I recently ran across an article (which will appear below) in the Las Vegas Review Journal that discussed the stall in new construction of apartments in the Las Vegas Valley. This lack on new construction is coming on the heels of falling rent prices and rising vacancy rates valley wide. At first glance, falling rents and rising vacancies might seem like bad news for private investors. But consider this: There are fewer than 1000 new apartment units slated for construction in 2009 and only 148 new home permits were issued in the Las Vegas Valley in December of 2008. This means that newcomes to Las Vegas as well as the rush of current home owners that are losing their homes and now looking for rental housing will have to rely on current inventory to meet their needs. So even though foreclosures have tripled since 2007, increasing vacancy rates and dropping rents as a result, these drops in rents are temporary. Over the next several months, demand for rental housing will begin to overtake supply and rents will rise again.
This is very good news for the savvy investor that buys investment properties now at 30 cents on the dollar and can rent his unit at a level well below current rent rates and still cash flow strongly. Over time, rents will increase along with appreciation, and this will eventually put this investor in a great position.
The entire Las Veags Review Journal article is reprinted below:
Valley apartment construction stalls
Production expected to fall under 1,000 units in '09 as rents drop, vacancies rise
By HUBBLE SMITH
LAS VEGAS REVIEW-JOURNAL
Apartment construction, like single-family homes, has slowed to a crawl in Las Vegas as landlords struggle with rising vacancy rates and falling rents.
Builders completed 2,670 apartment units in 2008, though production is expected to fall to under 1,000 units this year, said Michael Shaffner, associate vice president for Marcus & Millichap real estate investment services in Las Vegas.
Asking rents are expected to drop 0.2 percent to $873 a month, while effective rents -- taking out concessions -- will drop 3.2 percent to $804 a month, Marcus & Millichap reported in its 2009 multifamily market outlook.
"What we're seeing on average is one month free rent on a 13-month lease seems standard," Shaffner said. "Basically, rent growth is stagnant, so this is something we're seeing across the board."
Vacancy rates will rise 0.6 percentage points to 8.9 percent as the stock of "shadow" rentals, or single-family homes for rent, begins to dissipate. Vacancy rose 2.2 percentage points last year.
Multifamily broker Spencer Ballif of CB Richard Ellis showed vacancy rising to 10.96 percent in December from 9.93 percent the previous month. Vacancy was highest (11.53 percent) in Class C units, typically the older, cheaper apartment complexes.
He's also showing about 6,000 apartment units being built in 2009, though he's not sure what the number will be going forward.
"There's a lot being built because what's under construction today was planned two or three years ago because of all the hotels that were coming," Ballif said. "Some happened and some did not."
Lower monthly rental income diminishes capitalization rates for multifamily investors who once found Las Vegas to be a safe haven for their money, Marcus & Millichap regional manager John Vorsheck said. He's seeing more apartment properties in default and going back to lenders.
"We're seeing risk being priced into these deals," he said. "People look at Vegas as a town of opportunity. They think prices are always going to go up. They look at their debt and the fact rent growth didn't go up; now they get better returns in the markets they came from. A lot of (1031) exchange money was coming to Las Vegas from California. People were selling 50-unit properties in Anaheim and buying 100 units in Las Vegas."
San Francisco-based RealFacts reported average apartment rents of $878 a month in Clark County for the fourth quarter, down 0.9 percent from the same period a year ago. Occupancy dropped 0.3 percentage points to 92 percent for 106,400 units.
Among states in the desert region, Nevada had the highest average rent at $875 a month, compared with $804 in Utah, $766 in Arizona and $744 in New Mexico, RealFacts reports.
Vorsheck said the Las Vegas apartment market will stay in flux this year because of lingering economic stress, but signs of recovery are starting to appear.
Although several Strip resort projects have stalled, the opening of Palazzo and Encore added roughly 10,000 jobs and more workers are expected to be hired this year at M Resort and CityCenter.
Outlying areas in Henderson and North Las Vegas will post the highest vacancies because of single-family homes competing as rentals, Vorsheck said. However, people have become wary about renting a home that could go into foreclosure without their knowledge, he said.
"I'm still a believer in the fundamentals of Las Vegas," Vorsheck said. "Whether it takes 12 months or 18 months, it's going to turn around."
He sees added value in North Las Vegas in the coming years from plans to rehabilitate older neighborhoods along Las Vegas Boulevard. Nearly $1 billion in gentrification projects are proposed for the 238-acre redevelopment area.
RealFacts reported seven multifamily property transactions in 2008 valued at $154.2 million, compared with 19 transactions valued at $916 million in 2007.
Most investors see Las Vegas as being 12 months to 24 months away from recovery, but the real "negative" is the perception that the city is shedding a lot of jobs, Sauter said. In reality, total employment is down 0.5 percent from a year ago.
Due to rent declines and rising concessions, Las Vegas dropped two spots in Marcus & Millichap's 2009 National Apartment Index to No. 16.
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