Multi-Family Market Update

By Brit Vitalius, Principal, Designated Broker, Vitalius Real Estate Group

The multi-family market is at or near the top of hot real estate sectors in Southern Maine. The dramatic price increases are driven by strong buyer demand, low inventory and rising rents. In 2015, the total sales volume in Portland, Westbrook and Saco/Biddeford was up more than 20% in each area. This activity is particularly good news for Westbrook and the Saco/Biddeford area. I’ve been predicting Westbrooks resurgence for years and it may be finally happening – the number of sales were up 30%. Likewise, Saco/Biddeford has been slow to get back in the game, but in 2015 median prices jumped an astounding 27%.

Portland has launched into its own orbit for both sales volume and values. First, it was an extremely active year for sales as there were more large-portfolio transactions than any year in recent memory. The cap rates on these sales continued to push down to around 7%. This is a dramatic drop after many years with cap rates around 9%. Today’s buyers are driven by several factors: 1) The desire to place capital a cap rates above Boston and other metro regions, 2) The opportunity to reposition existing units to capture a higher end market with higher rents and 3) The security of a stable asset with an eye toward future appreciation.

The attraction of Portland to owner occupants and smaller multi-unit investors is also extremely high and inventory is the limiting factor. The median price of Portland 2 and 3 units were up 13% from the previous year while East and West End prices became almost stratospheric – $550k – $750k for 3 unit buildings. These sales were driven primarily by owner occupants of two different types: 1) Young first time owners who can live with imperfection and realize the cost of ownership is the same as the rent they were paying (even at these prices) and 2) Mature buyers who have the wealth to make the improvements needed and are willing to pay to live in the location they chose.

Finally, the Portland “rental crisis” was a dynamic covered extensively by the Portland Press Herald. While the rental market has tightened and rents have increased, the numbers in the press appear to be higher than the reality. Rents in Portland increased about 8-9%* rather than the 17.4% reported Zillow. In addition, the average 2 bedroom is probably closer to $1,300/month rather than $1,450 repeatedly quoted by the Press Herald.

March 29 2016 graphThe current market strength is driving the development of new market rate apartments in Portland’s downtown and outside the city. What effect will these new units have on the existing market? An increase in rental inventory could soften rents and bring about an abrupt halt to the exuberant optimism currently driving up sale prices. Watch the spring rental market to see which way the market is headed for the short term. Watch the market next spring to see how the new units are absorbed.

*Based on my 2016 Multi Family Forecast Report and a recent Comprehensive Housing Market Analysis by HUD.

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