René Nelson, CCIM, CRE with Pacwest Commercial Real Estate and Zoe York, MAI Appraiser with Duncan and Brown, discuss the trends in apartment sales in the Eugene–Springfield area over the last 18 months. René is committed to helping investors understand the various aspects of the multifamily market.
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How Do You Grade or Rate Multifamily Properties?
René Nelson: Last year there were some large apartment sales—Brentwood, for example. Would you call that a three star, four star?
Zoe York: From the appraisal standpoint, we tend to look at investment grade, rather than starring it three star, four star. I know if you look on CoStar, they specifically will put three star, four star. And I think they have it as a three star.
René Nelson: I would say that the average sale bid in the last 18 months is more in the $2 million range and typically happens between local investors. Local investors that own multifamily that have cash to play. They want to buy and add more units—1031 buyers, of course. Although, I think that may transition and change a little bit with rent-control from California investors wanting to 1031 into apartments. It will be interesting to see how that trends and the impact of rent control impacts. But just looking at it from a sales standpoint over the last 18 months with investors, what are you seeing as an average cap rate?
Zoe York: What I’ve seen in the last 18 months for these more sizeable projects that are $2 and $3 million and above tends to be in the 5.5-plus or minus range. It’s interesting when you talk about rent control and the impact that might have, because when you’re looking at a cap rate, a lot of those sub-five cap rates that I saw were based on actual in-place income. Some of those had some upside for rent increases. But I definitely have seen a strong trend of below 5.5 cap rates for those very high-dollar, newer, and larger investment multifamily properties.
What Is Motivating Sales?
René Nelson: What do you think motivates the average seller to sell? Because I know that you have to do some analysis, not only the numbers but was it an arm’s length transaction? When you’re doing that analysis on a sale, what do you typically find? Are they 1031 exchanging into other property, commercial and multifamily? Or are they transitioning out of the area?
Zoe York: I see a lot of 1031 exchanges, particularly on these high-dollar sales.
René Nelson: That makes sense. In the Portland market, we’re seeing that prices are starting to soften and cap rates are starting to adjust. I think it’s just because a lot of investors are skittish on the Portland market. There is a lot of class-A inventory that is still being built. And those rents are softening and that’s starting to put pressure on that. Are you seeing that in the Eugene market at all?
Zoe York: There’s very, very limited inventory to buy in Eugene. I think that alone will keep the demand up, even if the interest from out-of-area developers drops slightly. You’re still going to have interest in our area, given the strong economy. I wouldn’t be surprised if rent control softened it slightly, just because I do think it’s making out-of-area developers and investors a bit skittish on investing in the Oregon market overall. Of course, interest rates have a positive or negative impact on cap rates, so the promising thing over the next year is that they’ve indicated that they aren’t going to raise rates.