The Reno-Sparks apartment market will continue to face occupancy challenges due to job losses at local casinos, hotels and other gaming-related companies due to the current recession. Effective rents will remain flat in 2009 and in some cases decrease, while occupancies are expected to decline, building on a trend established in second half 2008. Landlords will be forced to offer concessions as they compete for new and existing tenants. Apartment owners across the market are vying to attract new tenants and retain existing ones. As a result, concessions are ranging from reductions in deposits to a full month of free rent, especially at properties with management issues.
Remaining flat, the local economy was experiencing unemployment of approximately 8 percent in November 2008 due to layoffs in many sectors, including the leisure and hospitality industry. In the 1970s, 30 percent of the employees in Reno worked in the gaming industry, but today only 17 percent are involved in that sector. In fact, the leading employers of Reno’s increasingly diversifying economy are the Washoe County School District, IGT, Catholic Healthcare West and the gaming-hospitality industry.
Looking at fundamentals, fourth quarter 2008 vacancy was 9.4 percent in the Reno-Sparks MSA, reflecting an increase of 290 basis points on a year-over-year basis. Although vacancies should continue to rise in 2009, occupancy levels should stabilize by year-end 2009. In 2010, a recovery is expected to take shape, driven largely by the limited amount of construction slated to come on line. For Class B/C properties, a recovery might take hold even faster than it will in the Class A market.
Positive demographics should attract long-term investors to the market, such as immigration by baby boomers from the San Francisco Bay area seeking to take advantage of Nevada’s tax breaks. A minor league baseball stadium being built downtown has created new construction jobs. In addition, mall REIT Simon Property Group is building a high-end retail center to complement the stadium and spur downtown revitalization, which should in turn spark apartment and mixed-use construction once the capital markets loosen up. New residents also relocate to Reno-Sparks because of the excellent quality of life offered by the nearby Lake Tahoe Basin, with its year-round array of activities including skiing, kayaking, biking, running, fishing, boating and other forms of recreation.
Private investors and high net-worth investors in joint-venture partnerships are expected to remain the most active in the market this year, even as transaction velocity and volume are expected to slow from their previous elevated levels of 2005 through 2007. A high net-worth individual based in the San Francisco Bay Area recently purchased the $56 million Montebello apartments from Chicago-based LaSalle Investment Management. In the fourth quarter, deals closed with cap rates as low as 5.4 percent. While this is somewhat of an anomaly, long-term property holders primarily from Northern California, Southern California and Reno continue to invest in local multifamily assets. While it’s been observed that a healthy majority of transactions involve high net-worth investors from California and Nevada, investment capital from New York City and Washington, D.C., remains prevalent in the market.
Despite a drop in sales activity from the peak, apartment properties are trading and being financed, thanks largely to agency lenders such as Freddie Mac and Fannie Mae, and still-active local and regional commercial banks. The current apartment transaction climate, defined by various degrees of price declines, should be distinguished from the sector’s long-term intrinsic value. Properties that must be sold in today’s environment clearly require discounting to clear the market. On the other hand, owners without a compelling need for an immediate sale, the majority of whom report healthy operations, are positioned to hang on through the downturn.
— Vice president of investments and director of the National Multi Housing Group of Marcus & Millichap Real Estate Investment Services in Reno and Sacramento,
Ken Blomsterberg and multifamily investment specialist Dylan Mattole
contributed this commentary.