PORTLAND, OR-Apartment owners will see their cash flow improve in 2006 as the condo craze continues to take units off the market and increasing rents remain too low to support new construction. That is the prediction of locally based appraiser Mark D. Barry, who publishes the Barry Apartment Report.
His prediction follows a clear reversal of fortunes for the metro apartment market in 2005. After three years of flat income and above-average apartment vacancy rates, the local apartment market began stabilizing in 2005, thanks to strong employment growth, limited apartment construction and declining apartment supply.
"The apartment market showed significant and obvious improvement in 2005," Barry tells GlobeSt.com. "This trend is continuing, with a landlord's market expected by late 2006 and in 2007."
Condominium converters effectively took a record 1,250 apartment units off the market in 2005. Combined with the increasing demand from job growth and general population growth, it was enough to drop vacancy from 7.1% at the start of 2005 to 5.9%, the lowest year-end rate since 2001.
The improvement will continue through 2006, says Barry. Employment forecasts are that the metro area will see 15,000 to 25,000 new jobs while Barry is predicting the little new construction and continued interest in the market by condo converters.
"Apartment construction simply does not pencil out with the current rents and sale prices," he says. "Expect to see 2,500 to 3,000 new apartments in 2006, or the slowest year for apartment construction here since 1993."
As for vacancies, Barry predicts they will have dropped to 4.50% to 5.25% by late 2006. Assuming an inventory of 230,000 apartment units, that means 10,500 to 13,000 vacant apartments by late 2006. The tightening market will lead to rental increases for the first time in four years, says Barry, leading to an increase in income of between 2% and 5%.
"Apartment rental rates have been flat to declining over the last three years," Barry tells GlobeSt.com "Expect this to change in mid 2006 to early 2007, as I expect we will be going into the early stages of a landlord's market." On the investment front, Barry predicts that if net income increases by 3% and interest rates rise by 50 basis points, "apartment values will flatten out and stabilize in 2006." Apartment values in Portland are up over 20% since 2002 while that average cap rate has dropped over 150 basis points to 6.72%, says Barry.
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