by Luke Hammill
Judith and Cliff Allen have owned the modest Marcus Apartments in Portland's Irvington neighborhood since 1979. They personally know their 10 tenants, many of whom have lived there long-term and pay rents that these days are below the market rate. The building is 50 years old, but the renters like having hands-on landlords, said the Allens, who live in Clackamas County.
The couple now wants to build another 12-unit structure on the parking lot in front of the building. The surprising thing, said Brian Emerick, former chair of Portland's Historic Landmarks Commission, is that they didn't just knock down the old building and put up something bigger and fancier – and a lot more expensive.
"Almost no developer would have saved the existing building," Emerick said. "They would have just knocked it down" and maximized the lot's value.
But the Allens don't want to throw their longtime tenants out of their apartments. It was perhaps a rare decision by an increasingly rare breed – the mom-and-pop landlord.
"There are very few of us left," Judith Allen said. "People who both own and manage. ... It's very expensive and time-consuming."
If local landlords are on the way out, it's because they're being replaced at a surprisingly fast clip by large institutional investors.
In 2015, the Portland area saw more than $1.7 billion in sales of large multifamily properties, more than double the previous record set in 2007, according to data collected by the commercial real estate firm Jones Lang LaSalle. Much of that money comes from pension funds, banks, unions, insurance companies or real estate investment trusts.
The result for Portland renters? It's increasingly likely that whether you're writing a check to a person or a pension, the money is traveling out of town. And investors' unceasing quest for yield puts upward pressure on rents.
Judith Allen estimates the couple receives about six offers a month from suitors, many of them large investment companies, that want to buy the Irvington property and develop it into "something much bigger." The couple originally bought the building after Cliff Allen published a teacher's manual, his wife said, and came into some money. They chose to invest it in real estate.
The Allens' children are now also in the real estate business, Judith Allen said. But with increased competition from institutional investors, it's not as easy these days to get a piece of the action.
"It's tougher now," she said. "It's a little more difficult."
Trickling down the asset ladder
Portland didn't used to be the kind of market where big, national pension funds came hunting for real estate. But low interest rates – which make it hard for funds to make money on traditional investments, and also make it cheap for them to borrow for additional acquisitions and developments – and the Portland area's tight rental market have shifted the landscape.
Ralph Cole, global financials analyst with Portland-based Ferguson Wellman Capital Management, said insurance companies and other institutional investors "are in smaller-size deals today than they were 10 years ago." That opens up opportunities in mid-sized markets like Portland's.
In the past, Cole said, an insurance company could generate returns by simply buying corporate bonds and treasuries. Low rates, though, have left them "searching other places to put funds to work."
"Apartments have been very popular because the fundamentals are so good," Cole said. Between October 2009 and October 2015, 39 percent of sales of buildings with 79 or more units went to institutional investors, and the trend has accelerated in the past two years.
The recent sale of the 63-unit Lower Burnside Lofts on the east side for $18.5 million to Boston-based Berkshire Group suggests investors are willing to perhaps "compromise some of their standards" to "grab any good quality" in the desirable Portland market, said Brian Glanville, senior managing director at the Portland arm of real estate consultant Integra Realty Resources.
Until recently, Glanville said, there was no way you'd get an investor interested in the price range below $20 million or $25 million. And only in the past two years has institutional money gone after buildings outside of the central city with fewer than 100 units, he added.
Robert Black, managing director at the real estate brokerage ARA Newmark, represented the Lower Burnside Lofts' seller, Portland-based developer Urban Asset Advisors, in the deal announced last month.
"The institutional buyer's understanding of the east side has really started to pick up, and their comfort level with the east side has started to pick up," Black said.
It's not just apartments
The ongoing real estate frenzy isn't limited to apartment buildings. Portland's office market saw more than $1 billion in transactions last year, according to Jones Lang LaSalle, with more than 77 percent of the money coming from institutional investors. Meanwhile, office rents rose by nearly 10 percent year-over-year and Portland's office vacancy rate was third-lowest in the nation, according to a report released in October.
A real estate investment trust associated with Connecticut-based UBS Global Real Estate set a Portland record when it bought the U.S. Bancorp Tower, known as "Big Pink," for $372.5 million. Prudential paid $155.3 million for the Block 300 building at 308 S.W. Second Ave.
The New Jersey-based insurance provider has seen "more opportunity" of late in "secondary cities" like Portland, said Theresa Miller, a Prudential spokeswoman who specializes in asset management.
"We're looking for good, steady, kind of predictable, safe returns," Miller said. The company typically is interested in holding onto buildings over a period of years, she added – "We don't come in just to flip stuff over."
And it's not just Californians flocking over Oregon's southern border – it's their money, too. The buyer of the 2100 River Parkway office building, which sold for $35.4 million last year, was CalSTRS, the California teachers' retirement system. (CalSTRS officials declined comment for this story.)
"There is not a very good return anywhere else," said Brian Allen, owner of Portland-based Windermere Real Estate. "You know, the bond market, the stock market – a lot of the places where institutional money might park itself – it's not that good right now. And people are seeing opportunities in real estate."
Advantages and disadvantages
The influx of institutional money bucks Portland tradition, Brian Allen said – traditionally, landlords tended to be wealthy but local. A doctor, lawyer, or business person, for example.
There are still opportunities for those folks, though, said attorney David Nepom, who represents such buyers.
"I see young folks still wanting to get into real estate in one manner or another," Nepom said. "And usually what they do is they start out with the single-family rentals and they move up into a four-plex or six-plex. ... Does it take more money now? Yeah."
Nepom doesn't believe the "American real estate dream is over," he said.
"I think it takes work and effort," Nepom said. "But I can think of a few clients off the top of my head who have been very successful at it over the years. ... Big money does not go after the single-family homes or the four-plex. They just don't."
Until now. A series of reports by the nonprofit Investigate West found that Wall Street was scooping up single-family rentals in Portland by the hundreds. And where did one of the investors – Blackstone, a multinational private equity firm –raise some of its capital? Oregon's own Public Employees Retirement System, or PERS. (Investigate West found that Blackstone had invested in more than 45,000 single-family rentals in 14 areas around the country, but not in Oregon. Another company, American Homes 4 Rent, pursued a similar strategy in Portland.)
Tenants worried about rising rents could be forgiven for fearing the trend. But institutional investors aren't "steamrolling" the local community, said Daisy Okas, a spokeswoman for the major retirement provider TIAA-CREF, which bought the Cordelia apartments in Northwest Portland last year for $47.8 million.
"We're investing capital and shoring up the housing stock," Okas said.
What's more, institutional investors are probably more likely to properly maintain their buildings, according to Brian Allen. And they're perhaps less prone to economic downturns or overreacting to the ever-fluctuating stock market.
"They do have really long horizons," Brian Allen said. "And so I would speculate they're very unlikely to be slumlords. They're probably likely to put in a professional property management company."
That's the case for Martin Forde, 22, who began renting at the Lower Burnside Lofts with his girlfriend a month after it opened last summer. The recent Oregon State University graduate moved to Portland for a job at the PepsiCo distribution plant in Gresham, he said.
Not long after he moved in, he found out the building was sold – a development he found "really surprising," he said. He hadn't been aware until this month that the buyer was an institutional group in Boston.
But it doesn't bother him. The location is ideal. When the lights went out, the property manager fixed it within 12 hours. And though the $1,465 monthly rent is expensive, he said, he can afford it.
Still, he wonders about what'll happen when his new seven-month lease expires.
"They haven't hiked rent," Forde said of the new owners. "But we'll see what happens when the next lease is up."
Clarification, April 11, 2016: This story has been updated to add that Blackstone, the company that raised some of its capital from Oregon's Public Employees Retirement System, invested in single-family rentals around the country, but not in Portland. A similar company pursued the strategy in Portland.