Reno’s economic drivers to multifamily investing
Most conscientious renters have probably noticed that rates have increased over the past couple years. By the same token, potential renters in the market to buy or invest in the housing market have probably noticed that sale prices have been appreciating as well, with little inventory available.
Reno, like many other U.S. markets, is experiencing a housing shortage that is fueling increasing rental rates. On a national level, the apartment market is booming, creating marketplaces crowded with buyers and apartment owners satisfied with increasing returns.
Apartments, in the classic sense, are supposed to act as a transition for people from early adulthood to home ownership. They can serve as a transition space for many Americans who are hoping to realize their dreams of home ownership. The benefits are that they provide a simple and cost effective solution. However, for many markets across the country, apartments are serving a different need.
During the recession, apartments served as a refuge for a large population dealing with mass foreclosures, turning many of those former homeowners into renters who continue to occupy an apartment, condo or house rental.
Additionally, many studies have shown that Millennials are not as eager as past generations to purchase their first home. These occurrences of preferred or forced renting over purchasing a home has even led to the rise of national single-family real estate investment trusts nationwide, which offer a wide selection of single-family homes for rent in neighborhoods once preserved for only homeowners.
These are a just a few of the economic and socioeconomic factors that have pushed the apartment market into a historic growth period since the recession.
The growth of the national apartment market is staggering, and is outperforming all other commercial real estate asset classes.
The most recent reports for the third quarter of 2015 show that apartment rental rates have increased 5.9 percent year-to-date, which is the strongest increase in this market cycle according to MPF Research, a leader in apartment trends research. This sort of growth was last seen during the tech boom at the turn of the millennium.
This cycle is also showing increased stability, as it has shown positive growth for 21 straight quarters with an average of 3.7 percent annual appreciation. To put that into perspective, the last cycle from 2004 to 2008 only lasted 19 quarters with an annual appreciation of 2.8 percent.
Does this sound familiar? Buyers and renters have heard this before: another housing bubble to pop, precursor to another wake of destruction for homeowners providing for their families or investors trying to balance their portfolio.
Housing is typically on the forefront of headlines during either a downside or upside of an economic cycle for Nevada. Economists and investors are now trying to determine whether this appreciation is another bubble or simply the beginnings of northern Nevada’s recovery and positive growth looking towards the future. Current market conditions for Reno are showing that apartments are going to continue to be one of the more stable investments in the area due to several recent economic triggers.
A recent study from the Economic Development Agency of Western Nevada projects that more than 50,000 jobs and residents will be added to the marketplace by 2019.
The majority of this development is centered on the large industrial projects such as the Tesla battery factory and the Switch data center at the Tahoe Reno Industrial Center located between Reno and Fernley.
That type of growth is going to require more supply of housing units in a market that is already stretched thin. The most recent housing reports show that single-family homes under $300,000 are at a mere 38 days of inventory, increasing competitiveness for home buyers in that price range.
A healthy marketplace for this segment of single-family homes should be near six months, approximately six times the current supply. An estimated eye-popping 45,000 new housing units, which includes apartments, single-family homes, and condos would need to be constructed at an average rate of 9,000 units per year in order to accommodate the anticipated growth.
Home builders and developers will be struggling to keep up with that pace. For example, almost all developed residential land has recently been acquired as developers are now turning to raw land to develop new rooftop communities in Reno, Fernley and Carson and the total approximated number of apartment units under construction or approved has increased to 2,170.
Sparks, with its proximity to TRIC, is expected to be one of the cities that will be most affected by new residents and growth. An approximate 2,000 new homes are approved or under construction in Sparks, in addition to several apartment developments including new condos at Victorian Square.
For investors looking to capitalize on Reno’s improving rental rates and low vacancy, large apartment complexes have proven to be the most desired investment. Complexes of 80 or more units are trading at steep prices in larger markets causing those institutional companies to turn to smaller markets like Reno.
In 2015, the Reno market has seen approximately eight of these properties sold according to Costar, a national commercial real estate database. Many of these large complexes are sold off-market before being publicly listed as they attract unsolicited offers or the listing brokerage can provide enough buyers that a listing is not necessary.
There is, for smaller complexes, similar activity with some properties producing multiple offers shortly after going on the market. Vacancy has remained between 3 to 4 percent for all apartment housing across the Reno/Sparks metro area. With this sort of demand, apartment owners across the area are in a very positive position in this seller’s market.
Apartment investors looking to buy have not only been challenged by available inventory, but instead, the rate of return.
Commercial lenders tend to favor apartments largely due to the low vacancy coupled with appreciating rental rates. Historically low interest rates have kept capitalization rates low. In larger markets like San Francisco or Chicago, apartment buildings are trading at cap rates as low as 3 percent, which is not leaving a lot of room for sizable returns.
Investors not interested in reaching for assets with low returns have been seeking out secondary markets in which to place capital adding even more interested buyers to a market like Reno, which as seen apartments trading between 5 and 7 percent.
Local developers, regional officials and residents have begun to notice the initial signs of development that will be required to supplement the large industrial developments at TRIC.
During the depths of the Great Recession, Reno was viewed as one of the more distressed markets in the West. However, over the last 24 months, we’ve seen an exciting market dynamic of economic development announcements, low vacancy in multifamily and low interest rates. All of these factors have combined to rapidly progress the strength of the apartment market causing buyers to adjust pricing expectations as sellers realize larger gains.
Trevor Richardson is an agent with Dickson Commercial Group. He can be reached at firstname.lastname@example.org.
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