Uncertain TimesMultifamily in Nevada

April was set to be yet another busy month for sales of apartment complexes in Nevada, one of the hottest multifamily markets in the country.

And then, all of sudden, it wasn’t.

After state and local governments mandated business closures — with resulting job losses — to battle the COVID-19 pandemic, multifamily investors, developers and managers stepped back until more certainty returns to the market.

In Reno and Sparks, new uncertainty meant that only one multifamily transaction closed during April, reports Ben Galles, a vice president with Logic Commercial Real Estate. Every other deal under contract was pulled from the table.

In Las Vegas, many pending acquisitions didn’t close, says Art Carll-Tangora, a principal and multifamily specialist with the brokerage firm of Avison Young. Litigation is following in the wake of some of the collapsed deals, he says, and many sellers have taken multifamily properties off the market until the dust settles.

Pandemic Impact

David Picerne, president and chief executive officer of Picerne Real Estate Group, says the company began seeing impacts of the COVID-19 shutdowns almost immediately.

The company, which manages nearly 6,400 apartments at 19 sites in southern Nevada, saw occupancy rates fall from 97 percent to 94 percent as residents moved out after losing jobs.

One of the company’s new complexes — a 320-apartment community — had been renting 40 to 70 units a month earlier this year, but leasing slowed dramatically in mid-March.

And tenants skipped rent payments. “We typically end the month with less than 0.5 percent delinquency, and we ended April with 4 percent delinquency,” Picerne says. “That is a very significant difference.”

Another hit: When the state government barred evictions during the COVID crisis, it also froze late fees, termination fees and the like. Those fees accounted for thousands of dollars of monthly revenue at the company’s apartment complexes, Picerne says.

The company’s staff stays in close touch with tenants who are struggling to make rent payments.

“We engaged our entire staff, contacting each resident multiple times to provide assurance, and we are there to assist and work out payment plans if needed,” he says. “We are empathetic to the plight of our residents.”

Even so, he acknowledges that some tenants, knowing that eviction is off the table during the crisis, refuse to work with Picerne staff.

“Fortunately, most of our residents appreciate having a nice place to live and want to honor their commitments. The vast majority of our residents are working closely with us and appreciate that we are trying to help in any way we can,” he says.

In late May, apartment vacancies stood at 7.3 percent in Las Vegas and 6.8 percent in the Reno-Sparks area, the Nevada State Apartment Association reports. Those figures mark an increase of just under 1 percentage point from a year ago in Las Vegas, and just a tiny blip upward in Northern Nevada.

Paying Rent

For many apartment owners and managers, the bigger question has been the ability of newly jobless residents to pay rent, says Susy Vasquez, executive director of the apartment association.

By the middle of May, landlords reported that tenants had paid about 87 percent of the rents due that month. But about 20 percent of tenants had arranged a payment plan to pay overdue rent. Vasquez says that some neighborhoods have been particularly hard-hit with large numbers of tenants who are struggling to pay the rent.

She says government rent assistance is needed to help people who have fallen two or three months — and soon, four months — behind in their rent.

At the same time, apartment owners and managers face additional operating costs as a result of the pandemic.

“We have made appropriate adjustments to safely address maintenance and leasing operations. Like all business, we have added safety measures to ensure our residents and those visiting our communities are safe,” Vasquez says.

The upshot of slow rent payments and higher operating costs: Landlords are worried.

“The market continues to remain stable. However, we cannot continue to sustain losses in rent for much longer,” Vasquez says.

But she says government officials are clearly aware of the challenges facing tenants and landlords, and she says elected officials and attorneys with legal aid programs have worked collaboratively to find solutions. The federal CARES Act — a response to the pandemic crisis — will deliver funds to the state and cities to help renters.

“We all have the same goal in retaining housing for Nevadans,” Vasquez says. “We hope government agencies fund existing sources of rental assistance in order to minimize delay and efficiently funnel funding to those in need.”

Under Construction

Uncertainty about the effects of the pandemic arrived on the heels of a record-setting year for multifamily sales in the Reno-Sparks market, says Aiman Noursoultanova, a senior president in the investment properties unit of the brokerage firm CBRE.

A complex of about 200 units, for instance, drew 22 offers from potential buyers last fall, and Noursoultanova says that level of interest wasn’t unusual. Demand for suburban properties, especially those close to major employment centers, provided a strong push to the market.

Investors were drawn to the market because of strong job growth in the Reno area, which in turn drove population increases and demand for housing. An attractive regulatory environment — rent control, for instance, is non-existent in the region — provided even more impetus to the market.

Those long-term factors likely will remain in place for the long term even if the pandemic creates a few bumps, Noursoultanova says.

But investors are keeping a close eye on the arrival of thousands of newly constructed apartment units at the same time that thousands of residents lost their jobs.

In the first months of this year, more than 10,000 apartment units were planned or under construction in the Reno-Sparks market. Construction — deemed an essential activity — roared ahead even as much of the economy was locked down.

That means that new apartments will be hitting the market even though the jobless rate in the Reno area reached nearly 20 percent during the pandemic closures.

But manufacturing employment, a fastgrowing segment of the Northern Nevada economy, wasn’t hit as hard nearly as tourism by the pandemic. Noursoultanova notes, too, the return of manufacturing jobs to American shores may help jobs — and rental demand — bounce back.

Signs and Signals

There had been signs, however, that Nevada’s white-hot multifamily market was cooling even before the pandemic shock.

Population growth fueled by the tourism industry in Southern Nevada and by the growth of Tesla and other manufacturers in Northern Nevada had been driving vacancies down and rents up for several years. Not surprisingly, lots of new construction followed.

“The data suggest that construction had nearly caught up when the COVID-19 recession hit us and sent us into a lockdown of the economy,” says Stephen Miller, director of the Center for Business and Economic Research at the University of Nevada, Las Vegas.

The center’s data, for instance, shows that rents were softening as newly constructed units came on the market. The median monthly rent of $1,050 in Las Vegas was down 5.7 percent from a year ago, while Reno’s median rent of $1,191 was down 3.4 percent.

Nobody, Miller says, knows for sure what’s coming next.

“All bets are off on the COVID-19 recession,” he says. “It was not a typical recession. Rather, the recession was kicked off by the public-health crisis and the shutdown of the economy by government action. Leading indicators were useless to predict the government-lockdown recession. The recession will cause rental rates to fall and vacancy rates to rise, which is already occurring. The construction of new apartments and homes will slow.”

Vacancies

How high might vacancies rise?

Miller notes that vacancy rates in Las Vegas during the Great Recession topped out at nearly 11 percent in late 2009 before slowly falling back to 5 percent at the end of 2019.

With the increased risks, some developers are rethinking projects. Others are moving fullspeed ahead, betting on a quick economic recovery. The pipeline of new apartments under construction stood at 3,314 units in Las Vegas and 4,054 in the Reno-Sparks area in May, the apartment association says.

TRU Development, a Las Vegas developer of multifamily and commercial projects, still plans to break ground on 1,284 units this year, and it’s currently leasing 210 newly constructed units, says Tim Deters, its president and chief executive officer.

Putting projects on hold until the economic outlook clears often isn’t a good option, largely because delays become expensive.

“With over 25 years in development, I can attest that starting and stopping creates many challenges, especially with design consultants and project costs,” says Deters.

But the decisions to move forward aren’t entirely in the hands of developers.

“Lenders are heavily scrutinizing our development community and the lending market in Nevada has come to a halt with COVID,” Deters says. “With Nevada having one of the highest unemployment rates, it is difficult to say when this will ease up.”

Investors in TRU Development projects look for modest rebound in the multifamily market this year, followed by a gangbuster year in 2021. But much depends, Deters says, on the ability of the Las Vegas market to attract large meetings and conventions as well as the restoration of consumer confidence when facilities reopen in the post-lockdown world.

TRU’s team sees opportunity in the uncertainty — rethinking its business plan, looking at new ways of structuring transactions, and considering potential new market trends.

“Many of our competitors are not currently in this mindset. Many are in fear,” Deters says. “We at TRU are more opportunistic than ever.”

Multifamily investors and developers who banked on ever-increasing rents in Las Vegas may face difficulties.

On the Horizon

Although Picerne remains optimistic about the long-term future of Southern Nevada, he expects a slow rebound before employment reaches pre-COVID levels.

“Given current and forecasted economic conditions in Clark County we do not anticipate the ability to increase rents,” he says. “In fact, we expect to see market pressure to decrease rents for the foreseeable future. Our profit margins are greatly impacted by the necessity to reduce rents in order to maintain occupancy.”

“There’s a lot of runway ahead of us before investors get comfortable with raising rents again,” Carll-Tangora added.

Still, some see glimmerings of hope. Preleasing of apartments that will be vacant soon, an indicator of the market’s future direction, has strengthened in recent weeks, says Vasquez.

“The data shows great promise, but we may be looking at a temporary blip supported by stimulus money,” says the director of the apartment association.

Carll-Tangora sees stability returning to the market, partly because landlords’ worst fears about late rent payments haven’t come true.

Plus, he says, the Nevada economy has shown resilience during past times of trouble. “Las Vegas always seems to come back,” Carll-Tangora says. “Las Vegas always seems to rebound.”