Real estate in Portland, Ore., is arguably one of the West Coast’s best-kept secrets. In addition to ski resorts and coastal areas within driving distance, Portland real estate has median housing prices more affordable than most other major cities in the Western U.S. What investors find to be most remarkable about the real estate market in Portland, however, is the fact that it is growing, in spite of the subprime disaster sweeping the country. Its hardy performance begs the question: What exactly makes Portland so special?
A “softer landing”
“Portland’s [real estate] market did not have the massive appreciation that some of the markets that are hurting now did,” Charles Turner of Prudential Northwest Properties, and author of PortlandRealEstateBlog.com, said. “The result is that [the market] has experienced a much softer landing.”
And, unlike housing bubbles that eventually popped in other major U.S. cities, growth in Portland’s real estate market has been largely contingent on population and employment, Max Sinclair, a real estate broker and Realtor who specializes in luxury and investment properties in Portland area, said. This has lent itself to steady growth in Portland, in spite of a potential national recession.
“Oregon has one of the lowest foreclosure rates in the country,” Sinclair said. “The market [should] continue at a steady rate of growth of 5 to 7 percent during the economic recovery period.”
Impressive job growth in Portland is likely to maintain a healthy flow of residents to the Portland area. A recent projection by the Oregon Employment Department estimated an increase of 240,000 jobs over the next decade—an increase of 14 percent compared to the last 10 years, Sinclair said. Furthermore, it appears that Portland is becoming an alternate hub for technological companies in California.
“Intel has some of its biggest plants in Hillsboro, a suburb of Portland, [and] Yahoo! also selected Portland for its customer service center,” Sinclair said.
Growing demand for Portland real estate is compounded by a limited supply of properties within the city. This is because local authorities maintain some measure of control over real estate inventory by limiting the number of allowable property developments within the metropolitan area.
As a result of enforcing an urban growth boundary, “Portland [is] in a better position to weather the ups and downs of real estate investment over the long run,” Sinclair said.
In addition, Portland presents an affordable option for real estate investment in the western region of the U.S. The median cost of housing in Portland is $283,000, according to the most recently published NAHB/Wells Fargo Housing Opportunity Index for 2007; this is a great deal cheaper than the median price in its larger Pacific Northwest counterpart, Seattle, which is estimated at $380,000. The difference is even more dramatic when comparing Portland with major cities in California; median home prices in Los Angeles and San Francisco are $515,000 and $770,000, respectively.
Predictions for a buyer’s market
The real estate market in Portland may have weathered the subprime storm, but the investment climate has nevertheless been changing. Sluggish demand for single family housing in recent years has driven the switch from a strong seller’s market to one that favors the buyer, Turner said. Specifically, sellers did not act quickly enough in adjusting sale prices and had difficulty capturing buyers as a result.
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“In a slowing market, [sellers] have to get in front of today’s market price, not chase the market down,” Turner said.
Consequently, the affordability of a buyer’s market opens up the opportunity for investors to make significant gains. Single family homes in Portland still present the best potential for return as long term investments, with appreciation in values that is typically higher than that of multi-family complexes, according to Sinclair. Further, rental of single family homes offers strong potential for cash flow, fetching lucrative rates in times of high demand.
In addition to the buyer’s market for single family homes, a new surge of condos in Portland will have a significant impact on the future of the overall real estate market. Although it appears the market for single family homes will remain somewhat strong, the plethora of newly constructed condos in recent and oncoming years is likely to weigh down other “strengths” in the market, Turner said.
“I think we’ll see [Portland] real estate going back to being a long term investment,” Turner said.
In terms of location, the most dramatic growth is predicted to emerge from places in the inner city, specifically in areas of Southeast and Northeast Portland in close proximity to downtown. Real estate prices are still relatively low—between $200,000 and $400,000—in these areas, and will rise relative to the demand for properties within the urban growth boundary, Sinclair said.
As for the suburbs, properties in the area of Lake Oswego, which has “the absolute best school system in the state,” should experience the highest rate of appreciation, Sinclair said. Because Lake Oswego has been developed to its near conclusion, the limited availability should drive a boost in property values.
Experts have found the combination of rehabilitating and flipping properties to be a particularly successful strategy for investment in Portland real estate. For example, Turner and his wife, who invest in real estate personally, have employed a general strategy of purchasing single family homes that are intended for remodeling but are also in adequate “rent now” condition. Last year, the couple sold their first rental through a 1031 exchange and bought two more, both of which are being rented. They plan to remodel those to showroom condition at some point before reselling them.
“Rehabilitating and flipping projects that pencil out before appreciation [are] a sound investment,” Turner said. “Appreciation should be considered the bonus, not the driving factor when investing in real estate.”
Sinclair has noted investment strategies that capitalize on the transformation of undesirable neighborhoods. During the last five years, he observed many investors “flipping from one neighborhood to another,” particularly in areas that combine homes built between 1900 and 1940; these areas include Alameda, Irvington, Laurelhurst, Sellwood and Eastmoreland.
As these neighborhoods become less affordable, investors are venturing into less desirable areas, such as the Alberta Arts District, Sinclair said. Another area that offers opportunities for flipping is the St. Johns neighborhood in North Portland, an area that has not previously been considered a first choice among buyers. However, when it comes to making a profit from flipping, “affordability is the key,” Sinclair said.
It’s easy to see why, as the demographic of “very wealthy” people in Portland is considerably smaller than that of California or Washington, Sinclair said. Thus, “any property as close to downtown Portland as possible under $400,000 can be a good candidate for flipping” as well.
Retail properties in the Portland area present an innovative opportunity for long term investment. As neighborhoods grow, so will demand for nearby goods and services, Sinclair said.
“A few years ago, investors from California asked me where they should invest,” Sinclair said. Among other things, he recommended investment in retail properties located along Southeast Division Street, near downtown. At the time, the location was underdeveloped for commercial properties and consisted of few shops and ample warehouses in disrepair—a desolate scene that stands in stark contrast to what visitors now find.
“That stretch of Division Street [has since become] a major commercial hub,” Sinclair said.
Retail properties can also provide an ingredient that many investment portfolios lack: diversification. Investors in only one type of property may not get far because fixed income return and appreciation go in opposite directions, Sinclair said. In other words, a market that yields higher rental cash flow is likely to yield lower returns.
“My advice is to…spread things out,” Sinclair said. “It can be in form of residential and commercial mix of portfolio, or in different markets altogether.”
Sinclair, who invests in real estate personally, takes his own advice to heart.
“I tend to select income properties in specific growth areas spread out in different cities,” Sinclair said.
Investors should note that retail properties require a different set of skills than traditional residential investments; investing in commercial properties requires more “business savvy,” Sinclair said. For instance, retail property owners need to assess the likelihood that a candidate for tenancy will be able to run a successful business.
A city of surprises
Those who dig beneath the steady numbers of Portland real estate may be surprised by what they find: a city, and its outskirts, becoming increasingly modern. In addition to job and population growth, Portland’s gradual transformation can be attributed to a trend of revamped neighborhoods stimulated by long term investments.
But not all of Portland’s surprises are pleasant. The city’s visible hand in controlling real estate supply can also be felt in changed regulations on party sewers, and as a result, is burning holes in some investors’ pockets.
“Sewers are becoming a major hot point in Portland,” Turner said. “Many of the buyers of yesteryear [who] are today’s sellers have no idea what their sewer is connected to.”
The city has mandated that if a party sewer line needs repair, connected lines must be separated and individual owners must foot the bill, Turner said. “A party sewer is the party that no one wants to be invited to,” Turner said. “[My company] just saw an investor foot the $7,000 bill to replace and disconnect the sewer line.”