Job losses in the construction industry, an abundance of condominium projects and waves of home foreclosures have led to stagnant apartment rents as well as difficulties in assembling deals to buy or sell complexes.
"We have a disconnect between the owners and the prospective buyers," says Len Ramos, first vice president of the multi-housing group for CB Richard Ellis. "Owners typically bought three to five years ago, and they have an exit strategy that says, 'I am buying here, and I am selling here.' But one number doesn't work anymore.
"We have more listings right now than we have ever had," Ramos adds. "The appetite to own multi-family property in Reno is as strong as it has ever been. The difference is that there is a gap between the buyers and the sellers."
Sales activity has been slow.
When CB Richard Ellis recently analyzed the market for larger complexes in the region those with 80 or more apartments it found 110 units were sold in the first quarter, and 104 were sold in the second.
Ramos says a recent third-quarter transaction adds 260 units to the overall count. By way of comparison, in the second quarter of 2007, investors purchased 1,249 apartment units.
Todd Blonsley, vice president of investments with Marcus and Millichap Real Estate Investment Services in Reno, says from 2003 to 2007 there were 83 transactions involving complex with 10 or more units, including some major deals in 2007 of $10 million or more. But 2008 has seen just four apartment complex sales.
"Prices got overheated, similar to housing," Blonsley says. "It was frothy, and people were chasing deals and bought with projections that rent would keep rising. They were buying at very strong number and competing to buy those deals, which made prices go up. Now, capable buyers are cherry-picking and offering numbers sellers aren't used to, so there is gap between seller expectation and buyer expectation.
There used to be five buyers for every deal, and sellers could get multiple offers. Now there are five deals for every legitimate buyer it's kind of turned on its head."
Don Wilkerson, president of Gaston and Wilkerson Management Group, agrees that the apartment market overheated during the housing boom, with investors purchasing properties at record high prices.
But slowing job growth, an influx of foreclosure homes coming onto the market as rental properties, and large condo projects that hit the market as rentals projects including the Village at Idlewild Park in Reno and Caviata and Waterstone in Sparks significantly increased the rental inventory. That led to lower occupancy rates for existing apartment housing, which in turn decreased the value of those properties.
"A few years ago the California markets were hot, and it spilled over to our market," Wilkerson says.
"People started coming over the hill and buying a lot of our properties. Our values got very high, and we saw a lot of transactions and a lot of speculation. That market has now dried up. Sellers think their property is worth more than the typical buyer does, so we are not seeing a lot of transactions."
Wilkerson says that the investment community now is purchasing properties for steady income rather than for the profits from a quick flip. When rents increase, so should investment activity.
But rents were flat or even fell in the first two quarters of this year, says Debbie Smith, vice president at Gaston and Wilkerson.
Average rents within the company's portfolio run $675 for a one-bedroom unit, $789 for a two-bedroom, one-bath, $940 for a two-bedroom, two-bath, and $1,365 for a three-bedroom, two-bath. CB Richard
Ellis, meanwhile, estimates average asking rents for complexes with up to 79 units average $645, while rents for complexes with more than 80 units average $884, mostly because of added amenities such as swimming pools and health club facilities.
Smith says in order to lure tenants through slow winter months, Gaston and Wilkerson sometimes was forced to reduce rents to 2006 rates, or in the best case to shave $10 or $15. In addition to rental adjustments, property managers commonly are offering concessions, such as $200 off or the first month's rent free, to increase occupancy. But Smith says changes in rental rates work better.
"We have had much better success varying our rents to whatever current economic position is in the marketplace," she says.
She predicts that by next summer the rental market will be stronger, and owners and property managers can start growing rents at the 4 percent annual clip that they experienced in recent years. Conservatively, she says, renters can expect a 2 percent growth in rents until the second or third quarter of next year and 4 percent by 2010.
Rental prices directly affect the investment community. Lower rents mean lower net operating income, which discourages some investors.
"It creates an unsettled environment," CBRE's Ramos says. "Investors are saying, 'I am not so sure.' Before, you could look at Reno and say you have value growth, population growth, job growth. Rents are going up.
But because of the vacancy problem, owners cannot push rents. They used to count on 3 to 5 percent rent increases, and they are lucky if they get 1 to 2 percent."
Ramos also notes some potential buyers are not able to secure loans, particularly at the prices sought by today's sellersnor can they project rent appreciation or strong occupancy.
"Buyers have not gone away," Ramos says. "They are sitting on the fence waiting for the dust to settle."
Marcus and Millichap's Blonsley expects the market for investors in multi-family projects probably will remain flat is for another 18 months. Ramos expects activity to increase when lenders and the investment community again see complexes with 95 percent occupancy and rent increases at least 3 percent annually, most likely the middle to end of 2009.
