent Rates
Zoe York: All of those projects that I’ve seen come up over the last few years, starting over in the north Ferry Street Bridge area, and then south Eugene, River Road, west Eugene, they’ve leased up within a few months of completion, and the projects that haven’t leased up in that fairly short timeframe, typically they’re more aggressive with their rents coming onto the market. There’s a couple of strategies that management companies use. Sometimes there are conservative rents in the first years to stabilize and then they increase after that. Other times, they come out strong and have a slightly longer stabilization period, but they start with higher rents, more at market level.
Regardless of their strategies, they’ve been very successful with lease up. Vacancies remain low and rents have continued to grow, which indicates an undersupply in our market.
Will rent rates continue to grow for new construction?
René Nelson: Do you think they’ll continue to push the envelope with rents given that rent control doesn’t apply to properties that are newer than 15 years? Do you think they’ll continue that strategy of kind of pushing the envelope on higher rents?
Zoe York: I think as long as our market is under-supplied, there is no reason not to push the rents because construction costs continue to climb. They’re very high. Land acquisition costs are starting to climb up as values are increasing, as rents are going up. The cost in is actually going up for developers so there’s really no reason not to push the envelope on rents to make projects pencil out and achieve the highest profit as long as the market can sustain that.
René Nelson: And on the new construction, are you seeing the combination? Is it more two bedroom, bath and a half? Is it studios? One bedrooms? What trend are you seeing right now on that new construction?
Zoe York: It varies depending on the area. I have seen more of a trend of folks trying to get the smaller unit types, the studios and ones, mixed into their development because those are in really high demand. There’s not a great supply of those, but the problem with that is it costs the same amount to put a bathroom and a kitchen into a unit that has one bedroom versus two or three bedrooms and so it’s very hard to feasibly construct a project that has only studios and ones. I’ve actually seen a pretty strong mix of studios, ones, twos, and threes come on the market, depending on the developer’s pro forma and how they’re mixing those units. But overall, it tends to have to be a two-plus bedroom per unit on average just to satisfy the feasibility of the project.