The Las Vegas Valley’s multifamily market is at an interesting crossroads, according to panelists at InterFace Las Vegas Multifamily. Hosted by InterFace Conference Group and Western Real Estate Business, the half-day conference was held April 24 at the Four Seasons Hotel in Las Vegas.
The metro area’s population is growing at a rapid pace, with a net migration of 45,000 new residents in 2018, according to research from Marcus & Millichap. This is the largest annual total for Las Vegas since 2007, right before everything went south for the Southwest.
“We started to recover later,” said Stephen Miller, professor and director of the Center for Business and Economic Research at the University of Nevada, Las Vegas (UNLV), who gave the conference’s special lunch presentation. “The recession here was deeper than the national average. It has been a slow slog, but in the last couple of years we’ve been growing more rapidly than any other state in the union in terms of employment.”
He’s not wrong. Companies have already added 33,000 new positions to the Las Vegas Valley in 2019. This is a 3.2 percent gain that exceeds the previous five-year average, noted Marcus & Millichap. Most of these jobs were in professional and business services, construction and leisure and hospitality. Unsurprisingly, many of these residents have come from California where taxes, traffic and high housing costs reign supreme.
“The higher-end demographic is expanding very fast in Las Vegas,” said Gary Banner, senior market analyst at TRU Development, during the conference’s Developers/Owners panel. “We had 48,000 people move here in the past 12 months. Lots of them are from Southern California. They’ve had enough SALT – state, area and local taxes – in California. But they come here with a housing expectation.”
The problem with this, Banner noted, is the type of supply these transplants are finding when they get here. The Valley may have added 3,429 units in 2018, according to Colliers figures, but he believed the region had a long way to go if it’s going to meet the high housing standards set in other states.
“We have employees with Google coming here making $1,100 or $1,400 a week, 380 Raiders employees just moved to town three weeks ago, so the higher wages are coming pretty fast,” he continued. “We don’t have enough of the right apartments. These wages are increasing and that’s the fastest-growing demographic and we need to build for what’s coming.”
Class A asking rents and annual rent growth both increased by 9.2 percent over the course of 2018, settling in at $1,097 per month and $1,274 per month, respectively. Fellow Developer/Owner panelist Bob Schulman, chairman of Schulman Properties, sees wage growth and neighboring states as ripe opportunities for luxury developers.
“The cost of rent-to-income in Los Angeles for luxury multifamily living is 50 percent,” he cited. “In Las Vegas, it’s 20 percent. When you’re talking about affordability, our luxury is far more affordable.”
This affordability may also attract frequent leisure and business travelers, Schulman surmised.
“We believe there are a lot of people who have one, two or three homes who come to Vegas and have business meetings on the Strip or conventions and they’re not interested in a home,” he said. “Our luxury product presents a great value. Where can you get that anywhere else?”
Schulman is putting his money where his mouth is. His firm is in escrow for an eight-acre site at the corner of Harmon Avenue and Koval Lane, a short walk from the Las Vegas Strip. The project will feature an 80-foot tower overlooking the Valley. Though the project may be large, Schulman is betting big on location over unit size.
“We need higher density and smaller units,” he asserted. “People really don’t rent by square footage. They rent by number of bedrooms and whether it’s affordable. If we can keep the units smaller, we can bring the average square foot price down by 10 percent to 12 percent.”
Taylor Sims, director of multifamily investments for Cushman & Wakefield and a Brokers panelist, has seen similar trends in size, especially when a luxury project is heavily amenitized.
“It has to be smaller units nowadays,” said Sims. “There is a rise in land costs, soft costs — everything is more expensive development-wise. The amenity game is just amazing right now. It’s across the board with tech packages, walkability, community feel and events.”
Some of these events include Wine Wednesdays at The Bascom Group’s properties, as well as Sunday brunches and Vegas Golden Knights game-watching parties at South Beach off Russell Road and the 215 freeway. Operators of high-end communities with easy access to the Strip, including the Martin, Panorama Towers, Turnberry Towers, Veer Towers and the Signature at MGM, have even been known to rent out entire nightclubs for monthly residential mixers.
“You can put every imaginable amenity in your building,” said Sims. “But at the end of the day, you have to look at total dollar amounts. You can cater to a niche market and find someone who really wants to live there, or you can cater to Vegas’ more traditional renter.”
Cost is a subject bifurcating the Valley’s offerings. It may not be a tale of two cities or a case of the haves and have-nots, but the discrepancy between luxury and affordable products — the two most in-demand asset classes — is significant.
Class B and C asking rents averaged $908 in the fourth quarter of 2018, up from $845 just one year earlier, according to Colliers. Luxury renters from neighboring states with high-paying jobs may only devote 20 percent of their income to housing, but that is not so for most Las Vegas workers, noted Mike Shohet, chief real estate development officer at Nevada Hand.
“We are affordable relative to our neighbors,” said Shohet during the conference’s Developers/Owners panel. “When you look at the rental market, yes we’re still cheaper than them. But when you look at rent to income statewide in Nevada, it is not in good shape. We have more than 200,000 households that are rent-burdened up to 30 percent. It might not seem like a big deal, but if you’re in the lower-income population, you have to make tough choices about other expenditures in your life.”
The affordable housing options are not keeping pace with demand, either.
“Housing affordability is at or below 50 percent of the median income,” said Shohet. “We have a 100,000-affordable-unit deficit for people at about the $32,000 household income mark. We’re among the worst in the country for housing affordability for the low-income segment.”
Unfortunately, the affordable housing market faces a few obstacles that panelists found hard to overcome in a for-profit environment. These include the rising costs of construction, limited capital resources and NIMBYism (not in my backyard) from surrounding neighbors.
“I cannot figure out how to do it,” said Schulman. “I cannot figure out how to build affordable housing and make it pencil.”
The Take What You Can Gets
While affordable housing may continue to suffer, many investors are interested in affordability when it comes to picking up assets at a discount.
“I get three calls a week from different investors that all want a value-add deal,” said Angela Powers, senior director of Berkadia and a Brokers panelist. “The problem is everything has been transacted between the southwest area of Summerlin and Henderson.”
It’s easy for investors to see why. The average price per unit has nearly doubled between 2014 ($73,627 and a 6 percent cap rate) and 2018 ($131,522 and a 5.4 percent cap), Colliers noted. Those who can get in on this multifamily market are doing their best to garner for position. Those already in don’t seem to be going anywhere anytime soon.
“Borrowers are willing to take a lower yield because this is a flight to safety,” said John Hurley, vice president of Hunt Real Estate Capital, during the Capital Markets panel. “Multifamily really is the safest asset. We have a whole generation of millennials with student loan and credit card debt. They’re not going to buy a house. They’ll likely be renters for a really long time. From a macroeconomic level, this makes sense because it’s probably long-term, stable growth, but it means a lot of capital will flow in because it feels safe.”
Fellow panelist Bobby Khorshidi, president and principal at Archway Fund, has seen these yields compress as well. He’s also observed that investors and borrowers don’t seem to mind, at least not enough to get out of the game.
“I have seen yields shrink,” said Khorshidi. “Las Vegas used to be where people would go for yield. That’s really changed. Las Vegas is no longer an afterthought. Instead, it is the thought that, with everything going on here with the stadium and housing, people are looking at Las Vegas as much more than just a place to go for yield.”
Sims actually appreciates the lower-velocity environment, as he believed the market needed to take a break following a slew of significant sales.
“We had a huge transaction volume in investment sales in 2017,” he said. “We had 90 sales that involved assets with more than 75 units. We’re returning back to a more normal rate. I would like to see 60 transactions of this size a year. There is such strong rent growth that owners who might have otherwise said they want to sell are now saying, ‘I’ll just sit on it. It’s better served having my money tied up here. I’ll refinance and ride out the Vegas wave.’”
Though that wave may not be the same size and force throughout the Valley, most investors have decided to ride that wave rather than bail out. Or, as Schulman put it, “I’m having way too much fun doing what we’re doing out here.”
— Nellie Day