Building Nevada - March 2009

Multi-Family Housing

Construction & Development in a Recessionary Economy

by Frank Albano

    The 2009 multi-family market will continue to be characterized by instability due to loitering economic woes. Deep job cuts, particularly in construction and gaming, are at the very core of the high vacancy numbers plaguing the apartment industry. A handful of Strip projects, Encore Hotel, MGM MIRAGE’s CityCenter Complex and Fountainbleu are due for completion in 2009 and will bring new job creation numbers to approximately 13,000 to 15,000 for the Las Vegas Valley and some experts believe this will soften the struggles of the apartment segment.

    With the limited job growth and an overabundance of rental homes, townhouses and condos, new multi-family projects are securely on the back burner. “A total of sixteen projects are in the construction phase with twelve of those projects set for 2009 delivery of 4,600 units. The remaining four projects will provide an additional 1,800 units set for 2010 delivery for a combined two-year total of 6,500 apartment units,” stated Chris Bentley, president of The Bentley Group Real Estate Advisors Inc, based in Las Vegas.

    Henderson and North Las Vegas will see the highest vacancy numbers, as there is a fierce competition occurring between single-family homes and apartments. These two areas saw the most robust building during boom times and now many of the newly constructed single-family homes are rentals. The caveat here is that renters are becoming increasingly wary of renting a home as it could be foreclosed upon before the lease term expires. Historically, renters would prefer to rent a home over an apartment, but with the current uncertainties in the credit markets, apartments might just be the more attractive option.

The Role of Employment Numbers

    The job impact on the economy and the apartment industry has gone from a minor question to a major question. The much-ballyhooed opening of CityCenter has stirred up a controversy. How will 12,000 new jobs and the residual overflow supporting jobs affect the apartment rental industry? Some experts, like Bentley, believe the jobs CityCenter creates will be a huge benefit to the market. On the other hand, Bret Holmes, president of the Multi-Family Housing Association, a trade group for the apartment industry, disagrees stating, “It will help out, but by no means be a huge benefit.”

    With supply of apartments outpacing demand and casinos laying off workers, who are the traditional apartment renter, the key to the equalization of supply and demand is absorption coupled with a recurrence of casino new hires. But when will the upswing start? The general consensus is not until 2010.

    “Demand has to catch up with supply and right now there is more supply than demand,” said Lawrence Baeck, vice president of acquisitions of Watt Companies, a real estate services company based in California.

    But again, those projects on The Strip will not see action until after 2010, and it will likely take even beyond that to secure financing, at which point the apartment building industry will spike. It becomes apparent that at the bottom of the pile lies bank lending; and once it begins again, activity will trickle down.

    “There is pain in the apartment occupancy market because multi-family building construction and development is tied to jobs,” said Baeck. “And there just is not enough job security or creation occurring presently.”

Construction Update

    While construction has slowed in the recent past in all areas of Southern Nevada, currently there are some areas where apartment construction is still taking place. In the Northwest and North areas of the Valley, there are a combined six multi-family projects currently under construction. The Southwest submarket is the other area of town still seeing construction of apartment complexes, with three projects (two of which are located in the master-planned Mountain’s Edge) currently in construction phases. Trammel Crow Residential and Fairfield Residential are the two most active developers with four and seven projects respectively. Other developers seeing a trickle of activity include, Fore Property Group and Picerne.

    According to a report by The Bentley Group, there are seven projects, located throughout Las Vegas, currently listed as ‘On Hold’ and another six projects as ‘Need Research.’ When the projects on hold are released for construction another 2,328 units will enter the market.

    When times were strong, the Valley saw an average of 1,500 to 2,000 new units each year. These numbers are not startling, but now that Southern Nevada is drowning in supply, absorption seems elusive; particularly in light of previously reported new unit totals of 4,600 for 2009 due to lender commitments.

The Rise of Shadow Markets

    There is a shadow darkening over apartments. It is rental homes, townhouses and condos, also known as “Shadow Markets.” Renters now have more choices, but all is not well in that realm either. While many renters will opt for a home to rent over an apartment, the gloom of foreclosure and eviction has spooked the renters. “Renters are afraid of renting a home, condo or townhouse and it then being foreclosed and they are evicted,” said Holmes.

    As foreclosures abate and housing stock dwindles according to the laws of supply and demand, will “Shadow Markets” once again cast their foreboding structure on apartments? A good question, but the future of this industry [apartments] is not subject to Merlin’s magic, it is solidly based on jobs, jobs, jobs, and a resurgence of construction.

    But as home rental prices come down and equalize with apartment rents, MFHA predicts the role of “Shadow Markets,” which created a diversity in home rental prices, will come down as the market readjustment will create more of a demand for renters to purchase a house as opposed to renting an apartment. But, with new stringent lender requirements, only those with good credit and a stable job will be able to a get a mortgage. Based on current lender conditions, that may change in the next six to 12 months, but for now the trend of “Shadow Markets” and the competition they present is predicted to slowly abate as resale housing foreclosures are absorbed.  

One Person’s Trash is Another’s Treasure

    As a result of the economy going south, near-term recovery is bleak, but what is one man’s poison is another man’s elixir, as investors have begun buying up troubled apartment complexes at bargain basement prices. Many owners who are strapped for cash and faced with vacancies are bailing out in lieu of facing bankruptcy.

    Ownership changes have been a trickle compared to the past few years. Data supplied by MFHA stated that there were only three ownership changes in 2008 of complexes over 100 units. In terms of units fewer than 50, during that same time period, there were just five ownership changes.

    Landlords face a tough road stated Holmes. From adjustments in rents [downward], to stagnant rentals, challenges of over-supply versus demand, to the largest problem, a lack of apartment absorption; a positive readjustment in these markets and jobs are key to unlocking the stalemate.

    Not everyone is as pessimistic about the fate of the multi-family housing industry. Trammell Crow’s Jeff Allen predicts multi-family housing will rebound. “It might take twenty-four to thirty-six months as the U.S. Treasury bailout process frees up credit and banks start lending again. Once this shakeout occurs, which will take about a year, it will be good news for multi-family apartment builders.”

The Long Road to Recovery

    The local apartment market fundamentals are anticipated to start stabilizing somewhat in the later quarters of 2009. Market stabilization is likely to be the catalyst for many investors who are currently sitting on the sidelines waiting for the turnaround. According to data compiled by Marcus & Millichap, assets adjacent to master-planned communities along the I-215 will attract large buyers and some syndicates due to their proximity to job centers.

    But what will it really take to bring back the apartment industry? “In a word, jobs,” said Holmes.

    All of the experts consulted for this story, agree to one basic fact- jobs are tied to the apartment industry revival. When jobs become plentiful once again, hotel/casino workers, the traditional renter, will need a place to live. So what exactly is preventing this from happening? The big projects postponed or cancelled due to a credit freeze means that the potential new workers that would have been hired, were displaced.

    Will lending start again so big hotel/casino construction can continue? The general consensus is: yes. Some say within six months, others say, within the next 24 to 36 months, while others call for an even longer-term prognosis of 4 to 5 years. But builders, managers, data miners and investors agree, the apartment industry will come back.

Frank Albano
Frank Albano is a freelance writer based in Southern Nevada.