Reno’s Economic Expansion, Population Surge Keep Multifamily Developers Active
By Kenneth Blomsterberg, Senior Managing Director of Investments, Marcus & Millichap
Reno recorded robust job creation last year. This was bolstered by corporate growth at the Tahoe-Reno Industrial Center in Sparks, which houses Tesla’s Gigafactory, Apple and Switch data centers, in addition to a collection of fulfillment and distribution centers. The standout pace of employment growth supported the strongest rates of net migration and household formation this cycle, increasing local housing demand. With an average mortgage payment for a single-family home hovering around $2,100 per month throughout last year, leasing was the preferred choice among new residents despite rapidly rising rents across all apartment classes.
In response, developers finalized 1,350 units in 2019, building on the 1,400 rentals delivered in 2018. Completions during the two-year span were concentrated in southern Reno neighborhoods and Sparks. These are areas where new supply has been well received, evidenced by the submarkets’ low 4 and mid-4 percent Class A vacancy rates as we entered 2020.
Investors were also active during the past 12 months, motivated by solid economic growth and historically tight Class C vacancy. Significant demand was registered from outside value-add investors, with California-based buyers accounting for roughly half of total deal flow. These parties, along with local investors, were most active in downtown Reno. They often deployed less than $100,000 per unit for small properties that provided first-year returns in the mid-4 to high 5 percent range.
South of downtown, smaller complexes along or near Virginia Street were also pursued by this pool of private buyers. Here, and in neighborhoods adjacent to the University of Nevada, Reno (UNR), opportunities to obtain mid-4 to high 5 percent returns via sub-$3 million capital deployments were prevalent, with pricing rarely exceeding $150,000 per unit.
Moving forward, healthy employment growth is projected for Reno as Google is slated to complete a sizable data center this year and several health tech companies bolster payrolls in downtown. Persistent job creation will support another strong year of relocations and household formation, preserving multifamily demand during a period of rising supply additions.
Developers are currently underway on at least 4,800 apartments, many of which will be delivered in the coming quarters. Like in the prior two years, completions this year are concentrated in Sparks and south Reno neighborhoods, with a collection of properties each comprising more than 300 units. Outside these locales, a 768-unit development dubbed the Lakes at Lemmon Valley accounts for most of the remaining apartments in construction.
This influx of larger-scale properties is likely to impact overall vacancy and increase concession usage. However, strong renter demand will equate to a high percentage of these units being filled within a year’s time. Leasing activity at these newly built projects, coupled with healthy demand for lower cost rentals, should keep apartment availability historically tight and below the national rate. This may warrant a sixth consecutive year of solid rent growth.
Steady renter demand for Class B and C complexes should also preserve buyer confidence, with sales activity hindered only by a decline in listing volume. Competition among regional value-add investors should be sizable for the few larger garden-style properties that become available. At these complexes, the implementation of comprehensive property upgrades following acquisition can translate to notable NOI growth. Smaller assets in downtown and southern Reno, including some with deferred maintenance, will continue to drive overall sales velocity, as these properties represent an attractive investment play for 1031 exchange buyers that have previous experience improving older apartments.
— This article originally appeared in the April 2020 issue of Western Real Estate Business.