Real estate markets are no doubt independently local in nature. Central Oregon seems to be as wildly independent as anywhere in the country. As a sub-tertiary market, we have always been more volatile both on the way up and the way down. In the good times, we command surprisingly low cap rates driven by limited supply and strong investor demand. During the most recent recession we crashed harder than most places, but recovered strongly and rapidly.
However, we should still observe and learn from national trends. We are not an island, nor are we immune from national market forces. It has long been observed that Central Oregon has a strong correlation with both California and Portland markets, and to a lesser degree, Seattle.
In the November/December issue of the Commercial Investment Real Estate magazine from the CCIM Institute an insightful article by Beth Mattson-Teig entitled Sailing Ahead: Will the renter pool keep up with the robust development pipeline? points out the following national trends:
1. Continuing strong, but slowing demand for apartment rentals.
2. Record levels of new construction.
3. Increasing vacancy rates and slowing rent growth.
4. Interest rates creeping up.
5. Caution and temperance from buyers that are not willing to overpay for assets, keeping sales activity in check.
We are seeing many of the same trends locally with vacancies edging up and rent growth slowing. And we are seeing caution from buyers. There is little new money going towards the purchase of existing assets as most buyers are completing 1031 exchanges.
Without a doubt multifamily has been one of the best performing asset types for the last eight to 10 years, and some sellers are taking advantage of the remaining seller’s market to cash in on handsome profits. Nationally, some are predicting a 10-15 percent reduction in valuations driven by rising interest rates and cap rates, oversupply, and a pause in rent growth.
Our advice to clients locally: to sellers, your property is likely at the highest valuation of all time. It is a great time to sell. The price point needs to be in line with current market cap rates and credible underwriting calculations. Buyers, if you’re not in a 1031 exchange, you may want to proceed with caution.
Ron Ross, CCIM is a principal broker at Compass Commercial Real Estate Services with more than 37 years of real estate experience. He specializes in multifamily investments, office and industrial leasing and sales, 1031 exchanges and investments. For more information about the Central Oregon multifamily market, contact Ron Ross, CCIM at 541-383-2444.