A record year for Reno’s apartment market

The robust Reno apartment market is a tale of two competing sides. On one hand, investors and apartment owners are enjoying the highest rental rates we have ever seen in the Reno area, which generates higher returns for their bottom line. On the other hand, tenants are struggling to keep up with rising monthly rental rates and are having difficulty finding an apartment with the low availability of inventory available. Housing affordability has become a major concern for the city of Reno due to rapid growth, and it’s safe to say that we are experiencing growing pains in the housing sector.

The Reno apartment market experienced those growing pains during 2016 through a swift rise in apartment rental rates. The high demand for apartments in the Reno area allowed multifamily owners to increase rents to an average of $1,066 per month and drove vacancy rates down to just under 3 percent at the end of 2016, according to the Johnson Perkins Griffin’s fourth quarter apartment survey. This translated to a whopping 12.6 percent growth for apartment rental rates during 2016. Reno significantly exceeded national trends that show rental growth hovering around 4 to 5 percent annually, according to MPF Research, a leader in apartment trends research.

Northern Nevada is not the only area in the region that is experiencing record-setting apartment figures. A neighboring market, Sacramento, is among the highest for large apartment markets in the U.S. at around 10 percent annual rental growth.

For investors looking to get into the Reno market, expected returns have been trending downward. There are a variety of reasons that capitalization rates have remained low in Reno, with investors looking to start in the mid-5 percentile range for large apartment complexes. These complexes are increasingly more difficult for private equity or institutional investors to acquire in our market. With a limited apartment supply base, rapidly appreciating rents, promising regional growth, and a central location on the West Coast, Reno has been a popular alternative for deploying multifamily capital. This competitiveness has led to many of Reno’s large apartment complexes trading hands off-market. If you examine the sales for 2016, cap rates have remained low even for complexes that need extensive renovations but are in relatively good areas for growth. The expectations for cap rates climb into the 6th percentile range for complexes that are smaller in the total unit count and are located in class C areas.

Multifamily investors will pay close attention to interest rate hikes in 2017. Typically, higher interest rates will be followed by rising cap rates, which will put a strain on expectations for buyers and sellers of multifamily properties. With cap rates remaining low, lending has proven to be difficult at times for investors looking to acquire smaller multifamily properties using more traditional commercial lending products.

A big story for 2016 has been the increasing rate of new apartment construction on a national level, which has also been the story here in Reno. MPF Research is estimating that U.S. apartment builders added 300 thousand new multifamily units in 2016, which is the most since the mid-1980s. In the Reno area, there are over a 1,000 units under construction and over 7,000 in planning phases, which is significantly up from the previous year. However, not all of the “planned” construction projects may come to life due to rising construction costs that have made it difficult for developers. South Reno and Sparks near the I-80 corridor have seen the most significant construction and planned construction. The I-80 corridor in Sparks should see significant multifamily activity due to the proximity of the major employers in the Tahoe Reno Industrial Center (TRIC).

The rise of hip urban restaurants, retail, and bars, in Midtown and Downtown Reno, has led to the opportunity for developers to convert existing motels into new apartment units. Downtown living has become a new trend for an area that is becoming very popular for urban dwellers. Examples of these new urban developments are the 3rd Street Flats west of downtown and the Center + Pine apartments near the new Patagonia location on Center Street.

When looking ahead to 2017 we are likely to see the dramatic 2016 rental rate growth begin to level off. Much like the national picture, Reno area will begin to see apartment rental rates cool down due to elevated pricing and new apartment supply. It remains likely for rents to increase in 2017 but overall demand for apartments will remain strong enough to absorb the new apartment inventory hitting the marketplace.●

— Trevor Richardson is an agent with Dickson Commercial Group. He can be reached at trichardson@dicksoncg.com.