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Apartment market climbs wall of worry

John Seelmeyer

The market for rental apartments looks as healthy as any segment of the real estate business in northern Nevada, but plenty of questions remain.

And the biggest question of all What’s the potential effect of the large number of single-family homes that may enter foreclosure? is probably impossible to answer.

Johnson-Perkins & Associates Inc., which completes a closely-watched survey of vacancies and rents in apartment complexes with at least 80 units, reported that the vacancy rate in the Reno-Sparks area stood at 6.56 percent at the start of this year.

That’s about half a percentage point better than a year earlier.

But commercial real estate brokers who specialize in multi-family properties said last week that weak rents continue to hamper the market.

The average apartment rent in the Reno-Sparks area stood at $822 a month, the Johnson-Perkins survey found. That amounted to a 2 percent decline during 2011.

Todd Blonsley, a vice president of investments with Marcus & Millichap Real Estate Investment Services, notes that the decline in rents during 2011 came on the heels of a 2.8 decline in 2010 and a 3 percent decline in 2009.

“An optimist would say, ‘The leak has slowed,’ while a pessimist would say, ‘We have not stopped the leak,'” Blonsley wrote in a forecast prepared for members of CCIM, a commercial real estate group.

Floyd Rowley, a senior vice president with the Johnson Group, noted that rents now are nearly identical to the first quarter of 2005 before the hottest days of the boom and before the bust.

The cash coming into landlords’ checking accounts may be weaker than the average rent figures would indicate.

“The ever-present ‘move-in special’ of rent concession appears across the spectrum,” Blonsley said. That’s an indication that property owners are willing to give up net operating income in exchange for higher occupancy.

On the other hand, almost no construction of new apartment buildings is expected in the next year or so, said Brian Egan of Egan Commercial Real Estate.

As the region regains its economic footing and more people get back to work, that will increase the demand for rental properties.

If the supply doesn’t grow, the increase in demand is certain to lead to improved stability in the apartments business, Egan says.

But he acknowledged that the number of foreclosed homes remains a wild card.

On one hand, families who lose a home to foreclosure have to live somewhere often, an apartment.

But investors appear to be snapping up low-priced homes from distressed sellers and putting them back onto the market as rentals.

If a continued flow of foreclosed single-family homes comes into the market, investors will be buying houses at ever-more-attractive prices, Blonsley said. And if they’ve purchased houses inexpensively, they can rent them inexpensively putting pressure on the apartment landlords who compete with them.

Egan, more bullish on the prospects for the multi-family market, said the slow-but-steady improvement of the region’s economy is likely to trump any short-term worries about the overhang of soon-to-be-foreclosed homes.

That’s an opinion that apparently is shared by the small investors who accounted for about 80 percent of the sales of multi-family properties in the area last year.

Those investors, Egan predicted, will attempt to push through rent increases this year. If vacancies remain essentially flat, he said average apartment rents may rise to about $850 end of 2012 up by $28 for the year.

Blonsley, more skeptical, projected that rents will fall another 1.5 percent during the year. And Rowley said most depends on the ability of landlords to get their free-rent offerings under control.

SIDEBAR

How about retail, office and industrial properties?

Other forecasts for the region’s commercial real estate market from members of CCIM last week:

Retail: Ugh. Kelly Bland of NAI Alliance projects that vacancy rates will continue to hover at about 17 percent, while Chris Waizmann and Shawn Smith of CBRE Inc. say the vacancy rate may even rise a bit. The problems: Lots of smaller space remains available in strip centers, and mid-sized stores such as Borders continue to close. Nearly 20 percent of the shop spaces in retail centers are vacant, Bland estimates. Waizmann and Smith say the region’s weak employment growth and troubled housing market will continue to act as a drag on retail projects through 2012.

Office: Depends where you are looking. Downtown space is in demand, and the Meadowood area is performing well, says Scott Shanks of NAI Alliance. Kevin Annis of Tanamera Commercial Brokerage predicts that region may be able to snag at least one significant company that is relocating to the area. Top-quality space will continue to outperform lower-quality buildings, say David Woods and Matt Grimes of CBRE Inc. A negative: Companies are leasing the smallest possible spaces, and the companies that are moving into the area are mostly small, says Bram Buckley of Lee & Associates.

Industrial: Just about there. The arrival of some big players in the Internet fulfillment business soaked up a lot of vacant space in the market, says Chris Fairchild of Avison Young, and further new arrivals could require construction of new facilities. A negative: It’s an election year with all of its uncertainties, says Dave Simonsen of NAI Alliance, and companies already have the heebie-jeebies about the European debt crisis.

NNBW staff