Saturday, March 22, 2003
Copyright © Las Vegas Review-Journal

Bull market in apartments predicted

Jobs growth, population rise, demographics perceived as factors behind strength

Construction continues Friday on new apartment buildings that are being built along North Rancho Drive near Lake Mead Boulevard. Photo by Gary Thompson.

The Las Vegas apartment market will enjoy a bull market starting in 2005, and it will be stronger than the previous run from 1995-2000, an executive with Marcus & Millichap predicts.

Linwood Thompson, senior vice president for the real estate brokerage in Phoenix, said job growth, population growth and some key demographic changes will contribute to the growth of the multifamily housing market here.

"Another reason I'm bullish for 2005 is the platform we're coming off of is much more fundamentally solid than it was the first time around," Thompson said Thursday at the Southern Nevada Multi-Housing Association forum at the MGM Grand Conference Center.

Las Vegas jumped 11 spots in the National Apartment Index to No. 13, the biggest improvement of any market in the index compiled by Marcus & Millichap.

The index is a snapshot analysis that ranks 40 apartment markets nationwide based on a series of 12-month forward-looking supply and demand indicators.

The improvement for Las Vegas was attributed to a combination of expectations, including stellar job growth, falling vacancies and declining new construction.

"The fuel that fires the furnace is job growth," Thompson said.

Las Vegas added almost 21,600 jobs in 2002, a 2.8 percent increase from the previous year, according to the Nevada Department of Employment, Training and Rehabilitation.

Employment is expected to grow 5.5 percent this year, which will help raise rental demand for apartments.

By comparison, Phoenix lost 17,000 jobs, Thompson said.

Las Vegas apartment vacancy is running around 7.8 percent, up from 7.3 percent a year ago, with average monthly rents of $722.

But vacancy rates are forecast to decline this year by 0.3 percentage points as employment growth rebounds and construction slows. Developers are expected to deliver 4,000 units during the year, down 14 percent from 2002.

Phoenix, which climbed from No. 28 to No. 20 on the apartment index, has average rents of $740 and 9.5 percent vacancy, down about 1 percentage point from the previous year.

Las Vegas is seeing apartment owners give concessions such as one month's free rent, which cuts into revenue collections, but those concessions are for three months in Denver and two months in Atlanta, Thompson said.

"In many markets you have a combination of increased vacancy and increased concessions where collections are down to 80 percent. Las Vegas has actually held pretty steady," he said.

The five-year run from 1995-2000 faced some headwinds that will have died down in the next run, Thompson said.

For one thing, home ownership rose from 64 percent to 68 percent, taking out 600,000 households that would have been renters.

"I don't think you're going to see it go up another four points from 68 percent to 72 percent," he said. "Foreclosures are up and you're starting to see them trickle back into apartments. It's going to be a lot harder to finance someone at 7 percent or 9 percent."

Also, two age groups between 20 and 35 were shrinking, resulting in a net loss of 1.1 million households that are traditionally renters. The "echo boomers" will bring those numbers back up in 2005, Thompson said.

With land prices at $160,000 an acre and up in Las Vegas, home builders are trying to squeeze more residential lots per acre.

"This trend toward higher density will continue and probably become even more pronounced in the years to come," said John Schlegel, planning director for Clark County.

Thompson said the underbelly of apartment investment remains strong.

"There's amazing amounts of wealth in the hands of private investors," he said.

Of the last 100 transactions between $10 million and $70 million recorded by Marcus & Millichap, 45 were closed by private investors using their own money and 40 others were by private syndicators using someone else's money, Thompson said. The remaining transactions were through institutional funds such as REITs and pensions.