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Rent breaks ending at apartments

John Seelmeyer

Apartment owners are beginning to turn off the spigot of concessions free rent, no deposits, free cable television that they’ve used to woo tenants in Reno and Sparks.

Vacancy rates are declining they stand at about 4.3 percent now, compared with 5.9 percent a year earlier and landlords are taking the opportunity to raise rents and roll back the concessions.

The trend isn’t readily apparent to passersby who still see banners hanging from apartment complexes, offering all sorts of deals to new tenants.

But Don Wilkerson, whose Gaston & Wilkerson manages several thousand apartment units in the area, says the concessions that remain are offered almost exclusively by out-of-town owners who have been slow to recognize the turn in the market.

Rents rose by 5 to 7 percent at properties managed by Gaston & Wilkerson last year, and the company hasn’t seen any need to offer concessions to maintain strong occupancies.

“None of the local owners are offering concessions,”Wilkerson says.”For the most part, concessions have been burned off.”

And Floyd Rowley,who handles investment properties for the Reno office of Colliers International, says that the remaining concessions appear to be growing smaller.

The number of apartment complexes providing breaks to new tenants 46 percent of the big complexes in the region remained unchanged from the third quarter to the fourth quarter of 2004, says a survey by Johnson Perkins & Associates and William Kimmel & Associates.

But Rowley adds,”It is unclear whether the dollars involved increased or decreased.My sense is that concession dollars have decreased in tandem with the decrease in year-over-year vacancies that the market has been experiencing for the last three quarters.” And some of the concessions,

he says, don’t amount to much in the first place.

Take the apartment owner who cuts the amount of security deposit he requires by $250.

“Reducing a security deposit to a qualified tenant by $250 does not appreciably increase the owner’s exposure to damage, yet in today’s low-interest-rate environment, only reduces the landlord’s interest income by $5 a unit per year,”Rowley says.

Cutting out the freebies can dramatically affect the economics of an apartment complex.

Todd Blonsley, a broker with Marcus & Millichap Real Estate Investment Brokerage Co., has noted that a month of free rent is equivalent to adding more than 8 percent to the vacancy rate of a complex.After all, a month of free rent on an apartment is economically identical to leaving one out of 12 units vacant.

Katie Morrison, who joined with Blonsley in analyzing the apartment market this month for CCIM, a commercial real estate group, says the persistence of any rent concessions in a strong market is noteworthy.

“Owners are not necessarily capitalizing on the strong market because they are giving away the farm without needing to,”Morrison says.

It’s possible, she says, that the persistence of rent concessions keeps apartment complexes full.With concessions, tenants might figure that it doesn’t make economic sense for them to purchase a house and move out.

Or,Morrison says, some apartment owners may be afraid that their occupancies will fall if they stop the freebies.

The analysis by Morrison and Blonsley suggests that the apartment vacancy rate is falling for three reasons:

* Home prices are rising fast.

That puts the purchase of a house outside the reach of an increasing number of apartment tenants.

* Even while the region’s population is growing, the number of new apartment units hasn’t kept pace.

Last year saw completion of 754 apartment units in the market, down from 1,015 a year earlier.

* Employment is strong.When tenants can find work, new rental properties tend to stabilize more quickly and churn among tenants is lessened.