Apartment Rental Market in Lane County
Understanding the phases of the real estate cycle is critical for investors because as vacancy starts to increase, it affects how much an apartment owner can charge for rent, which trickles down to their bottom line. This in turn impacts what their property could potentially sell for. Learn where Lane County is in the real estate investment cycle as well as what to expect.
What You Will Learn in Episode 4:
- The last recession and its impact on Eugene area commercial real estate
- The four phases of the real estate cycle:
- Hyper supply
- The current healthy apartment rental supply in Lane County: renters looking to rent and new units still being built
- How incentives go up as the rental market softens
- Impact of UO on rental pool market and the 3,000 new beds that will be coming on the market over the next 18 months
- How rent control affected migration into Portland
- The impact of rent control on out-of-state investors
Recovery, expansion, hyper supply, and recession are the four phases of the real estate investment cycle. In Eugene keeping tabs on what’s coming in the UO rental pool market is also important. Knowing where Lane County is in real estate cycle will help investors make critical decisions about their multi-family properties.Read the Full Transcript
The Four Phases to the Real Estate Cycle
Barry MacGuire: Welcome to the Disruptions In Oregon Real Estate podcast with your host, René Nelson, helping you stay in the driver’s seat of your investment portfolio. As a commercial real estate broker and investor herself, author René Nelson’s passion is to keep your hard-earned real estate investments working for you.
Her goal is to help Oregon real estate investors analyze and measure the value of their current real estate portfolio while exploring available opportunities. And now your host, René Nelson.
René Nelson: Thank you, Barry. Today I would like to talk about the four phases of the real estate cycle. And here’s why it’s important for the listeners to know this information because as vacancy starts to increase, it will make an impact on how much an apartment owner could charge for rent.
And then that trickles down to their bottom lines. So when they get ready to sell or if they want to sell, the first thing that we look at is the net operating income. So if your net operating income has been shrinking or reducing, that will have an impact on what you could potentially sell your property for.
Barry MacGuire: All right, you got to help me understand this. I’m new to this. What are the four phases to a real estate cycle and where are we right now?
René Nelson: Okay. The four phases are, first it’s recovery and that is where vacancy start to decline and there’s no new construction happening, so we’re in a recovery mode.
Barry MacGuire: Okay. Historically, let’s talk about when that happened. Was that after 2009, 2010? Were we in the recovery mode there?
René Nelson: Yeah.
Barry MacGuire: Okay.
René Nelson: We just started to see the market kind of catch its breath and all of a sudden we could notice that the market was stabilizing and the vacancy-
Barry MacGuire: We didn’t see it at the time. We were still a little bit frightened and scared about what was going on, but we were actually past the bottom and we were starting to get a little bit better. Right?
René Nelson: That’s right. That’s right. Historically, when we came out of that recession, we did not see a lot of new construction. If you think back about 2014, ’15, even ’16 as we were coming out of the recession, there were not a lot of new apartment complexes that were being built in our area. In Portland they were being built but not in the Eugene Springfield area, predominantly.
Barry MacGuire: Why cautiousness or what was the reason why?
René Nelson: For a lot of developers, they had taken it pretty tough financially in the recession and the lenders were not loaning money as freely as they are now. And so most of those developers, when they’re building apartment complexes, they need lenders’ money or leverage in order to pull it off. There’s one apartment complex that’s just being finished right now in Eugene that was $30 million.
Barry MacGuire: What? Just being finished now?
René Nelson: Yes.
Barry MacGuire: Wow.
René Nelson: That’s a lot of money to pull out of your own pocket, so a lot of them use leverage while when the lenders are conservative and not loaning money or requiring a much larger down payment, the developers don’t want to get into the market.
Barry MacGuire: What market was hit harder? I’m getting off topic here, but what market was hit harder during the great recession as far as rentals? Was it Portland or Eugene?
René Nelson: I would say it was 50/50. Part of our dilemma here in Eugene is we don’t have as many large employers. Our bigger employers here in lane County are the hospitals, university, education. But when you’re in Portland, you’ve got all the tech industries, hospitality, service, plus education, plus healthcare. So you’ve got more big employers in Portland.
Barry MacGuire: More diversification.
René Nelson: Yeah.
Barry MacGuire: All right. I’m sorry, I got us off topic there. Recovery is the first stage.
René Nelson: Recovery is the first one and then we go into expansion. So what we’re starting to see there is vacancies are still declining or flat, so people aren’t moving around and you don’t have a lot of competition. Vacancies are just kind of stable and now we’re starting to see people build, developers are starting to build. So think back to the development that occurred over by Costco off of Chad Drive.
Barry MacGuire: Just North of it.
René Nelson: Yeah, just North of it. That started right after we came out of the recession, they started building over there and started building apartments. And there were some additional apartment complexes that were built back in that area, in that very street bridge area. And primarily because you’ve got high earners that live in that area, high demand because you’re close to all the amenities, food, shopping-
Barry MacGuire: Shopping, High Five.
René Nelson: Yep. That’s what the renters want. And then you add to it, nice amenities in the apartment complex itself. Most of those have covered parking, they have pools, they allow pets. And so that will draw the demand for the higher quality tenants who want to pay more money in rent.
And so then you start to see more people want to get into the construction market because now they see that there’s demand and they see how fast those leased up.
So during that expansion phase, we see people kind of looking around, developers looking around saying, “Huh, maybe it’s time that I should start building.” And their bankers are now opening the purse strings and starting to loan money a little more freer.
Barry MacGuire: Okay. That’s the second step. What’s the next stage?
René Nelson: Well, the next stage then is hyper supply. What happens with hyper supply is we get into too much construction that has occurred and now there’s an oversupply. We’re not there right now in Eugene.
The market is there in Portland. There is an oversupply in the Portland market right now, but in Eugene, we’re at a healthy, healthy balance right now for the demand of renters that want to rent and the new units that are coming to the market.
Barry MacGuire: Do we typically follow Portland like six months to a year later? Are we going to be there soon, do you think?
René Nelson: I don’t know that we’ll be there soon. And I’m going to talk about why. Because the fourth part of the cycle is then a recession. And what happens during hyper supply and a recession is you start to have increasing vacancy and there’s still more units that are coming to the market.
Now, in Portland, they have more units that have hit the market because those apartments are now completed, but there’s not enough renters right now to absorb that. So they literally are starting to give concessions where they’re offering free rent, discount, you get a free month rent if you sign a 13-month lease. So they’re starting to do that in Portland.
I don’t think we’re going to have to do that in the Eugene area for a while because we’re still in a healthy balance. And part of that is because of interest rates.
If the lenders had increased interest rates, remember earlier in 2019 when the Fed Trader raised rates around July, mid year. And then they did a quick correction and they said, “Oops, we dipped our toe in the water, the market corrected itself, we’re not going to raise rates.”
Barry MacGuire: Sure.
René Nelson: If they would have started to raise rates like the Fed thought they needed to do, we would be headed into a recession in my opinion.
Barry MacGuire: Yeah, they were on a road to that in 2018. They were pretty aggressive with rate increases, right?
René Nelson: Yes. And they realized that they needed to reel it back in in order to keep our economy healthy. But in the recession, one thing that we noticed, rates were pretty flat, but then the lenders started requiring more of a down payment.
So they started tightening down their guidelines and a lot of us in the industry could feel the changes, but we didn’t quite see it coming. I don’t think anybody really realized we were going to have such a mortgage meltdown. We could do 10 radio shows on what happened there with the debacle with subprime mortgage rates and how that crashed the economy.
But ultimately, the lenders got really skiddish and so they tightened their lending guidelines almost overnight when we went into that recession back in 2008 and ’09 and that experience that we had. When they do that, that makes a direct impact on new construction. New construction starts and who wants to get into the market to build apartment complexes.
So right now we’re in a really healthy balance in the Eugene Springfield area in Lane County. We’ve got renters that are looking to rent and we’ve got new units that are coming out of the ground still. So we’re in a really healthy balance right now. In my opinion, we’re still in that expansion mode right now in our area.
Barry MacGuire: At least in Eugene. Not in Portland though.
René Nelson: That’s right.
Barry MacGuire: They’ve gone a little too far up there. How does the vacancy rate look right now for the whole State of Oregon?
René Nelson: In the Eugene area in the fourth quarter of 2019, we’re at 4.6% for vacancy. Statewide, it’s at 5%.
Barry MacGuire: That’s about average, right? Is that to consider the norm?
René Nelson: It is the norm. And what happens is as the rental market starts to soften, then incentives go up. Luckily we don’t really have to give a lot of incentives right now in Eugene.
We are seeing incentives in the campus area, but really what we experience here is there’s 23,000 students at the University of Oregon and 78% of those students live off of campus. So think about the population that’s out there in the renter pool. 23,000 students, 78% of them live off campus.
And if you did a poll within a one and a half, two-mile radius of the University of Oregon and you polled apartment complex owners, I can tell you at least 50% of those property owners, because I know a lot of them will say they either have graduate students or University of Oregon students that live in their apartment complexes. So that’s one thing that has helped keep our vacancy low in our area and keep up below the national average.
Barry MacGuire: All right, so do you think we have an oversupply of properties and how does rent control factor into all this?
René Nelson: Well, rent gains in Eugene are stronger historically than they have been in Portland and even nationally. During the last cycle, we saw our rents increase about 43% in the Eugene area, but that was before rent control went into play. So one thing that we’re watching right now, as I mentioned, rent growth is really supported by the low vacancy and the number of U of O students that are in the rental pool market.
Barry MacGuire: Sure.
René Nelson: A lot of Eugene apartment complexes are lower in what I call, no frills. They’re built in the ’70s, they’re a two-story walk up.
Barry MacGuire: Pretty basic.
René Nelson: Pretty basic, and that’s what the average young renter is looking for because it fits into their budget. I’m going to talk a little bit about what’s happening on the new construction end of apartments because we’ve talked a little bit about supply and demand. There are several new apartment complexes that are coming out of the ground right now.
Barry MacGuire: Here in Eugene area?
René Nelson: Here in the Eugene area, there’s one in the Country Club Road area that was 110 units. Just completed and that’s the one that costs roughly $30 million to build. And there’s 174 units out by Costco in Eugene and they’re leasing up right now and they’ve had a really good success ratio.
Barry MacGuire: Good.
René Nelson: In the South Eugene area, there were 117 units that were built in the South Eugene area and they were 60% occupied in the first month.
Barry MacGuire: Well, that’s healthy.
René Nelson: It is.
Barry MacGuire: Very healthy.
René Nelson: It shows that there’s still a high demand for renters that want to move into new quality units. And guess how much the average rent in that South Eugene complex?
Barry MacGuire: 1,000.
René Nelson: Ooh, no.
Barry MacGuire: Way off?
René Nelson: Try 1,300-
Barry MacGuire: Really?
René Nelson: For the average unit.
Barry MacGuire: The average?
René Nelson: Yeah. And then there’s new complexes that are being built downtown. There’s a couple that are being built out in the River Road area that will be done in January of 2020. And then the kind of the cherry on the cake or the cherry on the ice cream sundae is there’s 3,000 new beds that will be coming out of the ground in the University of Oregon area in the next 18 months.
Now, the average listener may be saying, “Why does that impact me?” Because the U of O students, as new opportunities for housing become available, they want to move closer to campus so they can walk and bike because it’s almost impossible to find a parking spot in the university area.
Barry MacGuire: Sure.
René Nelson: We kind of call it duck hunting with a rake. I mean, it’s just really hard to find a parking spot. So the closer they are to campus, to their friends, to their classes and to social life, they’ll move closer to campus.
So as these 3,000 new beds come out of the ground, think about the average student population at the university. They haven’t rolled out any new announcements that they’re going to double student population or grow a bunch of classrooms.
So I really think what that means is students are going to move in closer to campus and so we’re going to start to see some vacancies in the outlying apartments.
Barry MacGuire: Apartments, okay. Yeah, because that made no sense. You said that they’re pretty much steady at 23,000 students year after year and then they’re adding these 3,000 extra beds. Okay, that makes sense then. So is there an influx of people moving to the Eugene Springfield area?
René Nelson: We are still seeing a healthy balance of new people moving into the area, especially from outlying areas. They’re moving in because there’s job growth and where can you not go to a restaurant or to a store where there’s a help wanted sign right now?
Barry MacGuire: True.
René Nelson: I mean, they’re looking for people for employment. So we do have a lot of people moving into our area. For the listeners, you may be saying, “Okay, why is all this important to me?” It all boils down to your bottom line.
Let’s start at the top with your income. If you’ve got a 20-unit apartment complex and you’re within a five-mile radius of the University of Oregon, that pretty much encompasses all of downtown Eugene.
And now there’s 3,000 new beds competing for the same student population that are living in your complex. And let’s say out of a 20-unit complex, you’ve got five students that live there. Either the graduate students or junior seniors, you’ve got five people that live in your complex. If they can get cheap rent near the university, they’re probably going to move.
Barry MacGuire: That’s a quarter of your rooms.
René Nelson: It is. Now you have to figure out, “Okay, how’s the economy? Do I drop my rent? What do I need to do to stay full?” And there’s just a bunch of things that you really have to pay attention to and it changes almost on a monthly basis. Definitely changes on a quarterly basis.
That’s one reason that I provide to my clients a free Eugene Springfield multifamily report and you can go to my website, stoprentcontrol.me… I’m just going to segue here. I’m not asking you to sign any petitions. It’s just an easy website that I created, stoprentcontrol.me, so that people could go in, fill out their name and download a free copy of my book Disruptions In Oregon Real Estate.
I talk about the cycles in the real estate market and how that impacts you as a property owner, but then I also offer a free report to my clients on a quarterly basis that talks about the rent, the vacancy, what we’re seeing in either an uptick in rent or what we’re seeing for new construction starts.
And what I’m trying to do there is just help the apartment owners really stay aware of what’s happening in the market. Are we flat and stagnant for vacancy? Are we going to see a spike in rent? Are there 200 new units in my area that are coming on to compete with me? So it’s stuff like that. I always try to think, what are people laying awake at night thinking? And most people that own apartments are thinking, “How do I stay full and how do I keep the tenants that I have?”
Barry MacGuire: As far as migration to a Eugene, are we above, below average nationwide? I’d assume we’re probably a little bit above, right?
René Nelson: We are above, yeah. In 2016 and ’17 Portland had 101 people a day that moved into Portland.
Barry MacGuire: A day?
René Nelson: A day.
Barry MacGuire: Wow.
René Nelson: And so that’s where we also saw rent control start to take its grassroots movement because as all those people were moving into Portland, they kind of flooded the market and so there was a housing shortage, not enough units. Landlords started to spike up their rents and that’s where we saw our rent control start to take control.
Barry MacGuire: All right, so we’re going to wrap things up here. Well, let’s just do a little recap here. The four phases of real estate. We’ve got the recovery, expansion, hyper supply, and then recession. Portland tends to be right now a little bit more in the hyper supply. Eugene here, more into the expansion, maybe tail end of expansion. We’re not sure. We’ll see about that, right?
René Nelson: That’s right.
Barry MacGuire: But things are looking good so far, right?
René Nelson: Really good.
Barry MacGuire: All right. Things to do, pay attention to the vacancy rate because that signals hyper supply, correct?
René Nelson: Correct.
Barry MacGuire: Oversupply, that becomes a problem when you want to sell, right?
René Nelson: It does. Because again, if you start to experience high vacancy and your net operating income drops, that’s going to make a direct impact to what you can get for a sales price.
Barry MacGuire: Simple case of supply and demand.
René Nelson: That is correct.
Barry MacGuire: All right. Anything else you want to pass along? Let’s talk about the website real quickly. Let’s talk about what people can find on your website.
René Nelson: Sure. Go to stoprentcontrol.me. You can put in your name and click the button and you can download a free copy of my book. Disruptions In Oregon Real Estate.
Barry MacGuire: It’s a real easy read, by the way. I’m not a genius by any means, but I even understand it. It was really good and it’s a quick read too.
René Nelson: I designed it so somebody could sit down with a cup of coffee and drink it and get the basic just of how rent control is impacting Oregon apartment owners and what they can do about it.
Not everybody has to sell. This is not a gloom and doom situation, but what I want to do is educate people on what their options are and watch the signs.
I always listen to Warren Buffet and I try to read as much as I can read about him, and he’s always watching for signs on how the market is shifting and changing, and there are easy things that we can watch here locally with vacancy, with how many new units are coming out of the ground. Just those little tail signs will tell you where our market is going.
And then of course, watching interest rates and where lenders are at with their desire to loan money.
Barry MacGuire: One of my favorite quotes from Warren Buffet… He’s by the way, done pretty well for himself.
René Nelson: I would say so.
Barry MacGuire: His a quote was, “It’s always good to learn from your mistakes, but it’s even better if you can learn from other people’s mistakes.”
René Nelson: Yeah, that is so true. Very true. And you know, I would agree with that because we’re seeing that now in our Eugene market, what the Portland apartment owners had to suffer through. And it’s funny because, like you and I talk about, what happens in Portland trickles down.
So when rent control went into place, then the landlords got really tough on screening and started really making it difficult for people to qualify. The legislators have now passed rent screening laws in Portland. We know those are probably going to trickle out statewide within the next year or two.
And so talking about learning from other people’s mistakes, we’re watching what Portland does because then that impacts us here. I don’t want to be gloom and doom, but I will tell you that I work with a lot of out-of-state investors and they really are starting to segue into other markets. They’re headed to Utah, Texas, Arizona. I mean, you name it.
There’s about five states that they’re calling me saying, “I don’t want to buy in Oregon right now. I have apartments here, I’m going to keep them. But my gut is a lot of those out-of-state investors will probably start to sell within the next 12 to 18 months because as the rent control just continues to take more of a foothold and there is talk that they may lower rent control even more in the 2021 legislation year.
A lot of investors are looking at that saying, “I don’t know if I still want to be in the market.” But it’s a great opportunity for some of my investors that all ready own property. They live in Oregon, they’re trenched here and they just say, “I want to buy everything that comes on the market.”
Barry MacGuire: Do you think our friends in Salem are listening to investors from out of state and they are like, “Maybe we should reconsider this rent control thing?
René Nelson: Honestly, no. I don’t think they’re listening to it. I think what they’re listening to right now are the tenants because it’s still happening where tenants are having to move because owners are selling their properties because they’re getting out to do to rent control.
And when those tenants have to move and they’ve been somewhere for a couple of years and they realize, “Oh, my rent just went from 850 to 1,600. 13 to 1600 because that was all that was out there in the market.” That’s not really helping the cause right now.
Unfortunately as those units are selling, a lot of them are selling to owner occupants, people that are moving into single families and duplex properties, which is great for those people because now they can have a place that they call home and they own it, but it’s just shortening the housing supply.
It’ll be really interesting. I feel like at the end of 2019, we will now have a pretty complete year that we could look at and review. It’ll be really interesting to see how that has impacted and taken out of the available rental pool. How many units it has taken out of the rental pool.
Barry MacGuire: Stay tuned. René, thank you so much.
René Nelson: Thank you, Barry.
Barry MacGuire: Once again, you can go to stoprentcontrol.me to download a free copy of René’s new book Disruptions In Oregon Real Estate. She covers lots of good information in the book about rent control and how it’s impacting Oregon real estate, and the best part is, it’s free. Thanks for listening.
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