Despite tighter vacancies, apartment rents don't move

Vacancy rates for apartments in the Reno-Sparks area dropped the six of the past seven quarters and are approaching stabilized levels.

But property owners have yet to see any increases in rental rates, and that's keeping a lid on property values.

A quarterly apartment survey compiled by real estate appraisal firm Johnson Perkins and Associates shows that the overall vacancy rate in Reno and Sparks stood at 5.64 percent in the first quarter of 2011. In the fourth quarter of 2010, the overall vacancy rate in the region stood at 7.16 percent.

Johnson Perkins tracks 74 apartment complexes with 80 or more units.

Despite the improvements in the region's overall vacancy rate, rents are still stagnant or dropping throughout the area. The average rent for the first quarter of 2011 was $821 compared with $824 in the prior quarter.

Vacancies decreased in each of the 10 sub-markets tracked by Johnson Perkins, led by northeast Reno, which declined from 9.5 percent in the fourth quarter to 6.3 percent. West Sparks/North Valleys leads the area with the lowest vacancy rate at 3.9 percent.

Studios and lower-class apartments saw an increase in vacancy, however, mainly because renters moved up to classier digs, says Len Ramos, first vice president with the multi housing group at CB Richard Ellis.

"An apartment rental today is a good deal," Ramos says. "Class A and well-located Class-B properties are experiencing heavier activity, probably at the sacrifice of lower-class properties because of the deals being given by the nicer properties. (Renters) are looking for more room, nicer amenities, better location. They are moving up."

Occupancy has increased mainly due to landlord concessions such as reduced rents in exchange for a year-long lease or lower deposits.

Operating revenues and values at apartment investments won't increase until rents rise and landlords do away with concessions, Ramos says.

"Owners and operators are doing whatever it takes to achieve stabilized occupancy, and that includes a lot of concessions," he says. "Their main objective is to maintain occupancy to keep from losing money. Increased occupancy certainly gets them some money for their units."

Scott Griffin, principal appraiser with Johnson Perkins and Associates, says a healthy market is one in which roughly 50 percent of properties offer concessions. Currently, 82 percent of the properties in the Johnson Perkins survey offer incentives to entice prospective renters.

"That's still a pretty high percentage," Griffin says. "We will truly be at a stabilized market once concessions are back down to 50 percent. At that point we probably will see market rents stabilize and hopefully increase."

Pre-recession vacancy rates ranged from 3.5 to 5 percent depending on unit type and submarket. However, in mid 2009 the vacancy rate jumped to more than 10 percent as thousands of unemployed Nevadans left the Truckee Meadows. Although occupancy is improving, it has yet to translate into any significant sales of apartment complexes. There were no sales of complexes with 40 or more units in all of 2010, and the trend has continued this year, Ramos says.

"Interest in buying and selling is picking up, but there has been a big gap between sellers and buyers; prices have been too low for any seller interest, but that gap is closing," he says.

Dampening sales activity, says Floyd Rowley, senior vice president of investments at real estate firm Johnson Group, has been a $42-a-month average decline in apartment rents since their peak. Distressed properties are about the only apartment investments selling in today's market, he says.

"If we can see unemployment continue to drop, the overall economy continue to improve and rents start to firm up, we might see some sales transactions," Rowley says.

Sales peaked in 2007 with $256 million in apartment sales in the Reno market, Rowley says. That number was reduced by half in 2008 and again in 2009.