New and familiar players set their sights on the Valley due to ‘outsized ‘ population growth, record-low vacancies and a favorable landlord climate.
By: Nellie Day
Nearly 13 years after the Great Recession ended, Las Vegas is a new market. The city, like the rest of the country, learned some valuable lessons during that time. Since then, Vegas has diversified. It’s brought in sports teams. It’s continued to remain tax and business-friendly. Most importantly, its proximity to Southern California has been a linchpin for the city’s post-pandemic economy.
“Southern Nevada benefited from continued population growth- roughly 47 percent of new residents were from California – and a newly found presence of remote workers who looked to take advantage of the state’s zero income tax environment, as well as the city’s low cost of living relative to neighboring West Coast markets,” says Adam Schmill, first vice president of multifamily investment properties at CBRE.
”Las Vegas showcased strong market fundamentals in 2021 with top-tier population growth, a steady recapture of the jobs lost at the onset of the pandemic, record-high rent growth and record-low vacancy levels.”
Rent for an average one-bedroom apartment in Las Vegas was $1,404 in the first quarter of 2022, up 19 percent from a year earlier, according to Rent.com. The average two-bedroom jumped 21 percent – to $1,610 – during that same period.
Like many other problems out West, you can (partially) blame the Californians for this one. The Valley’s population grew by more than 2 percent last year, bringing in 45,000 residents, notes Jared Glover, associate director at Berka dia. This coincided, he says, with a lull in housing deliveries.
“Because of this outsized population growth, absorption continued to outpace supply almost threefold, keeping upward pressure on both rents and occupancy,” says Glover. ”Over the past several years, the market has delivered less than 2 percent of total supply in the apartment sector, alongside just 12,000 single-family homes on an annual basis. With current single family inventory sitting at under four weeks, median home prices rose 26 percent year over year to $425,000, pushing more prospective home buyers into the rental pool.”
The combination of these events led to the aforementioned rent growth. Despite all this – and the fact that rents continue to rise – Las Vegas is still about $200 below the national average on rent, Glover adds. CBRE notes Las Vegas ended 2021 with a rent-to-income percentage of 28 percent. This was up from 20 percent in 2019.
“As it currently stands, Las Vegas’ rent-to income ratio is still far below California markets like Los Angeles, San Francisco, San Diego and San Jose,” says Schmitt. “It’s in line with Seattle, Portland and Denver, and still slightly above Phoenix and Salt Lake City. Las Vegas’ affordability ratio has definitely increased, but it is not the only Western U.S. market to do so.”
Out-of-State Investors See the Value
Las Vegas is also beating the national average on vacancy rates. At the start of the year, the vacancy rate in the Valley stood at 3.8 percent compared with the national average of45percent, according to Steve Nosrat, principal at Avison Young.
“This has spurred investors on, causing them to feel more secure with Las Vegas’ long-term outlook,” he says. “The pandemic accelerated a lot of the migration from California to Las Vegas over the past two years. This, along with strong economic recovery, has pushed the Las Vegas multifamily market fundamentals to record breaking levels. A demand increased rapidly, so have rents”.
The Nevada Stale Apartment Association logged 193 sales of apartment complexes last year, up from 91 in 2020. Real Capital Analytics, meanwhile, notes that investors spent $2.5 billion on Vegas-based apartment assets in the first three quarters of 2021 – tripling what was spent in 2020.
Of course, affordability doesn’t just apply to tenants, but to investors as well. And those California dollars can go a lot further in the desert.
“The biggest trend for renters and owners is that Vegas is a value proposition compared to other markets,” says Devin Lee, director of multifamily investments at locally-based Northcap Commercial.
“We are so far off California rents. It would take a long time with very high rental increases for us to get near California rates, and that does not seem likely. Plus, many investors are fleeing other markets that do not have the favorable landlord climate that Nevada offers. Our taxation rules and eviction rules are favorable compared to other markets. Thankfully, neighboring states are continuing to change the rules, so investors are fleeing.”
Out-of-state investors like San Francisco-based The Roxborough Group can see the value of Las Vegas, especially compared with California.
“Las Vegas is an attractive market today as housing affordability is a key investment theme for The Roxborough Group,” says Charlie Neville, the company’s vice president. “Las Vegas remains one of the most affordable major metros in the Western United States.”
The Roxborough Group is looking to re-enter this market at a time when it’s red hot. The firm made its first acquisition here in 2015.
“We exited our latest Las Vegas multifamily investment in 2019 but are active every day looking to buy back into the market,” Neville explains. “Las Vegas is a high priority for The Roxborough Croup as we look ahead in 2022, and we would love to own more multifamily there.”
They’re not alone. Schmitt notes 17 new investment groups purchased multifamily assets of more than 100 units in Vegas in 2021.
“The timing of these new groups has a lot to do with population growth, jobs still needing to be regained, jobs that will be created, the higher propensity to rent demographic and the advantageous tax environment,” explains Schmitt.
“Investors love the story that Las Vegas has moving forward, even with the immense growth the market saw in 2021. This market also benefitted from investors who found it hard to buy in Phoenix in 2020 and 2021. As a result, they shifted their focus to Las Vegas to place capital in a resurging Sun Belt market that retained similar investment metrics and demographic trends, while also remaining a few years behind Phoenix in the recovery cycle,” adds Schmitt.
One of those new market entrants is Ideal Capital Group. The Clovis, California-based firm acquired the 287-unit Jade apartment complex near the Rio All-Suite Hotel for $124.5 million in December. Kevin Conway, the firm’s managing director, cited solid fundamentals as his reason for entering the Valley now.
“We have seen firsthand the migration of Californians to Las Vegas for a better lifestyle, housing affordability, and, of course, more favorable business and individual taxes,” he says. “Las Vegas is the entertainment capital of the world, and we wanted to be a part of that vibrant, dynamic metro.”
Conway acknowledges the investment market may be crowded right now, but he isn’t worried about pricing bubbles or bidding wars – at least not to any large degree. That’s because Ideal Capital is in this market for the long haul as opposed to simply capitalizing on short-term trends.
“We try to buy high-quality real estate at a fair price,” explains Conway. “People will always need a place to live. Cap rates and rents may fluctuate, but if you own high-quality real estate next to large, immovable economic drivers, you tend to do okay over time. We are committed to Las Vegas for the long term.”
Aaron L. Pacillio, chief investment officer at Davlyn Investments, has a similar stance. The California-based company, located in the South Orange County master planned community of Ladera Ranch, acquired Sonata, a 312-unit property in North Las Vegas, for $77 million in January. This marked Davlyn’s first acquisition in Las Vegas. As a long-term investor, Pacillio also appreciates Vegas’ real estate fundamentals.
“We do not assume rents will grow at the 2021 pace over the long term,” Pacillio explains. “We are long-term investors and, as such, buy the best fundamentals we can and hold. Sonata, for example, is near Nellis Air Force Base and the permanent workforce it supports. It is also a few blocks from an Interstate 15 on-ramp, offering residents accessibility to the Valley’s primary employment corridors, as well as a ton of quality industrial employment that some of our investors had ownership and/or familiarity with.”
Nevada’s location didn’t hurt, either. “lts proximity to our Southern California portfolio also made it a natural candidate for expansion,” adds Pacillo.
Investment Strategies Begin to Vary
These out-of-state investors are bringing another interesting trend with them: an appetite for luxury and Class A product.
“In the past, Las Vegas primarily attracted value-add investors looking to capitalize on an inventory with an average vintage of 1990, offering a discount to replacement cost and a strong yield,” explains Glover. “While this is still the largest pool of capital deployed in Las Vegas, 2021 marked one of the first years that major institutional capital flowed into core deals.”
Glover has witnessed this trend with the entrance of groups such as Walton Street Capital, TA ReaIty, Nuveen and LaSalle Investment Management, which spent $155.6 million to acquire the 456-unit Ely at the Curve in The Spring Valley submarket, in October. Walton Street Capital purchased and recapitalized the newly built, 286-unit Elysian at The Palms in November.
“We saw several I recapitalizations or outright sales over$400,000 per unit, above replacement costs, as continued in-migration from coastal cities and higher wage earners in the renter-by-preference category created demand for Class A product,” according to Glover. “A number of institutional developers either entered the market for the first time in 2021 or re-entered based on this growing demand for luxury apartments.”
A few new luxury communities from local and out-of-state developers have been completed, or soon will be, giving residents and investors more supply from which to choose. This new supply includes Nashville-based Southern Land Co.’s Auric Symphony Park, the first luxury multifamily residential community ay Symphony Park in downtown; Austin, Texas-based Aspen Heights Partners’ Pare Haven, also in downtown; San Diego-based Matter Real Estate Group’s UnCommons, situated between Henderson and Summerlin; locally based Calida Group’s Elysian at Tivoli in Summerlin; and Elysian at Centennial Hills just north of Summerlin.
“Value-add is still the broadest cross section of buyers, but since 2016 and 201& – especially after the Raiders announced their move – institutional buyers have become very active with new and newer construction assets,” says Scott R. McClave, senior principal of acquisitions and finance at Irvine California-based The Bascom Group. (On March 27, 2017, the National Football League officially approved the Raiders’ move from Oakland to Las Vegas. The renamed Las Vegas Raiders play home games at Allegiant Stadium.)
Value-Add Remains Popular
As McClave mentions, value add plays are still predominant in the Valley, though the trends surrounding these strategies are changing.
What’s evolved in the past few years is a significant number of buyers chasing older, pre-1990 assets,” he continues. “With the ’90s and new product getting bid up and rents rising, newer valueadd groups have found success with ’70s and ’80s product in older neighborhoods.”
McClave would count Bascom among these buyers. The firm purchased the 200-unit Sun Chase apartments just east of the Strip in December for $40.5 million. The complex was built in 1984. lt contains a mix of one- and two-bedroom layouts, with a fitness center, clubhouse, pool, barbecue area and putting green. Bascom plans to modernize the fitness center, clubhouse and pool areas while re purposing the putting green into a central park with a play structure, barbecue station, seating areas and landscaping.
“Sun Chase was 1980s product that had many of the benefits of 1990s product,” explains McClave. “This allowed us to capitalize on growing demand in workforce housing submarkets as long-time residents seek more value-based housing. Having the same private ownership for over 20 years meant the property was ready for a refresh with rebranding, paint, new unit interiors and updated amenities.”
Value-add plays remain popular in Las Vegas not only because of their lower-priced entry points, but also because they pay off. This is something Encinitas {San Diego), California-based Tower 16 Capital Partners experienced recently. The firm sold three Las Vegas complexes to Salt Lake City-based Bridge Investment Group for a total of $182 million in April 2021.
The disposition included the 540-unit Accent on Rainbow at 6666 W. Washington Ave.; the 313- unit Accent on Decatur at 2950 S. Decatur Blvd.; and the 312-unit Accent on Sahara at 4801 E. Sahara Ave. Tower 16 acquired the assets for $112 million in 2018 and 2019 and invested about $10.3 million on upgrades.
“We invested significant capital into renovating and rehabilitating the properties, which, for the most part, hadn’t been touched in years,” says Tyler Pruett, principal at Tower 16 Capital Partners. “Coming out of the COVID pandemic in Las Vegas, our investment partner was eager to realize the strong returns that had exceeded our original projections. Investing in the communities and ultimately exiting the assets exceeded our goals and overall investment returns.”
The average cap rate for value add acquisitions is 5.50 percent as of April according to commercial mortgage banking and advisory firm Apartment Loan Store. Nosrat predicts the value-add strategy will remain popular, as the promise of increased rents is just too hard for many investors to pass up.
“The majority of the investors we are working with prefer value add and workforce housing opportunities,” he says. “We are seeing $750 to $1,000 rental increases per unit, per month on units that were renovated just this past year, with an average renovation cost per unit of $9,500 to $11,000.”
Of course, nothing gold can stay. Inflation and higher interest rates are dogpiling on top of the already rising costs of labor and materials (if you can find any to begin with, that is).
“Interest rates have ticked up recently, which will eventually affect pricing and cap rates if they continue to increase,” says Schmitt. “There is an abundance of capital that is earmarked for multifamily product, which will help keep cap rates lower, but at some point the increase in interest rates will become a factor.”
As for what the future holds for Las Vegas, experts remain optimistic. Glover anticipates additional rent growth and high occupancy as ongoing labor shortages, rising construction costs and land prices will make it difficult for supply to outpace demand in the near term.
Schmitt agrees with this assessment, though he believes another rent hike like what occurred in 2021 would be alarming.
“I think there would be cause for a lot of concern if rents grew another 20-plus percent in 2022,” he says. “We conservatively predict rent growth of 6 to 8 percent this year. We believe 2021 was a bit of an anomaly that occurred as a result of unique market dynamics – navigating through a pandemic, eviction moratoriums, record home prices – that won’t be duplicated or persist moving forward. That said, the population growth in Las Vegas, the 60,000 jobs that still need to be recaptured, and the tens of thousands of employment opportunities that will be created strengthen the prediction that Las Vegas’ multifamily market will continue to flourish in 2022,” adds Schmitt.
In a city based on picking winners, these multifamily investment experts may hold the lucky cards.