Two ambitious buildings sprout on Division in Southeast Portland

Portland Business Journal  April 9,2010

By Wendy Culverwell

Despite an almost universal construction stoppage, a small Portland developer is doing something out of the ordinary. Urban Development Partners NW LP is building apartments.

The scrappy firm is about to complete “Merge,” a 13-unit project at 3103 S.E. Division St. It will start building a 26-unit sister project at Southeast 38th and Division streets in a few months. The firm declined to share the budget for either project.

Each is a high-end apartment building expected to command premium rents in order to pay for its splashy design, a daring move in a down market.

Urban Development Partners plans to own each project for the long term, similar to two projects it already owns in Portland.

“We’re not out to make a quick buck,” said partner Eric Cress.

The Merge site, which has a market value of $1.5 million according to county records, formerly housed Reliable Parts. The boxy one-story Reliable building is incorporated into the new building.

“Normally, the tendency by developers and contractors is to wipe the slate clean and start over again,” said Kava Massih, the San Francisco-based architect who designed the project for Urban Development Partners.

Merge essentially sits on stilt-like structural supports dropped through the building. Above the ground-floor retail, the two-story apartment section features a series of soaring blocks separated by a courtyard and varying roof heights.

The result is a light and airy project where many units have windows on three or four sides. A simple block-like project would have packed in more units, but wouldn’t have met the developer’s goals.

“Design matters,” Massih said. “People will respond to that.”

Urban Development Partners has its roots in Berkeley, Calif. where the founding team worked on a successful loft conversion. Inspired to form their own company, Cress and co-founders Steven Pontes and Avi Ben-Zaken moved the company to Portland in early 2006, a period when the company deliberately scaled back its development activity in anticipation of the real estate meltdown. It acquired two older apartment buildings and rehabilitated them, and started casting around for sites to develop.

Southeast Portland appealed to the team’s budget and urban lifestyle.

The company, which does not disclose revenue, is backed by private investors through its sister firm, Willamette Capital Management Ltd.

One reason Urban Development Partners is active now is because it did little new construction between 2004 and 2008. As a result, it didn’t end up with properties worth less than they cost to build.

“We didn’t lose anyone’s money,” Cress said.

Nonetheless, filling the high-end units at Merge could be a challenge.

Apartment vacancy rates have climbed in Portland as a result of the city’s high unemployment rate. Most new construction has been put on hold until the recession ends.

Amidst the gloom, however, is a persistent belief that demand will rebound faster than supply. That could mean an apartment shortage in the not-too-distant future.

Though small, Urban Development Partners has positioned itself to take advantage of that pent-up demand.

“Now is the time to be working on it,” said Ann Blume, a multifamily broker with the Portland office of CB Richard Ellis. “The market is tightening.”

The vacancy rate for newer apartment properties in Portland’s close-in eastside neighborhoods was about 4 percent in the first quarter, according to a report by CB Richard Ellis that covered properties with 100 or more units.

While larger than the projects Urban Development Partners is developing, the low vacancy rate signals that supply is tightening in some parts of town even as Portland struggles with ongoing job losses.

Mark Barry, principal with Mark Barry & Associates, a multifamily appraiser and author of the widely-read Barry Apartment Report, said some developers may be getting ready for a recovery now. Barry, who is not familiar with Urban Development, said the apartment shortage won’t hit until 2012.

One reason for low vacancy rates in the inner eastside is its lower-than-average rental rates. A Metro Multifamily Survey of inner and central southeast apartments last fall found the average rental rate was $1 per square foot.

At Merge, Urban Development Partners expects to command much higher rent by appealing to lifestyle-driven renters attracted to the neighborhood and its close proximity to downtown. Asking rents are $2.20 per square foot for units at the front of the building and $1.61 per unit for those at the back, Cress said.

The firm’s next project is at 3810 S.E. Division and like Merge, emphasizes design. The mixed-use project will feature 26 apartments and 5,500 square feet of street-level retail space. The property has a market value of $645,000 according to county tax records.

An existing home on the site is incorporated in the plans at the rear of the property to serve as a break between the heavy commercial development facing Division and the residential neighborhood behind it.

From the street, the single building will suggest the appearance of two structures flanking a courtyard centered on a Japanese ribbon leaf maple already on the site. The plans emphasize light and air and will recycle a local landmark.

The maple will be removed to a storage nursery at a cost of about $4,000 during construction and will be returned when the work is finished, Cress said.

Read more: New firm ready to ‘Merge’ - Portland Business Journal