Chasing the downward spiral of rents poses dangers

In the last 18 months vacancies have continued to decline in hospitality and multifamily properties alike. Migrant workers in the construction industry as well as many other families who suffered job losses and had no prospects for employment have simply left Reno and the State of Nevada in general. Multi-tenant property owners and managers are now faced with the ever-increasing challenge of keeping stringent tenant criteria with the need to maintain an occupancy rate that makes sense and services operating expenses. It can often feel like a game of cat and mouse or catch rather than business strategy, but like all games, in order to win you must deploy a winning strategy.

Where have they gone, where did they go? I spoke to Ashley at the South Virginia Street U-Haul location and learned that approximately 120 trucks leave the Reno area on a one-way trip out of state each month just from that location. U-Haul has 13 dealers in the Reno-Sparks area providing trucks, trailers, and packaging supplies. If we assume that the numbers are similar at the other 12 locations that could equate to as many as 1,500 families leaving the greater Reno area on a monthly basis.

Confirmation that residents are leaving the state is difficult to prove, but with a confirmed unemployment rate over 13 percent and U-Haul's data, it is plain to see that many Nevadans are faced with the challenge of moving to an area where they can find work. This concept was seconded by Balwinder Singh, owner of the Hi Ho Motor Lodge, who said that much of his vacancy is due to migrant workers chasing job opportunities elsewhere or simply returning to their native homes to wait out the recession.

The mass exodus from multi-tenant properties has left gaping holes in the rental market, which have been exacerbated by the influx of single family properties available for rent. The opportunity to have a two car garage, more than 1,200 square feet of living space and a fenced yard all at a price often below $1 a square foot has lured some out of the multi tenant properties. Many tenants have been able to relocate to take advantage of rate reductions, incentives and better living opportunities which has moved the occupancy rates from one property to another without any relevant overall market change concerning occupancy. While these lateral moves do not effect the overall population they have greatly affected multi-tenant properties that find themselves struggling to absorb the cost of utilities, maintenance and upkeep required in a large property with often expansive community space.

Competition is the name of the game, but some have lowered expectations, credentials, and given away the farm to appeal to tenants. Free rent, reduced rent, and raffle tickets for big-screen televisions have put those looking for new digs in the driver's seat and created a hard-to-track rental environment in Reno as well as in cities throughout our nation. Failed condo projects have further added fuel to the fire by bombarding the market with more units leading to a sometimes insurmountable absorption problem. A development in Seattle, Washington is offering leases in a failed upscale condo project at lower-than-normal rents for a term of 20 years with a minimal escape penalty. This seemingly crazy behavior is becoming the norm and forcing many owners to feel that they are insane if they are not running in the rent reduction race.

Many property owners feel that they are doing what they must to keep the lights on, which often means accepting less-than- creditworthy tenants, slashing prices and lowering required deposits to secure enough occupancy just to service debt and pay the utilities. The alternative is much scarier for most, which could mean coming out of pocket to cover operating expenses and keep the doors open. Even scarier to me is the reality that most are not facing: What is the cost to the property? A year from now or two years from now when a stronger economy rights the wrongs of our occupancy what will the physical damage to these properties look like? What will the cost be to correct damage and make repairs? Where will that money come from? Surely increased rents will allow for more maintenance and repairs, but then where is the profit?

Pay now or pay later is the bridge that is carrying us over these troubled times, but like the "Bridge Over the River Kwai" no matter how beautifully constructed it is likely to be blown to pieces in the end. The decision whether to drastically reduce rents or to embrace a 40 percent vacancy factor is reminiscent of the beloved word problems of junior high math class. Factoring in the cost of repairs, utilities, staff, and marketing to net a much smaller sum doesn't always equal profit. In fact, in many cases it is a detriment to the property owner to increase occupancy in a futile attempt to increase profits where utility costs are rising and property maintenance and repair costs are constant. I urge you to evaluate your operating expenses and potential income before drastically cutting prices or slashing the proverbial throat of your business.

Beckie Lewis is a broker in the hospitality and speciality group of NAI Alliance in Reno. Contact her at 336-4647 or BLewis@naialliance.com