The Out of Towners: the New ‘Normal’ for Portland Development Scene

By Lee Fehrenbacher, DJC Oregon, March 12, 2013

< LOI Environmental & Demolition Services employee Manuel Serrano, left, sprays water to contain dust as a former warehouse in Northwest Portland is demolished Mar. 6. Seattle-based Lake Union Partners are developing a $15 million, 104-unit apartment project on the Northwest 18th Avenue site. (Sam Tenney/DJC)

Construction of a new, five-story apartment building is under way in Northwest Portland, and the Seattle developer in charge is hoping other projects will follow.

Lake Union Partners recently broke ground on the Addy – a $15 million project featuring 104 market-rate units – at Northwest 18th Avenue and Northrup Street. The company has done fee-based work in Portland before, but with this project it is joining the ranks of developers and investors focusing more on the City of Roses as their own backyards become crowded.

“If Seattle gets saturated, we would like to have some stakes down in Portland to continue, and likewise if Portland becomes saturated, then maybe we’re in Boise,” said Scott Roberts, one of the four principals that founded Lake Union Partners. “That’s the strategy at this point.”

Other out-of-town developers are following suit. Wood Partners’ Seattle office, for example, is planning a 28- to 30-story high-rise in the Pearl with Hoyt Street Properties. Also, Las Vegas-based Fore Property Co. is planning a 220-unit development on the Northwest riverfront.

Rumors have circulated that Seattle-based Unico Properties is planning to build a high-rise on property that it owns at Northwest 12th Avenue and Overton Street, via 12th & Overton LLC. Unico officials declined to comment.

Sam Rodriguez, managing director of the Oregon office of Dallas-based Mill Creek Residential Trust, has watched Portland’s profile increase for the past few years.

“In 2010, you seriously couldn’t get an investor to … come see something in Portland,” Rodriguez said. “We had Savier on tap back then and it was a struggle. They’d say, ‘Hey that’s great. It looks like a fantastic project, but we’re not really interested in Portland right now.’ ”

Rodriguez referred to Savier Street Flats, a 179-unit multifamily project nearly finished in Northwest Portland. Rodriguez said investors would come only to buy distressed properties; few wanted to develop.

They preferred primary markets like Seattle and San Francisco – places with big employment engines like Boeing, Amazon, Microsoft and Google. The pulse of Portland’s economy, while strong, was tougher to identify.

Then, in 2011, land prices started to increase. And with so many players vying for a foothold in Seattle, some began exploring Portland for deals. Today, Mill Creek has more than 700 units under construction or in the works in the metro area.

“I think what’s driving the out-of-town developers to come to Portland is there is institutional interest to buy assets here,” said Joe Nydahl, a vice president specializing in the multifamily sector at Jones Lang LaSalle’s Portland office.

Portland, he said, has great fundamentals, including some of the lowest vacancy rates in the U.S. and healthy rent growth. At 3.3 percent, it’s tied with Los Angeles and Ventura County for the nation’s 17th lowest vacancy rate, noted Brad Doremus, a senior analyst for Reis Inc. Also, Portland rents increased by 3.7 percent over the past year, according to Reis data.

Investors like that.

Last year, institutional investors spent $862.7 million on multifamily properties in Portland, according to Jones Lang LaSalle. That’s down from $968.6 million in 2011, but only because fewer local properties were available.

Lee Novak, the director of development for Fore Property, said development in secondary and tertiary markets will likely increase as groups search for higher-yield alternatives. That’s what spurred Fore’s four-building project along the Northwest riverfront.

“I think we’ll see Portland be a growing target for investment over the next few years,” Novak said. “Will it ever be as big as Seattle? No, but I think there’s a lot of opportunity … We’re not pursuing Seattle. From our company’s perspective, if an opportunity came along, it’s not that we wouldn’t take it, but we felt that we would be late to the game if we went up there today.”

Greg Frick, a partner at HFO Investment Real Estate, said the wave of out-of-towners coming to Portland isn’t huge, but it’s noticeable. It’s also indicative of another trend.

Because Portland doesn’t have huge swaths of buildable land, many investors must lower their minimum criteria for projects. Frick said institutional investors may ordinarily stick to developments worth at least $20 million, but settle for $10 million deals here.

Another possibility, like for Wood Partners, is securing a prime property in the center of the city. In December, Frank Middleton, the company’s director of western region development, said expansion into Portland was part of a greater national plan launched in 2008. Wood Partners was searching for high-value, core assets – such as Hoyt Street Properties’ block in the Pearl. There, the group is developing an $80 million tower.

Lake Union Partners’ Roberts said prices in the Pearl are already prohibitive for smaller projects like the Addy. His company is looking slightly outside that bubble.

“We like to be a little bit in a pioneering location, but not to the point where it’s speculative,” Roberts said. “We look for markets like this where we can do a little better on the land costs.”

The Addy’s location, two blocks west of Interstate 405, isn’t in the Pearl, but it’s close. Lake Union Partners had been scouting for a suitable Portland site for a while when it came across one controlled by Phil Morford of Civitas Inc. It was already in mid-development.

Lake Union Partners, along with Salem-based investment partner Mountain West Investment Corp., took control last fall, and in January purchased the property for $2.5 million.

“We like the market down there,” Roberts said of Portland. “We have been actively shopping around the market for a second site.”