Jared Kadry is a Market Analyst with CoStar Market Analytics.

Introducing CoStar Market Insights: a new feature providing a snapshot of recent real estate trends in your market. The CoStar Market Analytics team monitors commercial and multifamily real estate across 206 metro areas, with a granular understanding of the projects, players and economic trends that move these markets.

Slowdown in Rent Growth Cools Apt. Sales

Institutional and local investors alike had the Rose City on their radars earlier in this cycle, mostly due to the strong apartment fundamentals and robust rent growth, but high yields Class A and B properties have mostly become a thing of the past.

Annual multifamily sales volume in 2016 marked a cycle high and cap rates for 4 & 5 Star product were some of the tightest on record. However, sales volume in 2017 is on pace to be much lower than last year’s, with first quarter volume amounting to about half of the apartment sales from first quarter 2016. Much of this can be attributed to external factors such as interest rate hikes, but local trends such as the significant slowdown in rent growth have also caught the attention of investors.

Portland enjoyed the strongest apartment rent growth among US markets in 2015, but has decelerated significantly over the last two years due to supply-driven vacancies, especially in the urban core.

Despite this slowdown, multifamily remains the preferred asset type in Portland for investors, with office being a distant second at around half the sales volume in 2016.

Although Sales Volume Falls, Pricing Still Moving Up

Somewhat surprisingly given the slowdown in sales, pricing for apartment properties is still on the rise in Portland. In Goose Hollow, Liberty Mutual and Security Properties formed a joint-venture and paid $47.5 million ($355,000/unit), at a 4.3% cap rate, for the 134-unit Modera Goose Hollow complex. Mill Creek Residential developed the property in 2015 and sold it shortly after it was stabilized.

Foreign investment has also made its way to the region. In December 2016, Thai-based Land and Houses paid $127 million ($446,000/unit), at a 3.8% cap rate, for the newly built YARD in Kerns. The property was reportedly less than 50% occupied when sold, highly unusual for such an expensive deal.

Multifamily investment activity over the last year has been concentrated in Portland's suburban areas, especially the Sunset Corridor and Vancouver. The nearby Hillsboro market has also experienced high levels of institutional investment volume thanks to a few large trades, and Vancouver has seen a good mix of local and institutional players.

In the region's largest multifamily property sale over the last 12 months, Invesco and Holland Partner Group combined to pay $140 million ($247,000/unit), at a 4% cap rate, for the 566-unit LaSalle Apartments in Beaverton in November 2016. The asset was reportedly 95% occupied when sold and is a great example of how tight cap rates are not unique to the urban core.