1. I GET AROUND: REAL ESTATE, DEVELOPMENT PLANS AND TRANSPORTATION Dr Matthew F Gebhardt October 18, 2013 Housing Land Advocates Conference

2. Agenda  Supply and Demand and Housing Markets  Assessment of Risk and Decision to Develop  Portland’s Rental Market

3. Supply and Demand

4. Supply Price QuantityO S0S0 S2S2 Decrease S1S1 Increase

5. Demand QuantityO D0D0 Price D2D2 Decrease D1D1 Increase

6. Supply and Demand O Pe1Pe1 Qe1Qe1 S1S1 g h D1D1 D2D2 Pe2Pe2 Qe2Qe2 i Price Quantity S2S2 j Pe3Pe3 Qe3Qe3

7. Elasticity of Supply P QO S0S0 D0D0 D1D1 P QO S0S0 D0D0 D1D1 Pe1Pe1 Qe1Qe1 Pe2Pe2 Qe2Qe2 Pe1Pe1 Qe1Qe1 Pe2Pe2 Qe2Qe2

8. Function of Housing Markets  Demand for housing depends on a wide variety of factors  Demand is determined by income, availability of substitutes and availability of complementary goods, rate of household formation, rate of mortgage interest, current housing price  Major factor in increased demand in Portland Metro Area is due to population growth, primarily from migration

10. Function of Housing Markets  Demand for housing is also extremely complex and fragmented  Big or small, near schools or near work, in Portland or Beaverton, buy or rent, old or new  Or maybe it’s simple: location, location, location

12. Distance from Center Rent/Price Bid-Rent

13. Function of Housing Markets  Supply is also based on a wide variety of factors  Price levels in the recent past (1-2 year lag)  Interest rates  Land available for housing with proper zoning  Construction costs  Speculative housing construction can have an effect

14. Function of Housing Markets  Housing markets do not function efficiently  Imperfect information  High search and transaction costs  Stock variation  Tend to be highly localized  Many submarkets  Prone to fluctuations

15. Net Operating Income/Costs Assessment of Risk

16. Net Operating Income Income after normal operating expenses have been deducted, but before non-operating expenses and debt service. Calculation: Potential Gross Income - Vacancy and Concession Allowance Effective Gross Income - Operating Expenses Net Operating Income

18. Construction Cost Estimates  Land  Site preparation  Infrastructure  Hard Costs  Labor  Materials  Soft Costs  Marketing  Operating  Legal fees  Accounting costs  Inspection costs  Overhead/administration  Insurance  Taxes  Consultants  Contingencies  Development fees

19. Develop or Not?  Comparison of expected NOI from the property to the cost of developing the property  If expected NOI is too low or costs are too high the perceived risk of the project may be deemed too great to proceed  Even if developer is willing to accept a lower return

20. ($ s) NetOp.Inc. Construction Costs

21. Develop or Not?  Lower rents (lower NOI) or higher costs can make risk of undertaking development greater  Equation can be changed through increasing NOI through:  More total units (higher densities – although this increases costs)  Mixing or changing the mix of units (more market rate)  Subsidizing rents

22. Develop or Not?  It can also be changed by lowering costs including:  Soft costs (design, entitlements)  Finance costs (interest rates, more equity)  Labor costs (non-union labor)  Land costs (discounted land)  Material costs (lower level finishes, smaller units)  Of course, perception also plays a part

24. Portland Market In Brief

25. Housing Affordability  Affordability  Defined as ability or inability to gain access to housing at market prices  Regional Variation  What constitutes affordable housing in Portland is quite different than what constitutes affordable housing in San Francisco  Two approaches to measuring affordability: ratios and residuals

26. Measuring Affordability  The ratio compares housing costs (prices, rents or mortgage payments) against income (wages, benefits, etc)  It is often suggested 30-40% of household income can reasonably be spent on housing  The residual looks at disposable income after the cost of a decent home have been deducted  This suggests that there is an absolute minimum disposable income required to sustain an acceptable quality of life; it is linked to poverty line estimates

27. Portland Area Affordability PortlandMetro Owner Occupied Housing Costs$1,471$1,461 Renter Housing Costs$905$934 % > 30%PortlandMetro All Households40.20%37.90% Renters50.30%49.40% Source: 2012 ACS

28. Portland Area Affordability Source: Norris, Beggs and Simpson 5% = Full Occupancy

30. Trade-Offs  Possible to trade off housing costs and other costs, especially transportation costs  Pay more than 30-40% for housing but walk, bike or take transit to work  Not always simple to make that trade off and more difficult with rising transit costs and service reductions

31. Questions? Answers? Thank You for Listening!