Hungry for yield, investors buy up region's apartments

The promise of high returns due to low interest rates is driving a new wave of apartment sales in northern Nevada.

Transactions tapered to a trickle over the past few years as apartment owners held onto their properties hoping to ride out weak market conditions, and cautious investors stayed inactive. But the apartment market has seen a recent wave of sales and pending transactions from formerly sidelined investors leaping back into the market.

Kenneth Blomsterberg, first vice president of investment and Nevada corporate broker for Marcus and Millichap, recently closed sales of the 324-unit Manzanita Gate apartments in northwest Reno and 98-room Royal Vista complex in Carson City. Blomsterberg also has another 538 doors in escrow between three complexes in northwest Reno and the Idlewild area.

Todd Blonsley, vice president of investments at Marcus and Millichap, recently closed the sale of the 81-unit Rancho 777 apartments on East Fourth Street, and Floyd Rowley, senior vice president of investments with the Johnson Group, has a pending sale of a smaller 20-unit townhouse near downtown Reno.

By way of comparison, there were just five multi-family sales in 2009 in Reno-Sparks above $1 million, and just two in Carson City in 2010, Blonsley says. In 2006, there were 15 deals over $1 million.

But properties now are seeing multiple offers Manzanita Gate had 13 bidders, Blomsterberg says, while Royal Vista had nine bidders.

"There is a lot of money trying to get deployed right now," Blomsterberg says.

With interest rates at 4 to 5 percent, Blonsley says, opportunities are surfacing for investors to see solid returns on apartment purchases. Investors who have waited for market conditions to improve now see reasons to buy.

"The cost of funding is so low right now with interest ranging from 4 to 5, that anytime someone can see solid apartment deals with cap rates in the range of 7 to 9 percent, there is a huge margin and they are able to get great leverage and tremendous deals," Blonsley says. "It is a huge opportunity for people with money on the sidelines who have sat still for a couple of years. They are tired of earning 0 to 0.5 percent and have decided it's time to get back in game and buy solid deals at below replacement costs."

Deals are getting done at an average of $30,000 to $50,000 a door, or $30 to $80 a foot, Blonsley says far below replacement costs.

That's expected to stifle new apartment construction for several years because investors can find turnkey deals below new construction costs. Per-door prices haven't been this low for seven to nine years, Blonsley adds.

Rowley agrees that investment money appears to be returning to the apartment market. Last year's two big sales, the Waterford at Sparks Marina ($13 million) and Waterstone condominiums at Kiley Parkway ($22 million) were the first signs that the market was turning, although both sales involved bank-owned properties.

Rowley says many investment brokers felt that selling prices in 2011 turned a lot of people's heads and that the Manzanita Gate transaction ($27 million, or $83,000 per door)) sets a new benchmark for the industry's recovery.

"It appears that irrespective of any peak or cycles in our market people are willing to bring properties to market," Rowley says.

Many investors pursuing deals in northern Nevada typically invest in larger coastal markets, Rowley adds, but they've cast their nets inward in hopes of more favorable deals. Some sellers, Rowley says, are exiting the regional market in search of deals closer to their home markets.

Another sign of change? The majority of deals over the past few years involved bank-owned properties, but private sellers are now putting their properties on the market, Blomsterberg says. And activity should continue as long as buyers can find double-digit cash flow.

"There is a lot of interest in Reno, but investors have to have decent yields to get excited," he says. "They are getting positive leverage and low- to mid-teens cash returns. As long as interest rates stay where they are and cap rates stay attractive, there is a lot of money trying to get into the market. Now we are seeing guys coming back into marketplace, and this is a good sign."