The recession is far from over. The biggest indicator of our economic health is how many people are unemployed.

Unemployment

In September 2008, 121,240 Oregonians were unemployed. In September 2009, 211,529 Oregonians were unemployed which means roughly 90,000 more people than last year. Oregon's unemployment rate was 6.8 percent in September 2008; in September of 2009 it is running at 11.5%. Crook County has the highest unemployment rate at 19.7%, with Gilliam County the lowest at 6.2%.

Unemployment is expected to continue to rise through the second half of 2010.

Increased Foreclosure rates

There is a direct correlation between unemployment and the ability of home owners to pay their mortgages. According to RealtyTrac, an online seller of foreclosed-property listings, Oregon had the 11th-highest home foreclosure rate in the nation from July to September (the third quarter). There were 76.6 percent more foreclosures in Oregon during the third quarter than a year earlier, during the third quarter of 2008. This pattern will continue until the economy bottoms out.

In the apartment marketplace, we will also see an increase in the foreclosure rate as some owners struggle with higher vacancy rates, lowered rental rates, and concessions. The Average apartment investor is going to face a loss of one month’s revenues, as a result of rental concessions they have to give to attract tenants. In suburban areas rents are dropping up to 10% while expenses for utilities and property taxes are creeping up. This has created a cash flow crunch for those owners who are highly leveraged.

Bad news (why we have fewer tenants) In addition to apartment dwellers not being able to afford rents because there are no jobs, or they have lost their jobs, we are seeing more roommates moving in together to reduce the rental costs until they can move from part time jobs to full time jobs. The federal first time homebuyer credit of $8000, coupled with low interest rates, have enabled many tenants to exit the rental market. These tenants are now moving into new homes, thereby increasing apartment vacancy rates.

In the Portland market place there are approximately 2500 condominiums unsold. The developers of these properties will have to make their payments to avoid foreclosure. To generate cash many are renting them. Depending on upcoming FHA rules condominium sales financing might be hard to find. If this occurs, some portion of the condominium market place will stay rentals for at least the next 36 months. This also pulls tenants out of the standard rental pool.

Finally, investors are purchasing foreclosed homes and converting them to rentals. Homeowners who have not been able to sell their homes are turning them into rentals to generate cash until the marketplace right’s itself. This is affecting the rental market resulting in reduction in number of apartment renters.

Good news

The good news is further off. In 2009 we expect the lowest rate of apartment construction since before the 1980’s. The forecast is for 900 apartment permits to be pulled in the Portland Metro area, compared to highs of 5000 permits a year in 2006.

Low construction rates will continue as bank financing for new construction will be hard to find.

This means that over the next 24 months the apartment marketplace will tighten. We expect rents to increase significantly at the end of 2011 and 2012 as demand will outstrip supply.

As the Federal tax credits for homebuyers evaporate, buyers will need higher down payments to purchase homes. Since it takes time to save for the higher down payments, we expect apartment tenants to stay tenants for an extended period of time. Increased demand will be generated by increased Population. Statistics show average increase in population in Oregon of 17,000 a year from now through 2015. Of this number we expect 32% per year to become tenants, because they are between 25 and 45 (typically a high rental group).

Eighty percent (80%) of the jobs nationally are in urban areas. This indicates that more people will move to cities rather than rural areas, and create apartment demand. Summary In summary, apartment owners will need to brave a downturn for the next 24 months, to get to the light at the end of the tunnel in 2012. This will motivate landlords to innovate to attract tenants and reduce operating cost. Our advice in the short term is not to leave that crash helmet out of sight.

Published: December 29, 2009

Use of this article without permission is a violation of federal copyright laws.

Clifford A. Hockley is the President of Bluestone & Hockley Real Estate Services, one of the larger brokerage and property management companies in Portland, Oregon. Mr. Hockley holds an MBA Willamette University and a B.S. in Political Science from Claremont McKenna College. He is a Certified Property Manager and Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM). Mr.Hockley serves as member at large on the Portland IREM board. He has twice been named Certified Property Manager of the Year (2001 and 2003) by the Institute of Real Estate Management and is a frequent contributor to industry newsletters.