HFO-TV: Commercial Real Estate – Portland Trends with Joe Cortright of City Observatory

HFO-TV: Commercial Real Estate – Portland Trends with Joe Cortright of City Observatory


Greg: Welcome back, you’re watching HFOTV. Welcome back to HFOTV. I’m Greg Frick, partner here at HFO Investment
Real Estate and today we have the benefit of having Joe Cortright speak here with us,
Director of City Observatory. How are you? Joe: It’s great to be here. Greg: Give me a little background, what is
City Observatory and kind of give a background on what you’ve done and we can get in and
talk a little bit about what’s going on before? Joe: Sure. City Observatory is a virtual think tank on
open policy and we focus on the 50 largest metropolitan markets in the United States. Basically, all the metros with a million or
more population and do original research on housing, economic development, equity, and
transportation. We also have daily commentary on the web at
our website, at City Observatory. Greg: And do you have local people in each
metropolitan area or how does it…? Joe: No, we’re a data-driven thing tank. So our view of metropolitan areas is largely
driven off of economic data. And then we work with clients and partners
in individual communities… Greg: Got it. Joe: …to provide our data. Greg: Based out of Portland or…? Joe: Based out of Portland. Greg: Oh, lucky. Who can imagine? Yes. Well, where does Portland rank in the top
50 in terms of size? Joe: We’re a little bit above the middle. Were about 22nd, 23rd depending on what yesterday’s
census numbers showed. Greg: Right. Okay. Well, we know a lot of talk lately in Portland
and I think nationally has been affordability. And that’s where we’re involved in the multifamily
side. So maybe give a little kind of an update on
where you’re seeing the cause and maybe the housing shortage in cities and policies and
where we’re going and where we’ve been would be great I think for our audience. Joe: Yeah. So, there’s really a confluence of kind of
three different things that are going on that influence affordability in cities. The first thing is in the United States there’s
a growing demand for urban living. More people want to live in cities. Partly, that’s a change in taste. Partly, that’s a generational shift. It’s really clear and we follow this group
we call the young and the restless, 25 to 34-year-olds with a four-year college degree
or more. They’re increasingly concentrating in cities
and in large cities in the United States and within metropolitan areas, they’re moving
more towards the center of cities. The number of those well-educated young adults
is increasing twice as fast in what we call close-in neighborhoods within three miles
of the downtown CBD as it is in the rest of the metropolitan areas. Greg: And that’s happening across the United
States. Joe: Just about everywhere. Greg: So this is not a unique West Coast thing. Joe: No, three quarters of the large metropolitan
areas in U.S exhibit that pattern. And Portland and a few other places were ahead
of the curve in that. That started happening here in the 1990s but
now it’s a nearly universal pattern. Greg: And does it matter about the education
level of the cities and stuff? I know Portland, Seattle, very highly educated,
a lot of bachelors. Is that drive it more to the core as well? Joe: Well, it turns out that, well, to back
up a step, the most important factors shaping economic development in the United States
right now is how well-educated your workforce is. We can explain 60%, more than 60% of the variation
in economic success among cities just by knowing what fraction of the adults have a four-year
degree. So the cities that are gaining smart young
people are the ones who are getting an economic boost as a result, and those two things feed
on each other. Young people come to dynamic places. Places become more dynamic because young people… Greg: And it just feeds upon itself? Joe: And it feeds on itself. And the second piece of this is real estate
markets are responding to that. So there’s this growing demand for urban living
and we really actually have a finite and slowly growing supply for urban space, of great urban
places. And so what we’ve seen particularly in the
last 15 years in the United States is something the constant called the urban rent premium
has increased sharply. So, the rents and home values close to the
urban core have way outperformed suburban values. Greg: It’s in just not rents, it’s home value. I mean, we’re… Joe: They all go together. Greg: We’re in the apartment industry and
we always hear and I’m always telling people, “Hey, you hear about increasing rents, but
if you look at home values, it’s the same concept within the same neighborhoods.” If it’s in the core, we’ve had a lot of appreciation. Joe: And I can maybe just show you a quick
slide on how this has changed over the last 30 or 40 years in the United States. And so this is what we call the rent gradient
and it’s basically how much people pay for a typical home based on how close it is to
the urban center. So in this chart, zero would be downtown and
20 would be the edge of the suburbs. Greg: Got it. Joe: And if you go back to 1980, the houses
in the center didn’t sell for very much if anything at a pro… or at a premium compared
to suburban areas. Greg: And that was the flight to suburbia? Joe: Yeah. It was the vestiges of that. And then, but steadily over each of those
succeeding decades, that line has gotten steeper in the center, which means people are paying
a bigger and bigger premium to live in the urban core. And there are a lot of reasons for that. One of them is walkability. We know that more walkable neighborhoods and
more walkable homes have appreciated more than places that are more automobile dependent. But again, it just reflects a demand for more
Americans living in cities and we aren’t building that many of them. Greg: And you’ve got the national shortage
because it’s, again within the core, it’s existing, the ramp up time and the delivery
time is so much longer there. Joe: Right. And because particularly in cities we’ve made
it really difficult to build more housing and that’s sort of where things, ultimately,
all these forces come together as in the apartment market. And in Portland, we went through a period
right after the great recession kicked in in 2007 where the housing market just fell
off a cliff. Our new housing construction fell off a cliff. And so the best way to do that is to look
at what we call the housing drought in Portland. What I did is I just pulled together some
statistics and these are the monthly building permit numbers for the Portland Metro area. And not surprisingly, when the economy went
into a big tailspin in 2007 and 2008, new housing stats dropped off appreciably. We went from something like 5,000 new apartments
a year to 600 apartments a year. And, but even though that was happening, even
though construction and new stats fell off, that didn’t mean people didn’t stop coming
here. Portland continue to be an attractive place
for smart young people. I don’t know if that’s exactly the year that
Portlandia started broadcasting. Greg: I think it’s right around, yeah. Joe: So, when you compare these two lines,
the red line on this chart shows the population growth per year, which is just months about
30,000 people plus or minus every year moving into the metropolitan area. And the number of housing starts dropping
precipitously. And so, you have this continual increase in
demand as more people move here and you’re not building very many new units. And clearly what happens then is we get into
serious shortage of housing. And in the housing market, what that means
is, is higher rents. And the next chart shows really the pattern
of rent increases in Portland over the last five or six years since 2012, and right during
the first few years after the recession or during the recession, rents were very subdued. They didn’t grow very much. It was 2% a year and then it went up to about
4% or 5% a year and then 6% a year. And then in 2015 and 2016, we did hit double
digits. Greg: For two years in a row? Right. I think at that point we’re the number one
metropolitan area in growth? Joe: Yeah. And that was really the logical outcome of
not building units for a long period of time and then having all this additional demand
came in. And finally, vacancies dropped way down and
everybody knew that things were really tight and prices started getting a bit up. And then, fortunately, if you’re a renter,
that’s turned around in just the last 12 months or so. Greg: Because we’ve had enough of supply brought
out there. Joe: We’ve had a lot more. We’re still growing, but there’s been a lot
more deliveries that come into the marketplace. And as a result, we’ve gone from double digit
brand increases to basically flat, 0% Greg: Especially within the core? Joe: Yeah. These are the zealous numbers for the Portland
Metro area. So it’s… Greg: Then I think we’re seeing a little tick
up on vacancies. We’re seeing some concessions here and there
coming back in the core. Joe: Yeah. Well, the other thing we’re seeing frankly,
that we didn’t see a little over a year ago is FOR RENT signs all over Portland. This is something we pulled together on City
Observatory. Just going around northeast Portland in about
15, 20 minutes. And you see something FOR RENT signs were
about as common as Donald Trump signs in 2016. Greg: Well, we talked a little bit, you know,
and we talked to economists, is if you looked at the economics, I try to explain to people,
“Yes, there’s a lot of cranes up in Portland now, and yes we’ve had a lot of building,
but if you really looked at it and you took that supply that’s been kind of a little snapshot
as a point, spread it out, it’s really you’re not going to meet the demand.” And, yes, we should’ve been building more
units coming out of the recession. The lenders weren’t actively lending at that
point, so we had this kind of even been up even more demand that we needed more supply
as we had to continue demand come. That’s the issue because, I always, “People,
oh geez. What is this crazy? We’ve got all these cranes, we’re going to
be way over built.” You don’t understand this may be even little
short-term, a bump of up vacancy, but we’re still under five. Joe: Yeah, absolutely. There’s a lot of catching up to be done in
the marketplace. It’s still a relatively tight marketplace
out there. No question there. Greg: And this is pretty common in the cities
that you see? Joe: No, I think the timing is slightly different
in different cities. I think Washington DC and New York were a
couple years ahead of us. Seattle, at least a year ahead of us. San Francisco, probably, a year or so ahead
of us and so on. They went into the down turn a little bit
before they came out of it in terms of housing starts a little bit more quickly. I think Portland hung on. We fell into the housing market slump a little
bit later than most and we’re a little bit… Greg: We’re a little late in terms of delivering
supply out. Joe: Yeah, a little bit late coming out. Greg: Okay. And then, so I know a big concern is you’re
looking at it as when you look at policies being made today and based on these things
that have happened in the last couple of years, is that really gonna help long-term or not? That’s a question that comes up. Inclusionary zoning is a big one that we’ve
talked about a lot. Joe: Yeah. Well, as an economist, it’s very straightforward. If you’re concerned about affordability and
in this situation, you want to see more supply get built. So you wanna create lots of incentives for
people to bring new product to market to increase the housing stock. And the concern that I have about an inclusionary
zoning and a couple of the other policies that are floating around out there is they
create a lot of disincentives for people to consider investing in Portland. And one of the things that’s happened in this
market is what we’ve seen a lot of outside capital essentially flow into the region to
get housing built here. And that capital has lots of options about
where it can go. It can go into a bunch of different markets. And anytime you create costs and uncertainty,
then you discourage the inflow of capital. It becomes additionally risky. You can’t be sure… Greg: You’re adding a risk premium on there. Joe: Yeah. You can’t be sure that a project’s gonna pencil
out or that these requirements aren’t gonna be…are too onerous, or in the cases of Fremont
place project with city Portland just turned down. That you could march all the way through the
city’s process, following all of their guidance and then have, after substantial neighborhood
opposition, how it turns out down you get your proposal turned down. And one of the virtues of the Oregon system
has been for years that we have this general requirement that cities follow clear and objective
standards in approving apartments and multifamily and actual all housing projects. And when that starts to break down, then I
think people who thought they had some confidence about how to invest in Portland are gonna
be a little bit worried. And that comes at a bad time. And the other thing I need to say is, we don’t
build housing at a nice, steady, even pace. When you look at the historical record, most
housing gets built in booms. So, if we want to make sure that we have enough
housing and we wanna address our affordability problem in terms of the old proverb, we need
to make hay while the sun shines. And so if we do something that blocks up the
supply of new housing, even for a short period of time, we could, a year or two years from
now, find out the window has closed. We could find out that the Fed has tightened
and raised interest rates. Alternative investments may be more attractive
than real estate. Greg: Other markets where the capital can
go? Joe: Exactly. And there’s no guarantee that two years from
now or three years from now, there’s the opportunity to build that housing. So, it’s very much in our interest to, as
a city, again, if we’re concerned about affordability, to get as much housing built as we can when
all the market factors are in and are working in our favor as opposed to situations like
we are in, say, in 2008, 2009 to try and make anything happen it was difficult because the
capital markets are were all frozen. Greg: Now, are you having these discussions
in other cities? I mean is this the same? Or is the West Coast a little bit unique because
of the amount of immigration? Is that…? Joe: I think there really are hot markets
cities in the United States and weak market cities in the United States. So, it’s most evident in places, particularly,
in the West. So if you go to San Francisco, if you go to
Los Angeles, Seattle, Portland, Denver, very similar sets of problems. If you go to most of the Northeast and Midwest,
say outside of New York, it’s much, much smaller problem. But there are hot neighborhoods in every city
in the United States. And they are bumping up against some of these
same problems in many of those cities as well. So you have situation like Chicago where I
think they have something like 43 cranes up in Chicago right now and the city is losing
population, but it’s because it’s extremely desirable neighborhoods in the center that
are attracting lots of people and meanwhile, you’re seeing disinvestment in other parts
of the city. Greg: So like back to Portland, I mean, when
you guys bring these up and kind of explain the cause and effects and maybe we wanna call
them the unintended consequences in some of the policies, how does the city look at the…how
do they take that? And are you guys making any headway and say,
“Hey, look, you’ve got to… while the people are ready to move shovels and dirts, we’ve
got to encourage this”? Joe: I’ve appeared a number of times before
city council and tried to make us strong and economic case as I can. But I also know this is a very emotional issue
for a lot of folks. When rents are going up, when people are being
displaced or evicted from their houses, that is a real issue and a real problem. Unfortunately, I think that sometimes we cast
this as a villains and victims story. And people who are actually riding to the
rescue by building more capacity, but we’re doing things that we’re pushing them away. The thing that’s gonna make landlords more
congenial and rents stay lower is to have more apartments getting built. Greg: For the good of the community, we need
more housing because affordability is an issue. As an existing owner, you’d say, “If you’re
gonna restrict supply, that’s only gonna benefit me long-term.” But for the good of the community where we
are trying to push to get more housing. And that seems to be kind of a disconnect. I see a lot of times, people not in the industry,
there’s this assumption that we’re just able to… that owners are able to charge any kind
of rent they want and that’s not the case. It’s tied to demand, it’s tied to supply. Joe: It absolutely is. And the other thing that I think is kind of
a pernicious myth is people say that, “Oh, well, you’re building new housing, but it’s
not for low and moderate-income households.” Which is absolutely true, but that’s always
been the case in the United States. We’ve never built new housing for low and
moderate-income people. We’ve always built new housing for middle
and upper income people. And then as wealthier people move into that
housing, the housing that they were in slides down market and becomes available to the rest
of the population. And so, unless you keep building new housing
at every segment, but particularly at the high end, then housing doesn’t trickle down,
doesn’t filter down to lower income households. And one of my favorite examples is the humble
ranch home, the 1200 square foot, three-bedroom, one bath, a single-level home that we built
tens of millions of in the United States in the 1950s and 1960s. We’ve built them all over the country and
today, in most metropolitan areas, that’s the backbone of the affordable housing stock
is 50-year, 60-year old ranch house. Greg: Which was when it was built… Joe: Which was middle, solidly, middle income
household. That’s what people were fleeing the cities
for. It was for this ranch house. Well, in places like Cleveland or Detroit,
that ranch house goes for $30,000, $50,000, $60,000. In Silicon Valley and San Jose, that same
ranch house goes for a million dollars. And the reason is they didn’t build enough
housing to meet the demand at the high end. And so those houses didn’t filter down to
be affordable for low and moderate-income households. Greg: And just as I was told, you know, you’re
exasperating the problem when you’re talking about on the core because if you have to build
vertical. Vertical housing is more expensive and it’s
very, very… it’s very problematic to try to build vertical housing for affordable. So, you build vertical housing which is middle
to upper and then you kind of see everybody else gets to kind of move up a class. Joe: Well, the other thing we know is that
the demand is very much in the center. Where we have a shortage of housing is actually
what we call at City Observatory, a shortage of cities by which we mean opportunities to
live in great urban neighborhoods. That’s where the price of housing is getting
bid up. It’s actually getting bit up in the kinds
of neighborhoods that we built in the United States prior to World War Two. These sort of traditional gridded streets,
sidewalks with a mix of commercial and residential uses so that you can walk to the coffee shop
or the grocery store or the school or the playground that aren’t as dependent, that
are more bike-able and more walkable, and we just don’t have very many of those neighborhoods
in the United States. And that’s why so many people really want
to move back to cities and take advantage of them. Greg: So, long term, if you see cities that
are putting policies in place that are restricting supply, do you see that you’re gonna see capital
and capital outflow out of those cities into other metropolitan areas that are more open
to…? Joe: Well, yeah, I think that it’s very clear
what we’re seeing in San Francisco is, San Francisco would be two or three times bigger
than it is if it didn’t have the kinds of… Greg: And we’ve been a huge…Portland has
been the benefactor… Joe: Portland has been… absolutely has been
a benefactor of that, but the fact that it’s so expensive to live and do business in California
generally, in San Francisco in particular, in the Bay Area, means that a lot of activity
that might have a really good reason to be there, isn’t there and come and goes to other
places. So yeah, there’s, I think, very little question
that the housing cost displace opportunities for economic growth. Greg: And that’s an argument we make a lot
of times is the direction that you’re heading with some of the policies in terms of restricting
supply because you, again, you’re not restricting demand. We still have demand here. But at some point, if a supplier is restricted
to such a point that affordability becomes even a harder issue, that demand will wane
a little bit and people are gonna look for other opportunities and that’s… Joe: The other thing we know is that if we
don’t build housing at the high end of the market, those people don’t go away. What they do is they bid up the price of other
housing for everybody else. So the people who suffer when you don’t build
high income housing aren’t high income households. It’s everybody else down the housing food
chain because there’s less supply for them and they have to pay more for it. So if we’re really interested in affordability
and equity, we really wanna be building more supply and I’m very much in favor of the housing
bond measure that Portland passed that provided $280,000,000 for housing. Absolutely a good thing to do. Greg: It was part of that. Joe: And there are a lot of policies out there
that can help, but adding supply at every segment of the marketplace is really important
if we care about affordability. Greg: Are there cities that you see that are
dressing this may be different than what we see here? Joe: There are a number of really interesting
and promising policies out there. I don’t think anybody’s got it exactly right. I think the Oregon land use system has some
good features to it. I mentioned the clear and objective standards,
the fact that cities have to allow for a mix of housing types. We don’t have the situation in Oregon as you
do in many other states where a suburb can say, “We don’t want any apartments at all
or we pull zone for two-acre or five-acre minimum lots and essentially keep all poor
people out.” So we don’t have that in Oregon. A couple of other states, Massachusetts has
an overriding state statute that says if you haven’t allowed any apartments to get built
in your community, then the state can come essentially override and grant building permits
for that. Greg: Now, is California doing that to some
of the cities now in the affordability piece? Joe: Well, California sort of has a theoretical
requirement that they’ve never really pushed of housing allocations. But state Senator Scott Wiener in California
has a Bill, Senate Bill 827 that would essentially preempt local zoning around transit-served
locations. So, essentially what they would do is say
you can build, I think, it’s a 65-foot or an 85-foot building within a quarter mile
of a frequent transit stop. So if it’s next to a railway station or a
place that has a really good bus service, you’re essentially going to allow, by right,
apartment construction. Greg: So that’s the state coming into the
local house and saying, “We’re not [unintelligible 00:22:16] and whatever. We’re not gonna allow you to continue to spur
or limits supply, restrict supply based on this.” Do you think that’s a move you think that
more states will do as this pressure becomes greater and greater within…? Joe: I think Senate Bill 827 is… and I don’t
know exactly what form it’ll exactly take when it emerges from the legislative process
if it does pass. But I think that kind of approach that creates
a limited override by the state of local land use controls can really change the game in
a fundamental way by… and it isn’t that we need to build a huge amount more apartments,
but we need to sort of open things up a bit. And if we had more supply, then it would directly
address the affordability problem. And so I think that is definitely a step in
the right direction. And one of the problems with local zoning
is every individual city, suburb and neighborhood has really strong incentives to keep the housing
out and let somebody else deal with it. [crosstalk 00:23:16] Greg: Nobody wants density in the neighborhood. Joe: Yeah. And that’s a very logical decision for any
individual neighborhood because it maximizes your value and let somebody else deal with
the consequences. Greg: You’re creating the issue of affordability? Joe: Yeah. And the way to break that down is to say,
“Hey, everybody is gonna have to allow some.” Not that we’re…because the concern now is,
“If I allow apartments in my jurisdiction, then all the apartments that get built in
the whole metropolitan area are gonna ended up in my neighborhood.” Greg: Which we’ve seen here in East County,
where you’ve got East of I-205 or now you’ve got the school districts are saying, “Hey,
we can’t have any more high-density housing on here. We don’t have enough school space for it.” The rest of the city needs to take their portion
of it. Joe: Well, I think to the extent that there
are perceived negative consequences to that, it makes sense to spread it out absolutely. But we’re gonna have to have some schools
and roads and transit for people wherever they are. Greg: Do you think this message is, I’m just
curious, the message is kind of getting through? Do you think…I mean, sometimes it’s a supply-demand,
but do you think politicians and policymakers are gonna say, “Hey, wait a minute. I think there’s a revamp of the IZ zone in
Portland. Which I think there’s an acknowledgment that
it’s really didn’t achieve what we were hoping to achieve”? Where do you see that going into ’18 or into
’19? Joe: Well, I think nationally there’s this
yimbee movement. The, “Yes, in my backyard,” movement of people
who are saying, “We have looked at it from, I think, a social equity and an environmental
perspective as well as the housing market perspective,” and say, “We need to allow housing
for people. We need housing for Portland for everyone.” If you’re locally, that spouses that. So, but I think there’s a growing recognition
that that’s the case. And then, that creates a set of conditions
where I think we can then think about things like this Senate Bill 827 in California, and
I would hope that people recognize the things like inclusionary zoning, at least the way
that Portland program is structured or are mostly counterproductive. Greg: Right. Okay. Well, great. Well, thank you for coming. If you want more information, you can just
go to the website below. Again, we use our research team, we use the
blog all the time and your information for a lot of our projects, and again, just trying
to educate the market as to what’s going on and how policies have some unintended consequences
long term. You’re making decisions based on a short-term,
I don’t wanna say bubble, but a short-term characteristic. But you’ve got to look at the long-term view
of this. This housing takes a long time to deliver
it. That’s the one thing. This is not like I can say, “I wanna deliver
housing and I’ve got housing in six months.” Joe: That’s basically the problem we’re in
is that demand can change really quickly and supply takes a couple of years to respond. And that’s essentially what’s happened here. We had a big run-up in prices until supply
responded. It’s responded now. Prices have leveled off and if we can keep
pushing on supply, they should moderate for it. Greg: But now you’ve got people saying, “I
don’t want any more supply here.” And that’s seen as kind of… that’s kind
of offset the…Again, well, thank you for coming. Again it was very informative. And we’ll see you next time on HFOTV. Greg, thank you. That was great. Our entire office specializes in multifamily
real estate. Making HFO the largest multifamily brokerage
in the Pacific Northwest. Your success is our passion. Build your legacy with HFO. Call 503-241-5541, or visit our website at
hfore.com for more information.

Leave a Reply

Your email address will not be published. Required fields are marked *