Supply of apartments grows tight

If apartment rents continue rising in the Reno area in coming months, the easy target for tenants' ire will be the loss of rental properties to condominium conversions.

A bigger factor, however, is this: Not many apartment units have been built lately, and not many are in the pipeline.

As a result, vacancies are falling most in the business think they're somewhere around 5 percent, if not less and tenants have a harder time finding the breaks such as a month's free rent that were common not long ago.

An analysis by investment real estate specialists Dewey Struble of Sperry Van Ness and Todd Blonsley of Marcus & Millichap estimates that the Reno area needs about 2,000 new apartment units a year to keep pace with demand.

In the last couple of years, however, they estimate that new construction only met half the demand.

And this year Struble and Blonsley told members of the real estate group CCIM they estimate that only 500 apartment units are likely to come on line.

Horizons at South Meadows a 344-unit project at 9350 Double R Blvd. is the only major new apartment development likely in the market in 2006.

Factoring in a handful of major rental projects that will be converted to condominiums, they said, it's possible that Reno and Sparks might end 2006 with fewer apartment units than it started with.

Already, the vacancy rate in one-bedroom, one-bath units has fallen to near 3 percent, and the vacancies in studio apartments are only slightly higher.

It's going to be interesting, Struble and Blonsley said, as the region's population continues to grow and rising mortgage interest rates mean that fewer renters will be buying homes.

The monthly payment on a $300,000 house is somewhere around $1,800 a month a figure that's nearly 70 percent higher than the rent on the most expensive apartment in northern Nevada. The average rent of an apartment in the area is $836 a month.

Ordinarily, the unbalanced supply and demand would send a strong signal to investors that it's time to begin building apart-ment complexes.

But that's unlikely to happen, Blonsley and Struble said, because the prices of land, water rights and construction make new complexes so expensive that investors can't figure how they'd make a profit on them.

And some of the projects that might have been built as apartments, they said, instead will be marketed as condominiums to capture some buyers who otherwise would be priced out of the residential market.

Rents already are beginning to rise.

In 2005, the pace of increases 2.7 percent across the market was noticeably faster than the 2.0 rent increase in 2003 and 2004.

Blonsley and Struble both project increases of 3 percent or higher this year, and they predict that apartment vacancies will decline to 4 percent by the end of the year.

Property managers have said in recent weeks that the number of concessions available to tenants free move-in allowances, for instance appears to be softening as vacancy rates fall.

Still, Blonsley said about 45 percent of the complexes in the area continue to offer some sort of concession, perhaps because they're simply in the habit.

Len Ramos, a broker who handles multi-family properties with CB Richard Ellis in Reno, believes there's still room for landlords to move rents up.

Some argue, he says, that Reno's low-wage employment limits the ability of landlords to make rental increases stick.

But a contrary belief among investors, Ramos says, holds that apartment owners simply need to be more aggressive.

"We've just been slow to increase rates," he told members of the Institute of Real Estate Management. "We're leaving money on the table right now."