Buyers look to distressed apartments

Apartment rents are falling, vacancy is rising and landlords are giving more concessions to get their units rented in a market of excess inventory.

Factor in 14.8 percent unemployment and it's easy to see how the multifamily housing market in Las Vegas could be viewed as a risky investment.

Still, investors are taking a good look at distressed apartment complexes that can throw off 10 percent returns in the Great Recession when no investment appears safe.

Opportunistic investors can acquire the Tam Drive Apartments in receivership for $295,000, or $12,292 a unit, said Geoffrey West, vice president of commercial brokerage CB Richard Ellis.

True, the apartment buildings are located in a rough neighborhood east of Interstate 15 and north of Sahara Avenue -- an area once known as "Naked City" -- and they need major rehabilitation work.

The upside is the reduced price and proximity to the Strip, West said.

"I think what's so attractive in apartments versus other commercial property types is that it's a critical need," West said. "People need to have somewhere to live. That's what investors feel. At its core, Las Vegas is a blue-collar town."

He's also got the 32-unit Bonanza Apartments listed for $640,000, or $20,000 a unit, reduced from $795,000. Projected net operating income after rehabilitation and other expenses is $84,463, giving a capitalization rate of 13.2 percent.

The downtown property is "somewhat nestled away from all of the challenges in surrounding neighborhoods" with single-family homes and government buildings in the immediate area, West said.

Distressed apartment properties will continue to come on the market in Las Vegas well into 2011 as lenders remove nonperforming assets from their balance sheets, brokerage Marcus & Millichap said in its third-quarter apartment market update.

The median Las Vegas apartment price declined 40 percent over the past 12 months to $37,800 a unit as distressed properties traded at deep discounts, driving up sales velocity by 30 percent in the first half of the year, the brokerage reported.

Capitalization rates for quality assets in good locations are running in the mid to high 8 percent range, up roughly 100 basis points from the year-ago period.

Dotan Melech, president of United AMS and court-appointed receiver for several Las Vegas apartment complexes, said demand for rental units will increase as people who've lost their homes to foreclosure and bankruptcy spend a couple of transitional years in "financial repair."

"I believe multifamily will be a good long-term investment due to the fact there's nothing being built and people are still losing their homes," he said.

Melech said his duty as receiver is to protect, preserve and marshal the property while it goes through the foreclosure process, bridging the "disconnect" between bank and borrower. He takes offers from investors and presents them to the court for approval.

Buyer caution is fading as vacancy rates begin to stabilize and prices fall below replacement costs, Marcus & Millichap said in its quarterly report.

Vacancy will end the year at 11.5 percent, the firm projected, rising just 30 basis points from 2009 when the rate surged 300 basis points. Over the past 12 months, asking rents declined 3.6 percent to $812 a month, while effective rents -- taking out concessions -- fell 4.4 percent to $755 a month.

Las Vegas investor Wallace Roberson said he's getting a lot of bank-owned properties at discount prices, fixing them up and putting them back on the market. He has a fourplex for sale on 15th Street for $80,000.

"You pay below market value, plus some of them need a lot of work," he said. "You're going to put money back into them."

CB Richard Ellis' West said it's going to take some time to work through the amount of distressed properties in Las Vegas, which is significantly higher than comparable markets.

The majority of apartments for sale throughout the country are either "trophy or trauma," West said.

He's seeing more Class C apartments -- older, lower-end properties with no amenities -- come on the market in Las Vegas. Banks are more likely to keep "trophy" properties, he said.

"Lenders are more willing to part with those C-quality properties because there's not as much meat on the bone," the broker said. "Those deals have viability and lenders are working with the receiver or borrower to do different things."

West reported $26.6 million in sales volume through July for apartment complexes with five to 100 units, which already exceeds last year's total of $25 million. There were 38 transactions involving 1,008 units, compared with 29 transactions and 696 units in all of 2009.

Smaller properties are more attainable for investors, West said. They don't have to syndicate their money or be part of a complex transaction, thereby keeping direct control over their investment, he said.

Developers will build about 1,500 apartment units in Las Vegas this year, after completing 1,700 units in 2009, Marcus & Millichap reported. Over the past five years, they averaged 2,200 units.

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.