REGIONAL MARKETS: WEST

APARTMENT FINANCE TODAY • APRIL 2008

Winning Hand

Las Vegas’ coming hotel boom will benefit its apartment market.

By Jennifer Popovec

Las Vegas—Multifamily owners and developers have been dealt a bad hand for 2008 here, but they remain confident they’ll win big in 2009 and 2010 as 43,000 hotel rooms open on the Strip and more than 200,000 jobs are created.

“We’re experiencing a little bit of heartburn right now because of job losses and the housing slowdown,” said Greg Spezzano, director of design and marketing for Alliance Residential Co., a Phoenix-based developer, owner, and manager of apartments. “But, if the numbers bear out, we’ll actually have a housing deficit.”

Alliance Residential, which owns or manages 3,500 apartment units in the Las Vegas area, has positioned itself to take advantage of the housing demand, Spezzano said. The company has a 312- unit complex called Broadstone Azur in lease-up and another 186-unit project, dubbed Broadstone Indigo, in pre-leasing. It also has plans to break ground on two more communities totaling 720 units by early April. All four of the company’s new projects are located in North Las Vegas, the hot new area for multifamily development.

“We’re really excited about the coming years because we’ll be able to reap the rewards of what we’re doing now,” Spezzano said.

Demand will outpace supply

Over the past few years, Las Vegas’ multifamily market has gotten a boost from strong job growth—not only from tourism, but also from the construction industry. But the slowdown in singlefamily home construction, coupled with the mortgage meltdown, has put a damper on job growth in the Las Vegas Valley.

In 2007, the Las Vegas metro area added only 7,000 jobs compared to 33,800 jobs in 2006, which pushed the unemployment rate up to 5.1 percent at the end of 2007, an increase of 1 percent over the previous year, according to the Bureau of Labor Statistics.

The negligible job growth caused apartment demand to soften, said Brian Gordon, principal of Applied Analysis, a Las Vegas-based economic consulting firm. Even worse, the apartment market is competing with the single-family homes and condos that investors gobbled up during the housing boom. “These investors haven’t been able to sell these homes and condos, so now they’re renting them out,” he explained.

The Las Vegas apartment market had a surplus of about 4,000 rental units in 2007, and at the end of the year, it was 92.3 percent occupied, down from 95.4 percent at the end of 2006, according to Applied Analysis.

The decreased demand was evident in the rental growth, said Chris Bentley, principal of The Bentley Group, a Las Vegas-based brokerage firm. In 2007, rents increased just 2.8 percent compared to almost 4 percent in 2006 and more than 6 percent in 2005.

Concessions are also prevalent across the Las Vegas metro area, especially for new properties, “We are absorbing about 30 units per month, and to do that we are offering concessions including one month free rent on a 12-month lease to two months free rent on longer leases,” said Alliance Residential’s Spezzano.

Fortunately, single-family home builders and condo developers have pulled back dramatically. While there are about 12,238 condos under construction, developers have pulled the plug on nearly 22,000 condo units, Gordon noted. Moreover, most of the units under development are located on or near the Strip so they won’t compete head-to-head with rental communities, which are primarily in the suburbs.

And even though 2,100 units will come online this year, along with another 3,388 units in 2009, demand is still expected to outpace supply. “The merchant builders have returned to Vegas—the last time we saw them was 2000—so development has really increased,” Bentley said. “But, it’s expected that we’ll have a deficit of 1,200 units in 2008.”

At the end of this year, occupancy is expected to increase more than 1 percent to reach 93.5 percent. And, by the end of 2009, the market will be 95 percent occupied as the rental undersupply is expected to grow to 8,700 units before climbing to 13,700 units in 2010 and a whopping 15,200 units in 2011.

“There is going to be an unbelievable [hotel] boom between now and 2010,” Spezzano points out. “In the past, the apartment market’s peak rental rate growth and occupancy corresponded with the opening of 10,000 rooms, so we have an unprecedented amount of openings that are coming.”

Roughly 6,000 hotel rooms will be added to Las Vegas’ existing 130,000 room inventory this year, with another 23,000 opening in 2009 and 13,200 opening in 2010, according to the Las Vegas Convention and Visitors Authority.

“We have $35 billion of development in the resort community, and those resorts and casinos will require significant employment,” Gordon said. “Ultimately that employment will drive demand for rental housing.”

Over the next four years, Las Vegas will expand by 562,000 people, pushing the city’s population to more than 2.5 million. During that time frame, the area is expected to average job growth of 4.8 percent annually.

Prices hold steady

With such a bright future, prices and cap rates for Las Vegas apartment assets have moved very little. “Not much has changed, because we’ve got something that other markets don’t have—something that we can look forward to,” Bentley said. “Vegas is the last one to go into a recession and the first one to come out.”

Class A properties are still selling at $125,000 to $165,000 per door, according to David Baird, a multifamily broker with Sperry Van Ness. Meanwhile, Class B assets are trading at $75,000 to $85,000 per door, and Class C properties are raising $60,000 to $70,000 per door. He said cap rates have stayed steady at somewhere between 5 percent and the mid-6 percent range.

However, investment activity is down substantially due to the diminished liquidity in the capital markets. Baird estimates that transaction volume is down about 75 percent compared to this time last year.

In 2007, Real Capital Analytics tracked $1.1 billion worth of apartment transactions, down 22 percent from 2006. The average unit price was $106,302, up 7 percent from 2006, and the average cap rate was 5.7 percent. Private investors accounted for almost 60 percent of the buyers in Las Vegas, while condo converters represented 16 percent of the buyers.

Bentley estimates investment sales volume will reach $3 billion this year, with 55 to 60 communities trading hands. But he doesn’t expect much movement in prices or cap rates. Specifically, he expects apartment investors will be interested in assets in “new” North Las Vegas, which he said is the upscale part of the suburb. He is marketing a 426-unit complex in North Las Vegas that was originally constructed as a condo project and then turned back into a rental community. The property, The Reserve at Arrow Canyon, is listed at $76.7 million and is attracting institutional interest.

Bentley also expects investors to be interested in value-added opportunities such as converting Class B properties into Class A properties. One such property is the 280-unit Portofina Villas. Listed at $35.5 million, it has already generated inquiries from 45 potential buyers, he said.

“This is the calm before the storm,” Baird said. “Activity is slow right now, so investors should take advantage of opportunities to buy before the next boom happens.”