IRR-Las Vegas Mid-Year Viewpoint 2015 Local Market Report - Multifamily
Forecast change rates for next three years remain steady due to muted supply additions. The impact that the shadow market of home inventory has on the rental market is waning as additional rentals are offered in the traditional apartment sector and those moving from apartments to home rentals have largely already transitioned. Moving into a new home or condominium remains the biggest reason for loss of tenancy at the Class A apartments. In the Las Vegas market over the long-term, 10-11% of households in apartment complex units buy homes, but it has been closer to 20% over the past few years. We believe this transition is starting to slow as price escalations in the housing sector make the transition from apartment to home ownership less attractive. The trend should positively impact apartment unit living in the upcoming forecast years.
There is a general consensus that the end of 2014 has seen frictional vacancy levels in some submarket areas. Frictional vacancy is that vacancy level below which vacancy cannot decline any further due to normal unit turnover and other vacancy events (eviction, death, etc.) Although there has been some recovery in prices and rental rates since the recession, the Las Vegas market tends to underperform the larger regional and national market in the multifamily space. In the past year cap rates have experienced minor fluctuations with overall rates at levels similar and even slightly below that of the prior year.
The general trend appears to offer much more focus on the acquisition of B/C grade properties which have been largely left out of focus of buyers in the market in prior recovery years. The B/C properties are often the subject of upgrades that often result in a minor update for $1K-$5K per unit that can yield a $50-$100 per month rental increase. Supply additions forecasted by REIS annualized for the next five years is 1,500-2,000 +/- units per year. There are currently 1,236 units currently identified under construction in the REIS New Construction Listing section reporting Under Construction / Planned / Recently Completed Projects. Currently, there is little expectation of a material deviation in the number of units to be added to supply. At the peak of the market construction cycle in the late 1980's to mid-2000's for apartments - unit additions of 5,000 to 10,000 new units per annum were common. This muted new construction cycle represents a more conservative approach by developers in Las Vegas and should provide some measure of confidence and a lower perceived risk to developers contemplating a new project in this market compared to prior epochs in the Las Vegas Apartment development market. From 2008 to 2014 unit inventory additions have hovered around 1,000-1,500 +/- units. The risk of spiking vacancy rates is relatively small in this environment.
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