Apartment developers battle costs, vacancies

Although construction of new apartment complexes remains slow in northern Nevada, rising land prices and higher construction costs are beginning to shape the future of the market.

Rising costs mean that developers of new complexes need to peg rents at higher levels, but higher rents may mean that developers need to invest more in amenities such as upgraded interior finishes to justify higher prices.

And given a soft market for rentals throughout the area, some developers appear to be walking away from the rental market for a while as they develop condominium projects instead.

On the face of it, the apartment market in northern Nevada looks healthy.

In a report last month to the commercial real estate group CCIM, Todd Blonsley of Marcus & Millichap Real Estate Investment Brokerage said the vacancy rate in apartment units stood at 4.8 percent at the end of 2003.

But that figure, he said, is misleading.

About half the apartment complexes in the Truckee Meadows, Blonsley said, are offering rent concessions often a month of free rent to new tenants.

In economic terms, that's the same as leaving an apartment unit vacant for a month an 8.3 percent "economic vacancy." Combine that with the reported vacancy rate of 4.8 percent, and apartment owners need to figure more than 13 percent of their units aren't generating any revenue.

Even though apartment rents rose an average of 5.3 percent last year the average was $770 a month at year-end developers still remain wary.

Major projects under construction these days include the 260-unit Bristol Bay in east Sparks and the 300-unit Parr South and 120-unit Whittell Pointe Apartments in north Reno.

About 680 additional units are on the drawing board and could begin construction this year in Spanish Springs, Damonte Ranch and Sparks, Blonsley's analysis found.

Higher development costs may be contributing to developers' cold feet, particularly when demand is soft.

The Tanamera unit of USA Capital Corp., for instance, continues to look at the level of amenities in new apartment complexes as land and construction costs push rents higher.

For example, floors that once might have been covered with linoleum now may be covered with tile, said Joseph Milanowski, president of Tanamera's parent company, USA Capital.

"You can't have those kinds of rents without those kinds of amenities," he said.

Another possibility open to developers who find themselves with highpriced land, Milanowski said, is higherdensity projects that spread land costs over more units.

Yet another alternative that's gaining favor is development of higher-end condominiums and other for-sale projects on expensive land.

Tanamera, for instance, brought its Fleur de Lis Townhomes in South Meadows to the market in mid-2003.

The first phase of the luxury units priced from about $200,000 to $300,000 sold out quickly and Tanamera has a waiting list for the next phase.

Developers are looking at similar projects around the region.

"That market hasn't been explored here for a few years," said Don Wilkerson, a principal in Gaston & Wilkerson Management Group.

The firm manages more than 2,000 apartment units in the region.

Particularly in a soft market where a new apartment complex might not fill for two years,Wilkerson said a condominium project may allow a developer to reduce the amount of time he's financially exposed before he can nail down permanent financing.

So where will moderate-priced apartments be built? "There's cheap land," said Blonsley.

"It just happens to be 15 miles from downtown Reno."

Those developments, he said, will be farther from bus lines, jobs and other services that apartment developers typically have wanted to have nearby.