While Portland’s vacancy rate remains low, a third quarter drop in rents — a time rent growth is usually strong — is cause for concern. Victor Calanog, Head of Commercial Real Estate Economics at Moody’s Analytics, shares his analysis.
Portland’s effective rents dropped 1% in the third quarter of 2022, a reversal of the positive trends the market had seen since it began recovering in the middle of 2021. Vacancies, however, remained tight, falling below 5% in the third quarter to end the period at 4.9%. Portland has not seen sub-5% vacancies since early 2018, according to Moody’s Analytics CRE.
To a certain extent, the slowdown (and even the drop in rents) was not a surprise. Second quarter effective rent growth of 0.1% already represented a major pullback relative to the first quarter’s 4.3%.
But what is particularly worrisome is how rent growth pulled back during the second and third quarters, because this period has traditionally been stronger. It’s when households make decisions to move, and when rent growth tends to accelerate. Moody’s expects rents to continue to rise in 2023, but at around half the pace they rose in 2022.
Top submarket: Milwaukie/Oregon City
Some submarkets are performing relatively better. Milwaukie/Oregon City’s vacancies of 2.6% held steady as the lowest vacancy rate in the Portland metro in the third quarter. Effective rents fell, but by only 0.3% — about one-third of the metro’s decline.
Even pockets of strength could be hit by recession
As the old saying goes: Real estate is inherently local. But even the stronger Portland submarkets may be subject to larger national forces if the economy enters a recession. The probability of a recession occurring in the next 12 months has risen to a statistically uncomfortable 50% to 60%, and with many CEOs of large firms cutting back on hiring plans, performance metrics for affected apartment markets may pull back accordingly.
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