Vacancy rates rose sharply in small apartment complexes in Reno and Sparks in the last 90 days, apparently as a direct result of rising unemployment among the retail and construction workers who often live in apartments.
Even in higher-priced large complexes, vacancy rates are running at least double historical figures. That's beginning to spell trouble for some landlords who borrowed heavily and paid top dollar for apartment buildings in 2006 and 2007.
Johnson-Perkins and Associates Inc. of Reno estimates that the vacancy rate in large complexes those of 80 units or more stood at 10.87 percent at the end of the first quarter.
Leonard Ramos and Alex Mellinger of the multi-housing group of CB Richard Ellis say the vacancy rate among smaller apartment buildings climbed sharply during the first quarter, standing at 11.1 percent on
March 31 compared with 8 percent just 90 days earlier.
"The driving factor is a loss of jobs," Ramos and Mellinger wrote in an analysis of the market. "The majority
of job losses were in the construction trade, followed by the retail sector. Construction and retail workers are prime renters. In the main, they have left the area, decreasing demand."
Since March 2008, the Reno-Sparks area has lost 4,700 construction jobs, the state Department of
Employment, Training and Rehabilitation says. Another 1,300 retail jobs have been lost.
The turmoil in the job market means that some apartment tenants have moved home with their parents,
Mellinger said. Others have doubled up. And some tenants in higher-priced apartments have figured out that they can rent a house for the same rent they're paying for an apartment sometimes even less.
Ramos notes, too, that some new projects that were developed as for-sale condominiums now are available as rentals further pressuring apartment owners.
With rising vacancies come flat or lower rents.
Rents in big complexes fell by an average of about 1 percent during the first quarter, Johnson-Perks and Associates and CB Richard Ellis said.
Some properties cut rents even more.
American Campus Communities Inc., which owns the University Highlands student housing project near the University of Nevada, Reno, reported last week that it's cut rents by 5.8 percent. The property, designed to house 717 students, was 63 percent occupied at the start of the current school year.
Even a 1 percent rent reduction may not sound like much, but it's a big worry to apartment investors who bought properties under the assumption that rents would steadily increase while vacancies remained low.
"Any properties that were closed in the middle of 2006 to the middle of 2007 are likely to be under tremendous stress," said Floyd Rowley, a real estate investments specialist with Colliers International in Reno.
Those properties are likely to carry high levels of debt, and their owners were likely have projected vacancy rates of about 5 percent a number that was conservative by historical standards. It's half the current rate.
A handful of apartment properties in the region are teetering on the edge of foreclosure by lenders, and more foreclosures are possible as loans written during the mid-decade boom come due.
New buyers of apartment properties or landlords looking to refinance existing mortgages find that banks have tightened down substantially on the optimistic projections made by borrowers in the past.
"The glory days of that financing are gone," said Dewey Struble, a broker who specializes in investment real estate with Sperry Van Ness in Reno.
Unable to raise rents, landlords in the current market instead are focusing at stabilizing their vacancy, Ramos and Mellinger said in their analysis. Most are hoping to achieve at least 95 percent occupancy, using concessions such as move-in allowances and free rent to attract tenants.
Landlords will face more competition from the 958 apartment units currently under construction in the region. Those projects include the 300-unit Pioneer Meadows in Sparks, the 350 units of The Alexander in South Meadows and the 308 units of The View in northeast Reno.
Much of the outlook for apartment owners depends on the job market.
Ramos said he takes some heart from a recent Manpower Inc. report that employers in the Reno-Sparks
area have turned more optimistic about their hiring plans during the second quarter and fewer are planning layoffs.
The CB Richard Ellis multi-housing group analysis said it doesn't expect vacancies to rise much more, although rents are likely to remain soft for a while.
