Despite the loss of 220 units to fire at The Alexander fire in south Reno last month, there still are 780 apartment units that will come online by the end of the year units that are likely to increase vacancy rates and depress rents throughout Reno and Sparks.
Fore Properties is constructing 308 units at Selmi Drive in Reno and another 300 units at Rolling Meadows Drive and Wingfield Hills Road in Sparks. The Alexander still has 130 units ready for occupancy, and A.G. Spanos Companies has said it will rebuild the torched units. And the Wright Street Senior Apartments, featuring 42 units, is under construction.
Adding more units to an already soft market could lead to increased vacancy. Increased competition for a dwindling pool of renters could lead to lower rental rates, multi-family housing experts say. Most of the new properties being built are first-class apartment communities that will directly compete with condos, townhomes and single-family residences, says Len Ramos, first vice president with CB Richard Ellis' multi-housing group.
"It is going to be a little tough on them," Ramos says.
A report by Johnson-Perkins & Associates says overall apartment vacancy stands just under 11 percent a historic high (records date back to 1999).
"Eleven percent means that we have high unemployment, construction work is down, and people are either leaving the area or they are doubling up with friends and family, or they are starting to rent houses," says Floyd Rowley, multi-family and investment specialist with Collier's International.
As a result of widespread vacancies, the average rental price for an apartment in a large complex in the Reno-Sparks area dipped $41 from October of 2008 to June of 2009.
Ramos says the area to some degree already suffers from oversupply. But compounding factors, such as the large number of homes on the market available to renters and massive job losses in the construction and retail industries core tenant bases for apartment communities have pushed the vacancy rate to its current level.
Apartment owners are scrambling to keep the tenants they have and lure new ones with concessions.
"It really has forced operators to focus primarily on achieving occupancy, stabilizing it at the highest level," Ramos says. "Therefore it affects rates you have to reduce them to get the occupancy target."
Lower rental rates leads to lower property values. Rowley says that $41 dollar dip in rent amounts to $800,000 lower value for a 200-unit complex. The declines have helped stifled sales of apartment units in the region in 2009. To date, there have been no significant sales, and last year there were only four transactions of 80 or more units.
Buyer and seller expectations still remain at opposite ends of the spectrum, Rowley adds. Owners of apartment buildings are hanging on to their properties if they can, while investors are still waiting for the market to hit bottom.
Ramos says 2009 will undoubtedly be one of the weakest on record for sales. He says CBRE is working on three deals each with 100-plus units that are in escrow and expects them to close before the end of the year, but he doesn't expect any other sales.
However, he does sense a change in buyer perception as the bottom nears.
"Calls the last six to eight months are, 'When is this going to be over?' Now, I am getting calls asking, 'What do you have available? What is out there?' I think the investment community is beginning to sense the bottom is not too far off and this may be a good time to buy."
But until lending loosens, sales will continue to be slow, says Todd Blonsley, vice president of investments with Marcus and Millichap Real Estate Investment Services.
"The entire market is just at a standstill because of the financing aspect. Only when lenders feel some kind of bottom and the lending spigot opens up again will we see sales happen.
"Some of the things out there are absolutely well-priced, but lenders aren't handing out money and buyers are still questioning if it is the bottom," Blonsley adds. "You can make the best buys today in last four or five years, but transactions just aren't coming together."
Small multi-family woes
Small mutli-family rentals duplexes, four-plexes and the like are suffering many of the same ills as the single-family housing market.
Danielle Young of Real Estate Connection in Reno tracks sales of smaller properties in the Reno-Sparks market.
During May, June and July, Young reported last week, 16 out of 24 sales of smaller multi-family properties in the area involved bank-owned properties that had gone through foreclosure. Another four of the 24 transactions were short sales in which the sales price wasn't enough to cover the outstanding mortgage balance. Only four transactions were traditional sales.
Most of the transactions followed by Young involved duplexes, although a few were as large as 12 units.
