Trending UpMulti-Family in Nevada

Multi-family developers in Nevada are convinced a strong trend in the segment will continue for the foreseeable future.

The U.S. is in the longest economic expansion in history and with it has brought a boom in multi-family developments in Nevada. David Picerne has been involved in Clark County multi-family developments since 1986, and he’s cautiously optimistic the good times will continue. As president and CEO of Picerne Real Estate, Picerne said Nevada real estate is entering unprecedented territory in its growth.

“It’s been a very good past five years,” Picerne said. “Prior to 2008-09, when the market fell off the cliff, there weren’t deep recessions. The market would have a few good years and a few not so good. The market continues to be in a very good supply and demand equilibrium.”

Picerne’s firm owns approximately 7,000 high-end units in Las Vegas and, while it’s a national developer Picerne Real Estate currently has a development focus in Las Vegas, central Florida and New England.

Picerne did express concern Las Vegas developers might be close to outbuilding demand, but its currently abated by a slowdown in single-family housing. The single-family development market is dominated by public builders, Picerne said, so there’s a much more disciplined approach in the industry than prior to the Great Recession. He cites a greatly reduced single-family home start number as a reason the supply and demand equilibrium is working positively in multi-family’s advantage.

“Overall, vacancy numbers are staying stable or getting lower,” he said. “In our portfolio, we’re at the highest occupancy since I’ve been in town.”

As occupancy rises, so do the rent rates, which he said have increased significantly.

While occupancy continues to increase, transaction volume has stalled. NorthCap Commercial Multi-Family Director Devin Lee said transactions were down 50 percent.

“A lot of sellers are sort of rich on pricing and fat and happy,” Lee said. “Everything is going well, so they’re just sitting on things for now. Buyers aren’t willing to stretch that low on cap rate.”

Although the first half of the year was a bit tight, Lee believes the tide is changing and is hoping for the second half of 2019 to finish strong. With the interest rate decreased there seems to be capital available to make deals happen. He said he and his firm have plenty of deals in the works and he’s not entirely sure what’s triggering the phone to ring, but it’s ringing.

The Great Recession, however, has kept some investors more wary to make deals than in prior decades.

“Ten years ago, hogs got slaughtered,” he said. “You can be a pig today, but I think the hogs are still waiting to see what happens. The hogs are waiting in limbo,” said Lee.

The multi-family climate in Reno is similar to that in Las Vegas, said Jesse Greer, multi-family partner at Avison Young. With a strong demand for units and a “tremendous” amount of new or renovation project starts, sales volume on multi-family has slowed.

“Everything is full and good and owners are making money,” he said. “There’s also nothing to exchange into. At the end of the day, investors are getting the returns, so if they sell, where do they go.”

Like Picerne, Lee believes the singlefamily housing shortage in Las Vegas is helping the multi-family development market. The shortage, along with a job abundance he predicts is on the horizon will lead to continued strong development.

Despite the recent surge in phone calls and potential deals, Lee believes the year will still finish slower than the previous three years.

“On the seller’s side, they’re content with what they have; they can’t find where to put their capital that’s better elsewhere,” he said. “There’s no sign that it will retract anytime soon. That whole recession in 2019 people talked about, that’s not coming true.”

Potential Road Blocks

The biggest concern moving forward for multi-family development, and likely construction overall, is the high cost of construction. Picerne cited a global inflation rate of approximately 2 percent, but when looking at the construction industry it reached between 5 and 10 percent.

A nationwide labor shortage also causes problems, which is exacerbated in Las Vegas because of the multitude of commercial projects in motion, such as Las Vegas Stadium, Las Vegas Convention Center and several resort properties.

“There’s plenty of demand to sustain the levels of development we’re seeing,” Picerne said. “The problem, if there is a problem, is the cost to develop an apartment or single-family home is going up higher than incomes. You see the potential, if there’s not discipline in the development community to see the softness in the high end. So the concern would be costs getting too high and people’s inability to pay rents at the highest levels that we’re getting.”

An issue could be the population growth outpacing new jobs in the market, which might contribute to the lack of ability to pay rents, Picerne said.

“We’re seeing some signs of turnover with trouble affording the rents that we need to get to justify the costs increases we’ve incurred the last several years,” he said. “We’re not California, where the rents are potentially double what they are here. Here, at the upper end, we’re starting to stress the abilities to afford. That’s the only chink in the armor I see today.”

The effects of the Federal Reserve’s interest rate decrease in July are yet too be seen, Picerne said. The rate increases in 2018 put pressure on projects costing more, so the decrease was a slight relief in that sense, Picerne said. He added that it makes some projects more viable to move forward as many in the pipeline are having trouble getting off the ground with prohibitive construction costs. Despite that relief, however, the costs are still prohibitive at times to bring the product to market at a price an average renter could afford. The lower costs of borrowing money is also an attractive option when building.

“The lower cost of debt will help offset some of the construction cost increases,” he said. “It’s a good thing in making them economical, but if it leads to over-building, then it’s an issue.”

As for affordable housing, which is a consistent struggle across the U.S., Lee said the construction prices are prohibitive to even start, especially with all the projects in Las Vegas.

“You’re competing with Strip casinos and stadiums,” he said. “Those are going to get built. Even if the land is given for free, you still couldn’t build an affordable project.

“Everything getting built is Class A, and even Class C is becoming B. All of our product is getting nicer, just like the houses.”

Greer said there’s approximately 20 projects with 6,100 Class A units set to come online by 2021, which would be essentially an 18 percent increase in inventory. That could cause a great softening of the market.

“All those new units could drive the rent down, maybe a bit,” he said. “We’re guessing, 18 months from now the market will soften. Maybe people will take a second look and believe it’s time to sell.”

Investors will continue to look at Nevada, however, Greer said, because of the low tax rate. Because most investors are coming from California, the alternatives would be Oregon, Washington and Idaho and, while not as egregious as California, the tax rates are still high.

Nevada’s Economic Influence

While Reno might see its market for multi-family units soften, there’s plenty of optimism the city will continue to surge. Greer said it will be key to watch the population and median income growth, particular if the income growth warrants the average rent of $1,300 in Reno.

Greer believes Reno is in an excellent position when it comes to the economy as the industrial parks are seeing increased activity. Much of that activity, he hopes, will drive the employment and income, such as projects by Tesla, Switch, Amazon, Google and Apple.

“Tech is coming here, for the good and the worse,” he said.

Lee, who primarily deals with 100-plus units, said the Las Vegas market is mostly devoid of “mom and pop” developers.

“Vegas is overpriced,” he said. “They’re moving to Texas, Oklahoma, different locales.”

Las Vegas continues to surge. The region is seeing increased population and diversification, as well as gaining national relevance within the sports community. While sports teams don’t signify everything, Lee said they do bring a legitimacy to the city. Now with an NHL team, the Vegas Golden Knights, and soon an NFL team once the Oakland Raiders move next year, Lee said the city is halfway to becoming a full “Major League” city. Plenty of rumors are also abound in NBA and MLB teams making their way to Las Vegas, and if those come true the city could see a major influx in investment.

“There are some funds that, unless you have four sports teams, they won’t even look at your city,” Lee said. “That’s going to change. The new Vegas is party Vegas and having sports teams is going too allow us to be a party mecca.”

Picerne believes Las Vegas is unlikely to be hit as hard as it was during the Great Recession, even in the unlikely event the next downturn is as bad as the one a decade ago. Las Vegas continues to be among the fastest growing cities in the U.S. and now, with a maturing economy growing outside the gaming industry, Picerne sees more opportunity to weather a downturn. Still dominated by tourism, however, Picerne, believes a mild recession wouldn’t slow down that piece of the pie anyway.

“I’m a big believer of Las Vegas,” Picerne said.