Rent Control in Oregon and Development in Portland

Quick Update: The rent control legislation referenced in this blog was signed into law by Governor Kate Brown on Thursday, February 28th, 2019.

My latest blog covers two related topics: the pending state-wide rent control legislation and development going on in the city of Portland. Even though these topics might seem a little dry, they literally could impact every single person in the city of Portland, either directly or indirectly, whether you are a renter or a home owner, along with many people throughout the state.

Debates about rent control legislation are raging

Actual image of a Portland landlord

Actual image of a Portland landlord

The market as a whole always slows down in winter, but residential inventory has risen dramatically in the past month. There are lots of reasons for that… seasonality, a re-balancing of the market, affordability, etc.

What’s notable is that quite a few former rentals are going on the market, or will be soon, which is likely a “straw that broke the camel’s back” reaction by landlord-investors to a bill that recently passed the Oregon Senate and is now being considered by the House.

The legislation is to enact statewide rent control measures, something that no other state has ever done. It also would prevent no cause evictions after the first year of residency. I’m not going to go into the positives and negatives here, just be aware that there are plenty of arguments for and against, many of which have merit on both sides of the issue.

What I do want to mention here, because it relates to the residential real estate market and inventory, is that investors are starting to pull out of the Portland metro area. (We’ve already seen over the past couple of years or so that new investors are no longer looking at Portland as a good place to bring their money.)

Here’s a break down of just some of the reasons we Realtors have heard relayed from investors:

  • Mandatory renter relocation assistance legislation passed in Portland in 2017

  • The rapidly rising costs of labor (maintaining a rental home costs money)

  • Rising property taxes (even though we have a 3% cap each year on assessed property tax values, Portland voters LOVE passing measures that pile extra taxes on top of that, and another 652 million dollar bond was approved in November, 2018)

  • Even though rents seem steep in Portland, they have been relatively flat for the past few years. Also, rent here is still low compared to other west coast cities (see above linked article). It’s very difficult right now to make an investment home purchase make sense on paper - purchase prices are simply too high compared to potential rent income. Since individual investors would rather have a portfolio centered in specific areas, it means to increase their portfolio, some investors are selling their Portland homes and purchasing homes in other areas of the country, usually using 1031 exchanges.

  • Landlords are often portrayed as evil money grabbers here in Oregon (see picture above). But, they have to make some money on their investment properties (which is a fairly risky investment to start with)… The current atmosphere of anger and hatred toward landlords makes it increasingly difficult to invest in Oregon. They are finding other cities that are in need of their business and stewardship. (Not that I’m saying all landlords are good, nor am I saying they don’t need oversight!!!)

  • Rising problems associated with homelessness. Portland residents apparently call 911 every 15 minutes on average with a complaint regarding a homeless person.

(Don’t hate the messenger, I’m just passing along what we Realtors are seeing and hearing. FYI, I do not own any rentals, nor do I intend to, but I have helped investors purchase property.)

Actual image of an Oregon legislator fighting to protect tenant rights.

Actual image of an Oregon legislator fighting to protect tenant rights.

Before I get trashed for having written all of the above, I think we can all agree that protecting renter’s rights is very important. But, are we getting to a point that legislation with the best of intentions may result in a dramatic decrease in rental inventory, particularly single family homes, townhomes, and plexes, which definitely won’t help renters?

Even if this legislation doesn’t have much impact right now, since rents have been increasing at a pretty slow average pace for years (well under the proposed 7% annual cap), it signals a continuing trend of enacting legislation that makes landlord-investors genuinely worried about their investments.

Of course, there are always beyond-the-norm examples of tenants throughout the state whose rents are suddenly increased by untenable percentages, or served evictions with little notice and very little time to find a replacement property. These people absolutely need protections. Common sense legislation that applies to the state as a whole is a good idea.

(FYI, the city of Portland, and many other cities, already have many laws, both new and old, that are supposed to keep these things from happening, but enforcement can be tricky.)

Okay, I said earlier that I wasn’t going to give arguments for and against this legislation, and I guess that’s out the window… You can see that it’s a complicated issue.

As a state, we want laws that make sense and do some good for people. But, we also don’t want to drive away investors, which can exacerbate the problem we’re trying to solve (mainly, affordability and fairness).

Actual picture of the confusion this issue causes.

Actual picture of the confusion this issue causes.

Historically speaking, rent control has not exactly been very successful. So, the question is: Why do Oregon lawmakers think that this rent control proposal will be successful when rent control has produced negative results so many times for other areas of the country?

Whatever the reason, and for good or ill, it sure looks like this legislation is going to make it through the House and be signed into law.

The good news is that with all the new apartment tower construction going on in Portland, there won’t be a lack of unit-style rentals in the near future (more about that below). But, renting a house might become more difficult than ever.

So, if you prefer to live in a house instead of an apartment, the time to buy may be nigh!

Development Insanity

I quickly want to address a couple of the reasons behind all the construction going on in Portland.

Actual picture of an Opportunity Zone

Actual picture of an Opportunity Zone

The current construction craze is mainly due to one factor, but it will continue due to another, kind-of crazy factor that I don’t think anyone could have anticipated:

  1. Legislation that went into effect in 2017 that requires Portland area developers of larger apartment buildings to include a certain percentage of affordable units

  2. The zany “Opportunity Zones” that developers are starting to take advantage of.

The first factor doesn’t seem like it would cause a development boom. The legislation, which is by no means unique to Portland, seemed like a good idea. Make sure that a certain percentage of new units are affordable. That’s definitely needed!

The problem is that there was a surge of new projects that were approved right before this legislation went into effect. Then once it did, new proposals have been almost at a standstill. So, we now have lots of tower projects that are just being completed, which will result in a surge of apartment inventory.

Another actual picture of an Opportunity Zone

Another actual picture of an Opportunity Zone

The second factor, Opportunity Zones, which is leading to the next construction boom is complicated. This article discusses both of these factors in more detail and is worth the read.

Basically, the 2017 tax overhaul combined with some very odd decisions by Oregon officials have turned downtown Portland into a tax break heaven for developers.

Opportunity zones are intended to provide incentives for developers to bring their money into struggling areas of the country. Calling the entirety of downtown Portland a “struggling area” is a bit of a stretch… but, there’s no doubt poverty is on the rise and we’ve got an increasingly large population of homeless people, which is why downtown Portland qualified.

No one really knows yet how this is all going to play out, what types of projects developers will end up building to take advantage of these big tax breaks, and how much of the housing will, in the end, be “affordable”. But, it will be interesting to watch it unfold!

Have I officially scared you away from even thinking about buying a home? Never fear! Even if everything that’s going on in the Portland rental market is wonky, at least the real estate market is truly beginning to balance out, making it a good time to be either a buyer or a seller. Let’s talk about your thoughts and goals!

Throw me a line and let’s chat

Name *