By Alan Sorem
During the 19th and early 20th centuries, miners would carry caged canaries with them into the mines. The canary’s rapid breathing, small size, and high metabolism would cause the bird to suffer the effects of methane, carbon monoxide, and other harmful gasses before those gasses affected the miners. If a canary was noticeably affected, the miners would sound an alarm and attempt to evacuate the mine before it turned deadly.
If real estate attorneys had a mascot, it would be a canary in a coal mine. Friends, colleagues, and acquaintances ask me how the real estate business is doing. Some ask out of genuine interest in how my practice is going; most, however, are really asking, “Is it safe to go into the mine?” For the first time in many years, I think the answer – with a few qualifications – is yes, it’s safe to go into the mine.
The seasonally adjusted unemployment numbers in the Salem Metro area have vastly improved. They fell last year from 8.9% to 7.2%, and they are currently holding steady at 7.0%. This is still substantially higher than the 2008 pre-recession seasonally adjusted unemployment rate of 5.2%. However, both the insured unemployed and those unemployed for 26 weeks or less have returned to pre-recession levels. Total unemployment is still higher than pre-recession levels because the number of long-term unemployed (those unemployed 27 weeks or more) remains elevated above 2007 levels. This measured return to employment stability has proven adequate for purposes of sustaining moderate real estate investment over the last two years.
The Willamette Valley Multiple Listing Service data for the average and median sale prices for residential properties provides similar evidence of moderate improvement. In 2007 (which represents the peak in real estate values), the average and median sales prices for a home in the Willamette Valley were $249,203 and $217,000, respectively. In 2011, the average and median sales prices had fallen to $193,821 and $169,000. Those prices have since risen to $220,178 and $194,900, which represents roughly an 89% return to peak values.
These two economic indicators are strong evidence that our local labor force has substantially returned to pre-recession levels and that the capital lost in the real estate market since 2007 has mostly returned. Although these are good signs that it is safe to go back into the mine again, they do not prove that the development business has gone back to what it was in 2007. At the height of the building boom in 2006-07, the City of Salem issued 679 single-family dwelling and duplex permits (SFD/DPLX), along with 309 permits for apartment units (MFX). In 2013-14, the City of Salem issued 302 SFD/DPLX and 239 MFX. These numbers show that while unemployment rates and property values have substantially returned to pre-recession numbers, new residential construction remains substantially lower than pre-recession levels. Moreover, the ratio of new, single-family dwelling units to multi-family units used to be approximately 2 to 1. Now the ratio is approximately 5 to 4.
Homeownership rates have steadily dropped since their peak in 2005. At that time, the national homeownership rate was 69.5% and the rate in Oregon was 70.1%. As of the second quarter in 2014, the national homeownership rate had dropped to 64.7% and the Oregon homeownership rate dropped to 60.8%. Meanwhile, vacancy rates in Oregon have dropped from 7.2% to 3.4% over the same period. The current trend is that communities throughout Oregon are becoming denser, and developers are responding to this market trend. Residential development is occurring again, but it is at a much lower level than pre-recession activity, and is now more evenly allocated between single-family developments and multifamily developments.
In the new commercial and industrial uses arena, construction activity remains severely constrained. At the pre-recession peak, the City of Salem approved permits for $143 million in new commercial and industrial buildings. The following year, that number was cut in half. In 2009-10, construction activity in Salem substantially increased again to $179 million, due in large part to state construction projects. However, by 2012-13, Salem new commercial and industrial activity reached its bottom of just $16 million. Last year, that number increased to $48 million. Development in Salem is on the rise, and the rise is no longer dependent on government spending. These are promising indicators, but they also show there is still substantial room for improvement in our local development economy.
My practice has seen the following phases in the real estate business cycle: the last throes of the real estate boom, the crash, massive influx of real property into creditor control, sale of real property assets to cash investors, and now, the acquisition of real estate for residential multifamily, residential single family, and retail uses. The only constant has been change. Right now, I am down in the mine, breathing easy and heading deeper. Stay tuned for what happens next.