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Every Friday, join us as we dive into the latest in real estate multifamily with David Moghavem, Head of East Coast Acquisitions at Trion Properties. David invites top experts who know the ins, outs, and trends shaping the real estate multifamily market across the nation!
Whether you’re a seasoned investor or just curious about where the next big opportunity might be, Deal Flow Friday brings you the weekly inside scoop on what’s hot, what’s not, and what to watch for in today’s ever-evolving real estate scene.
David Moghavem (01:53)
Hello and welcome to another episode of Deal for Friday. I'm your host David Mogavum and today coming out of Portland, we got Ben Murphy. Ben Murphy is the investment sales director at Commercial Integrity ⁓ covering the Pac Northwest. He's done over $600 million in transaction volume and continuing to do more. He's done a lot of transactions including a few at Trion. ⁓
Ben Murphy (01:57)
Thank
David Moghavem (02:20)
We thank Ben for all the deals that we've done together. And Ben, thank you for hopping on the pod to talk about PAC Northwest.
Ben Murphy (02:28)
Yeah, thanks for having me, David. Yeah, I think with Tryon it's six or seven, I can't remember, but pretty good track record, so.
David Moghavem (02:36)
Yeah, and you guys, you and Liz and the team, you guys are super dialed into the market. ⁓ You know, we have a value add strategy that we've always done and you guys do a great job sourcing deals from sellers that have a lot of meat on the bone that have, you know, a blank canvas value add opportunities and ⁓ really compelling opportunities to capitalize on and we
Definitely thank you for that. mean, that run between 2015 and 2018, the deals we did together, the good old days, that was amazing. And we couldn't have done that without you. Shout out to Farhan as well, ⁓ the mayor of Portland, as we call him. But I want the audience to get a little bit of a sense of Portland.
Ben Murphy (03:16)
Thank
David Moghavem (03:31)
We get it. You we've been investing in there for over a decade and obviously you get it. But a lot of the audience, they don't see Portland on the top markets to invest in. It doesn't have the same cache right now. And but at the same time, I think when you are have boots on the ground, you're seeing that there's a lot of opportunity and a really compelling story, just a different type of story. ⁓ So I think I want to start off, just give the general overview.
Why Portland? The 10,000 foot overview. Why Portland?
Ben Murphy (04:04)
Yeah, I mean, there's a lot of ways to answer that question, David, but I think high level Portland, I have always been prone to wanting to invest in blue states as an investor myself who owns some smaller properties, but then as an apartment broker, think the play in port
David Moghavem (04:25)
By the way, that's
sorry to cut you off. that's, that's actually pretty contrarian in a sense. You're seeing a lot of investment right now in red States, maybe blue cities and red States. ⁓ so I would love to also unpack that too. Like why, why personally do you like blue States? And I think you can make a case for it. I'll, I'll kind of chime in after, but I want to hear your take.
Ben Murphy (04:47)
It's, I mean, it's a combination of a couple of factors. would say one is there's just the supply side argument of, ⁓ there's not enough deliveries. There's not enough units coming online. And we have so many different barriers to entry, whether it's high SDC fees, you know, crazy, crazy high construction costs, ⁓ limited land available, a very strict urban growth boundary.
David Moghavem (04:55)
Yup.
Ben Murphy (05:12)
which is a term for every city in Oregon has its own urban growth boundary and it only expands every 10 years. And it never expands as much as it should. So, you look at those factors and it's always gonna be pressure on rents in a good way for investors as in rents are going up more than rent states where there's always a glutt of supply typically when market cycles are strong. So there's that side of it. There's also the regulatory side that I think
pushes a lot of people away and rightfully so, it makes it tougher to operate. Property management is more challenging, landlord tenant law is more restrictive and onerous. generally speaking, you're not gonna have the competition for deals that you are in kind of like the Sunbelt or some other regions of the country. And that's why I think you can get better returns.
in Portland and some of those areas too, when there's less competition, I think there's a better cap rate to be had, I guess, because you're not gonna have as many offers, best in finals type deals going on, and you can find juicier returns. So I think those are maybe the two major factors why I'm bullish on investing in blue states in the long run. Yeah.
David Moghavem (06:33)
Yeah,
I always see, and this might not be a fair comparison, but just anecdotally, the way I see it is I see kind of Pac Northwest or at least like suburban, Pac, Portland as almost like the Midwest in a sense where it's like steady cash flow, ⁓ not a lot of supply. ⁓ You have a supply side story to it where you're not feeling that glut.
affecting rents and for value-add investors, that's like a gold mine, right? Buying older vintage deals, sprucing them up, you know there's a demand on the other side. There's not going to be new supply that's going to compete with the 10, 20k unit that you're spending on a renovation.
Ben Murphy (07:24)
Totally. And Portland's a unique market. And when I say Portland, I mean the Portland MSA. So that'd be Washington, Clackamas, Multnomah counties, and then like Clark County, which is Southwest Washington, Vancouver. And there's like 1.2 million people. It's not a huge market nationally, right? It's kind of like a lower tier market for institutional investors. So I think sometimes it gets overlooked.
by those larger players who might want more scale. And it's not as liquid of a market as other regions of the country. And when I say liquid, I like Dallas, Fort Worth, for example, deals trade every five years, like almost on the dot. transaction volume's way higher. like Portland is unique in the sense of there's a lot of private client, family office, kind of generational ownership that
You know, these deals have not traded in decades. So when they do come up, and I think Tryon knows this from their business plan, there is quite a bit of meat on the bone, operationally speaking, know, management efficiency wise, ⁓ unit renovation wise, however you implement your value add. ⁓ So Portland is unique from that standpoint too. ⁓
David Moghavem (08:43)
Yeah,
I would add to that. As a value add owner, that's exactly what you're looking for, right? That type of profile where units haven't been touched for over a decade, blind canvas value add opportunity to spruce up. It's tougher to do in some of these Sunbelt markets. ⁓ When you have a lot of supply that you have to compete with, you have to be careful how much you're going to spend and how hard you're going to push rents. You have a little bit more of an ROI on a place like
Portland MSA and in the suburbs. Another point I would also caveat is Portland's a pretty affordable city compared to some of these other major markets. The income ratio to rent spent is much lower than places in California, places in Colorado, Texas. So you have a lot of runway there to kind of push rents to where it needs to be. So I think there's good product
as a value-add buyer in Portland that you don't necessarily see, even though it doesn't have the highest inbound migration and it doesn't have that type of cache that you're reading on some of these reports, it's got a great supply side story and great product to execute on a value-add plan.
Ben Murphy (10:04)
Playing off the affordability
Two other factors that I think are intriguing about Portland as a market is one office rents and employers relocating from the more expensive Bay Area and Seattle markets for much cheaper leasing space. So you're seeing kind of these satellite offices for some larger tech firms, you know, expanding because their overhead is a lot cheaper and you know, they can afford it. And that...
David Moghavem (10:19)
Mm-hmm.
They're putting
a foot, they're just putting a foot, a foothold satellite office into Portland and that could grow into something bigger maybe.
Ben Murphy (10:35)
Yeah.
And then the second point on the affordability is single family home values as a percentage of income, median family income are some of the highest in the country. I mean, they're obviously not going to beat, you know, Bay Area homes, right? We all know, or like LA homes in certain really desirable neighborhoods. But keep in mind, Portland has much lower median family incomes in those markets respectively too. So like, it's not uncommon for a starter home
in a generally average area of Portland in a decent school district to be like a million dollars or more. And relative to what the income thresholds are, a lot of people are renters by necessity, not by choice, because they can't afford a home or a starter home. So I think the thesis of investing in multifamily makes sense from that standpoint too in the Portland market.
David Moghavem (11:35)
Yeah. And one thing I want to really unpack is going back to the supply side story, because I think it does tie into what you were just talking about with the affordability. ⁓ You touched earlier on some of the laws, inclusionary zoning ordinances and ⁓ expansion and inventory that there's a cap on that in some regard. Can you kind of give the audience a little bit more detail on the history of it?
when it passed, kind of what resulted and what you're dealing with now that kind of contributes to this because I think when like nationally there's not a lot being built but I think Portland has a very unique story as to why that's separate from high costs of capital and yada yada yada that you always hear tariffs. Portland has a very specific story why there's no supply today.
Ben Murphy (12:27)
So, inclusionary zoning passed in Portland into law in February 2017. So, it's a ways back, but what you saw was the smart developers and most of the developers knew this was going to come through, grandfathered in their permits prior to that cutoff date and kind of sat on them, you know, two, three, four years.
So what we're seeing is the tail end of the pre-inclusionary zoning permits finally deliver in 2025. And now there's virtually nothing in the pipeline as far as new deliveries and new supply projected for the Portland MSA.
David Moghavem (13:07)
Yeah, and
for the audience, just to back up, like inclusionary zoning, it's basically ⁓ fees, right? Or fees in lieu of putting affordable housing into new developments. And there was a cutoff where you can grandfather the old rules. The new rules make it a lot tougher to pencil.
Ben Murphy (13:26)
Correct. So when you were pre-IZ, you could build, if your permits ran before that cutoff date, a normal market rate apartment building with no affordable units. The new law says 10 % of your units need to be set at 60 % of median family income, or 20 % of your units need to be at 80 % of median family income within your building. And that's if your building's 20 units or larger.
And that's purely city of pork. That's not in the suburbs, the suburban markets. ⁓ You get a 10 year property tax abatement on those units. So they take a pro rata share to offset that lower rent that you're targeting for those affordable units within the building. then the.
What's out of whack is the affordability periods 99 years. So those units actually need to stay affordable for 99 years, but you're only getting a 10 year abatement. ⁓ Generally developers hated it because you're basically leasing to kind of a tenant profile that doesn't fit the, you know, ambiance of the building or the amenities or the sort of tenant profile that you targeted in these
beautiful class A apartment buildings with rooftop decks and other amenities. So, you know, it's really been an utter failure of a policy to promote more housing because you saw this flush of permits and then a steep drop off. So it did not really incentivize and the risk factor, right? Developers look at it and it all comes down to NOI and they were taking on too much risk to, you know, NOI and their budgets and their performance. So,
they basically just didn't pencil deals after that cutoff date because of that received risk of building affordable units within your market complex.
David Moghavem (15:29)
Right. So make it made a harder to pencil, but now on the other side, that's why you saw so much supply in the urban core. And so I guess, you know, taking a step back, when we talk about Portland, it's almost like a tale of two cities, right? There's the suburbs and there's urban. ⁓ Talk to me a little bit, like, you know, continuing on what we're seeing today in urban, you know, we toured personally, a handful of deals in the urban core and we're seeing that it's still, you know,
there's still concessions, but they're starting to get absorbed. They're still light at the end of the tunnel. You're seeing really good discounts or replacement costs. ⁓ And so even though from a yield perspective, it looks thin, there's a good basis. What are you kind of seeing to, I guess, to add on to that in the urban core? And do you see a recovery on the other side?
Ben Murphy (16:19)
I do see a recovery. think values have to bottom out in the pendulum eventually swings the other way. Market conditions always rebound. But right now, the challenging part with underwriting core deals in Portland is even at like a 200,000 or 220,000 per unit basis going in, these cap rates are still like five to five and a half.
And a lot of the challenges with these deals is they're over-assessed for property taxes and utilities. So two line items on your pro forma, property taxes and utilities on some of these deals total like 2,500 to 3,000 a unit gross on your expense load. And that's two out of 10 or 12 line items on your expenses.
David Moghavem (17:10)
By the way, the Sunbelt guys are all saying that's cheap. because of the, yeah. But yes, I get what you're saying. It's definitely higher than what it used to be for sure.
Ben Murphy (17:13)
Okay, well, yep, I guess. ⁓
Yeah, so like these deals for like five, $6,000 a door gross per year in expenses, and now they're like nine, $10,000 a unit. And, you know, even though you're buying at a basis of 200 a door, you know, your app rates low, mid fives, your negative leverage going in when rates are, you know, six or six and a quarter. you have to...
David Moghavem (17:29)
Mm-hmm.
Yeah, I would argue
it's even sub sub five when you're like netting concession like net of concessions and some sometimes bad debt, right? Like you're probably getting into the fives and maybe a six trended, you know, once those concessions burn off and ⁓ that's something you got to get behind.
Ben Murphy (17:48)
There you go.
So you have the expense side and then you brought up a good point. If you look at the income and you total lost a lease, concessions, vacancy and bad debt, some of these deals we BOV are, you know, 15, 20 % below that gross potential rent figure. So yeah, you kind of got the income side of it too. So rents have been flat the last few years in this product type, class A, you know, close in Portland. We all know expenses haven't.
the NOI has been eroding and we all know interest rates are up. So it's kind of this, what's your thesis on Portland? Rents do have to rebound because they're not building. Do you buy at the low basis because rents will rebound and there's no new deliveries and bank on maybe selling 10 years, not five years out? I think that's what some people are looking at as a more long-term look. And I think it's a good play because at some point,
you're going to turn around and these deals should be worth closer to what they cost to build. We just don't know how long that's going to take. And there's a lot of fear and uncertainty with the volatility in the markets right now. So I think people are looking at Portland as a good time to buy from the basis standpoint for sure.
David Moghavem (19:22)
Yeah, I think the discounts replacement cost is very deep. know some people sometimes throw around in general, you can buy below 30 % below. I've seen in Portland, it's maybe even more like 50 % with some of the IZ post IZ ordinances and cost of bill today. ⁓ Another thing I would add, which I'd love to get your take on is some of the laws that passed that allowed for
I guess more relaxed use of drugs on the street and some of these unsafe laws are now getting repealed and rolled back. You probably know it much better than I do of kind of like what those laws are, but I'm hearing that those got repealed and the city's kind of turning a corner, especially in the urban core. Do you think that's also playing a little bit of a role of the urban core bouncing back?
from that regard that people actually want to live there.
Ben Murphy (20:22)
We are, we're
seeing steady improvement and they recriminalized hard drug use, which, you know, I don't know why that was ever.
a good idea to begin with, but so that's helped. There is the taxation side of it too on businesses that is becoming a little more balanced, I would say. For example, there's a preschool for all tax on like people earning over 150,000 a year.
David Moghavem (20:35)
Right.
Ben Murphy (20:56)
I think one and a half percent. I mean, it's it's big if you're earning over that income threshold. And the governor came out and wants to repeal that because they see that a lot of middle high income earners are leaving the city altogether. And that's their tax base. So I think the pendulum is starting to swing the other way on some of that. And the elected leaders are starting to figure that out. Portland also has a new form of governance. There are they basically revamped how the city council is structured.
And ⁓ I believe there's now 12 total city council members. So that's a good and a bad thing. But I think generally speaking, three or four of those are very middle of the road. Whereas before it was only five city council members and they were all very, very radical left. So we're getting some of the city council makeup a little more middle of the road, which is nice. And I think that's why we're seeing some of these changes be implemented. So yeah.
David Moghavem (21:55)
Yeah.
Ben Murphy (21:56)
That should help the livability and the crime. And I think those are basic necessities that people expect and that'll help revitalize the core and the adjacent kind of core markets.
David Moghavem (22:08)
Yeah, you are definitely starting to see some of these blue cities that kind of use the post-COVID era as like a test of like, let's try decriminalizing and this. And we're seeing some of that backfiring and we're seeing the pendulum now starting to swing to something more balanced. And I think as it relates to investing in urban core, that's exactly the thesis as boots on the ground. Like people really do wanna live. ⁓
in the urban core, in the Pearl, in all these awesome places that are becoming a little bit more safe. ⁓ I guess moving more towards suburban, what are some of the suburban markets that you're pretty bullish on right now in Portland?
Ben Murphy (22:58)
I love Washington and Clackamas County. ⁓ Cedar Hills, for example, huge mall redevelopment, very close to Portland's, know, 15 minutes downtown.
And it's, you know, a lot of those addresses are Portland, but it's unincorporated Washington County, you know, areas like downtown Beaverton, downtown Oregon city, Lake Oswego, they're on fire. And what you're seeing is a lot of the businesses that were previously very entrenched in Portland are either leaving their footprints that were in Portland altogether and opening up a new kind of base of operations.
whether it's a restaurant, ⁓ a really successful bar, entertainment sort of uses, they're opening up in these different nodes of the suburbs. And you go here and there's these farmers markets, it's super walkable, the streets are closed. So you can bike and walk around and shop and eat and listen to music on the street.
I don't know, there's probably six or eight areas outside the core that feel like if you were to go there 10 years ago, we're super sleepy and are now extremely lively and feel very urban. And it's cool to see a revitalization like that. And I think...
David Moghavem (24:26)
What do you think is
driving that? What do you think is driving that?
Ben Murphy (24:30)
You know, I think people really value having those uses close by. And previously, and I think this is a nationwide trend, people had to go to like a downtown CBD or an area like in the city center to find a lot of that walkability. But, you know, I think people are finding that they value that and they want it closer to them. And if they don't live downtown,
some of those little nodes are just opening up near where they live, which is typically the suburbs. And I think developers are realizing that, you know, the city council and the mayors for these different cities, Beaverton, Lake Oswego, Oregon City, Westland realize it. So I don't think that trend is going to change anytime soon because it's been very successful. mean, the food cart odd scene is big too. you, it's really interesting. You like see it.
David Moghavem (25:23)
Huge.
Ben Murphy (25:26)
And you're like, okay, this is what I would envision Portland as, but I'm not in Portland. I'm in a suburb 30 minutes outside of Portland.
David Moghavem (25:34)
Yeah, it sounds like the, it's almost like an urban sprawl. And I feel like it happened as we saw the urban core deteriorate where people are like, I want this closer to me without having to go all the way there. I also feel like suburban living in Portland, super charming, good quality of life, which is why people want to be there in the first place.
Ben Murphy (25:57)
Yeah, I agree. I mean, I the school districts are, you know, there's there's better school districts out the outside the Portland City Center too. So if you have a family or a young family and you're growing up, I mean, that's where people want to live. So they sort of brought the best of Portland to the suburbs.
David Moghavem (26:13)
Yeah. So I guess as a incoming new investor that wants to invest in the Pac Northwest and Portland MSA, what's your advice to them? What are some things to look out for when investing in Portland?
Ben Murphy (26:29)
Well, there's markets to avoid and I don't know how much I should go into that, but right. I would just, I would say ⁓ what's intriguing about our market is again, people are really kind of forced to be renters because single family home prices are just completely out of whack with, with, with, with income characteristics in our market. And
David Moghavem (26:34)
Yeah, you never know if you have to sell a deal there. So maybe don't maybe don't disclose that. Yeah.
Ben Murphy (26:57)
To the extent you can focus on demographically growing sub markets within Portland, I think you're gonna do very well. And those are areas in Washington County, Slackamas County, and then Clark County, which is also like Southwest Washington and Vancouver, that area. to ⁓ the extent you can focus in those markets and.
You know, we're seeing an obvious flight to quality right now. So I think a lot of people's preferences is 90s and newer product for a couple of reasons, but insurance is one, know, CapEx is a concern, ⁓ know, deferred maintenance related to older plumbing, electrical stuff like that. ⁓ you know, the challenging part with those deals when you're buying in our market, and I think this happens elsewhere, is cap rates are so compressed on that 90s and newer product too, because there's just more competition.
I think there is a play to be buying the older vintage product, like the sixties and seventies build that might be getting overlooked because of those challenges. And, you know, you can get some of these deals at 120 to 150 a door basis, you know, which is at the hay day, you know, these deals were selling 200 to 220 a door as renovated. So you're getting like a 30, 40 % discount to the
David Moghavem (28:14)
200 plus. Yeah.
Ben Murphy (28:20)
peak in 2020-2021. ⁓
David Moghavem (28:24)
I would also add
to that, you know, to those who are listening and say, hell no, I'm not buying sixties and seventies. I think they're not all created equally. think Sunbelt seventies and sixties is also very different than a Portland 60 seventies, especially if it's supply constrained market with good demos and good schools, which I think you have a good amount of those in Portland suburbs. So again,
blank canvas value add opportunities that you can get where you're actually going to get an ROI. So you still have to spend the dollars on the deferred maintenance side and some of the plumbing and things like that. There's no question about it, but ⁓ I think you would get a higher ROI and a more supply constrained market than maybe like a Sunbelt market.
Ben Murphy (29:15)
Totally. And some of that product, the 60s and 70s product that we would maybe reference as like class C. The design of it's really, really appealing. Like often it's low density. It's very well parked. They're single style, like single level kind of garden style units. It's almost that irreplaceable, like, I don't know that. Like they don't build like the new build stuff is like, you know, three stories.
carports, it's more cramped. Yes, it has amenities. Yes, it's newer. But I think there's a place in that market for the older vintage product, especially as renovated, that kind of becomes B plus sort of housing that's not a class A deal. Rents are $1.50 to $1.80 a square foot instead of like $2.20 to $2.50 a foot. And people will pay up for that.
David Moghavem (30:08)
Yeah.
Ben Murphy (30:11)
And it's not at the top of the market where you're kind of risking really pushing rents, you know, on much newer product, where you're almost competing with like rental homes in a way. You're not going to with that 60s, 70s product typically. And I think it's at a price point that, you know, people can afford, know, 1500 to 2000 a month for a two bedroom renovated unit. I don't see a lot of risk there long run. As long as you manage it well and maintain the units well and
Yeah, so.
David Moghavem (30:45)
I mean, that's been Tryon's MO, right? These were the type of deals we were buying and we had a lot of success doing it and we had a great run working together on those types of deals. And it's a great market given that there's a good ROI and it has good floor plan layouts, spacious units, low density, things that wouldn't pencil today for a developer if they were to try to replicate a garden style deal in the same market.
⁓ I guess closing thoughts, Ben, you're going to probably get a flurry of emails ⁓ after this saying how do I invest in Portland? How do people get a hold of you? And I guess final thoughts on kind of your pitch on the market.
Ben Murphy (31:30)
Well, thanks again for having me, David. It's been great to chat. I would say I'm the director of commercial integrity Northwest. I'm really a middle market guy, 30, kind of up to 100 units and typically sub-institutional asset types.
your vintage bricker style buildings close in up to your 70s or 80s build in the suburbs.
I would say Portland long-term is a great place to invest just because of the peer supply side argument. We're not going to see anything be built in our market, in my opinion, over the next 10 years, close in or downtown, because it's $400,000 to $450,000 a unit to build. And construction costs have never been higher. Labor's never been higher. Soft costs are going to stay elevated. We're all seeing inflation is more entrenched than we thought. So I think my
high level thesis on Portland is supply and deliveries and absorption of units in the next decade are gonna be way lower than we saw in the previous decade. And that's great for rents. ⁓ It's great for vacancy, concessions will burn off and we're a generally very unaffordable market for single family homes. So I think this is a great place to invest for
for asset types that are kind sub-institutional with that kind of like B minus B plus reno strategy, which is kind of what I focus. So you can reach out to me, email or phone anytime. ⁓ I don't know if I need to put a plugin for my contact info here or not, but there you go. So.
David Moghavem (33:11)
We'll be in the show notes.
Perfect. Alright Ben, well thanks for hopping on. Always awesome chatting with you. Looking forward to doing our next deal together. And see you in Portland next time.
Ben Murphy (33:25)
Sounds good. Thank you.
David Moghavem (33:27)
Thanks.