Apartment vacancies decline from historic highs

A little less than a year after some of the highest apartment vacancy rates on record in the Truckee Meadows almost 11 percent in Reno-Sparks the overall apartment vacancy rate showed significant improvement in the first quarter.

The area's overall vacancy rate dipped to 7.8 percent in the first three months of the year, says a market-tracking report compiled by Johnson-Perkins & Associates, a real estate appraisal firm in Reno. The report tracks properties with 80 or more units.

Scott Griffin, senior appraiser with Johnson-Perkins, says the July 2009 vacancy rate of 10.93 percent was the highest on record. But the downward trend was sparked by concessions such as a month of free rent, reduced deposits and reduced monthly rents with a 12-month lease, as well as absorption in the shadow market homes made available for rent.

"In a really strong market, we usually have 50 to 60 percent of properties offering concessions," Griffin says. "In our last survey of 71 apartments, 92 percent of them were offering concessions."

Another factor pushing down regional apartment vacancy rates, says Floyd Rowley, an investment and multi-family specialist with Colliers International, is strong absorption of three-bedroom, two-bathroom units in certain suburban markets.

Leasing for larger apartment units has been strong in developments such as Caviata at Kiley Ranch in Sparks and the Resort at Tanamera in South Meadows, spurred by former homeowners who lost their homes to foreclosure but desired to stay close to their former neighborhoods.

"In bedroom communities, the vacancy for three bedrooms was virtually zero," Rowley says. "The common theme is that most (renters) are families, and that they had left the homes they originally lived in and moved into three-bedroom apartments. They lost their homes but wanted to stay in the same school district and keep the same friends for their kids."

Overall, the vacancy rate for three-bedroom, two-bath units stands at 10.1 percent, a decline of 3 percent since July of 2009. Average rental prices are $1,128, the Johnson-Perkins report says.

"Three bedrooms traditionally have the highest vacancy, and in the good old days everyone saved up to buy house," Rowley says. "In our market today, even though the overall vacancy is under 8 percent, in certain suburban submarkets the vacancy is much lower."

Len Ramos, first vice president of the multi-family group with CB Richard Ellis, says all units except studios improved in occupancy and rental rate in the first quarter, primarily because owners and managers adjusted to current market conditions.

As regional job losses increased, owners and managers were caught unprepared for a huge loss in occupancy due to loss of jobs, Ramos says, and they didn't move quickly enough to lower rents and increase concessions.

"Once they did figure it out, the target became to achieve occupancy at whatever highest level they could," Ramos says.

Ramos says rents and occupancy in apartment communities appear to have stabilized.

"We are not seeing an increase in vacancy," he says. "We were bumping along the bottom; now we have hit bottom.

"We have achieved some degree of stabilization with occupancy, but it has not solidified. We need to see another quarter or two, and I think that will take the rest of the year."

As properties stabilize and rent roles increase, it may be a signal for the investment community to jump back into the fray. Investment interest in apartment units has been almost nonexistent due to declining property values as high vacancy rates eroded properties' net worth.

"It will lead to more sales eventually," Ramos says.

An interesting paradigm shift in apartment investment, Ramos adds, is the fact that investors no longer factor in growth in potential purchases. Due to declining values and occupancy, investors only can use current rent roles in the financial makeup of their purchases one of the main factors in curtailing sales because it led to significantly higher capitalization requirements.