Reno’s proximity to the Bay Area is supporting an economy beyond the gaming industry. The area’s lower cost of living is also attractive for Bay Area transplants attempting to further stretch their income. Tesla is the most notable utilizer of the metro’s favorable location and business-friendly environment.
Ken Blomsterberg, Marcus & Millichap
The company pulled 112 permits last year to build out internal areas of the factory. The introduction of Tesla’s electric semitruck necessitates a further expansion of production in the coming years. On the supply side, development is ramping up quickly as builders finally move away from primary markets to relieve housing pressure in tertiary metros.
Inventory will expand by more than 4 percent this year, representing the largest increase on record. The South Reno submarket contains a majority of the completions slated this year. More than 1,400 units are underway in the submarket, including nearly 1,000 scheduled for delivery in 2019.
Builders are also active in the Sparks submarket, where 600 units are underway and scheduled for completion. The introduction of new units has pushed up the percentage of properties offering leasing incentives to 16 percent. Still-tight conditions are limiting the average incentive to just nine days of free rent.
An influx of new apartments will put upward pressure on vacancy this year, lifting the rate 50 basis points to 4 percent. Despite the increase, conditions will remain sufficiently tight to enable sizable rent growth, allowing effective rents to climb 7.3 percent this year to a monthly average of $1,167 per month.
Investors attempting to balance their low-return portfolios in coastal California counties are increasingly turning to the metro. While the prevalence of new projects could entice some larger buyers to the area, most deals will be in the Class C sector as higher yields remain the primary motivator.
Average cap rates for lower-tier properties were in the mid-6 percent range last year, and they should remain relatively consistent during 2018. Properties near the University of Nevada, Reno, will remain popular for investors due to consistent renter demand. Enrollment at the university has soared by 23 percent to 22,700 students since 2010.
The gaming industry also supports strong apartment demand as many leisure and hospitality positions pay wages that preclude homeownership. Gaming revenue in the county increased by more than 2.3 percent in 2017, an indication that tourism is rising.
As the overall market performance continues to strengthen, out-of-state investors will continue targeting apartments in Reno as they search for higher yields than those available in the Bay Area. The average cap rate was close to 6 percent entering the year.
— By Kenneth N. Blomsterberg, senior vice president of investments and senior director of the national multi housing group, Marcus & Millichap. This article first appeared in the April 2018 issue of Western Real Estate Business magazine.