Has Reno-Sparks become the darling of the multifamily world?

The sale of 3rd Street Flats, formerly the Kings Inn, in downtown Reno is slated to close at the end of July. Bentar Development and Basin Street Properties originally sold the 94-unit building in 2017 for $18.6 million.

The sale of 3rd Street Flats, formerly the Kings Inn, in downtown Reno is slated to close at the end of July. Bentar Development and Basin Street Properties originally sold the 94-unit building in 2017 for $18.6 million. Photo: Marcus & Millichap

By Rob Sabo

Wednesday, July 28, 2021

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Northern Nevada continues to be a hot topic among multifamily investors as more and more buyers are taking a hard look at investing here.

And what few deals are taking place, said Ken Blomsterberg, senior managing director of Marcus & Millichap’s national multifamily housing group, are bid much more hotly with multiple offers coming in over asking price.

Also, he added, a dearth of deals has professional investors adjusting their investment strategies and pursuing different avenues to deploy investment funds and gain a foothold in the Reno-Sparks market.

“Many are looking for value-add properties, B and C class properties where they can create value through operations, renovation, financing and lease recapture,” Blomsterberg told the NNBW. “Normally they would be looking for (large) stabilized newer properties. Now they are looking for deals in that 50- to 100-unit range. Investors are broadening their scope, and Reno is definitely a market where they are zeroed in.”

The main challenge, Blomsterberg said, is getting owners to sell their properties without first identifying a replacement asset to complete a 1031 exchange. A 1031 exchange allows investors to defer capital gains taxes on the sale of commercial investment properties if they put their sale proceeds into similar replacement investments.

Ryan Rife, first vice president of investments for Marcus & Millichap’s national multifamily housing group, said the buying pool is extremely aggressive, but it’s hard for investors to find deals. Lack of sale inventory, combined with uncertainty about proposed changes to 1031 exchange laws, has stifled owners’ desires to sell lest they make a misstep or tax laws are changed.

“Any time you get uncertainty in real estate, you are going to have people sitting on the sidelines waiting to figure out what position they want to take,” Rife said. “That has been big in terms of sellers not being as motivated to transact.”

Buyers who have assets that have seen significant appreciation over holding time might be motivated to sell, but they are wary of paying capital gains taxes on the sale of commercial investment properties. Investors can defer gains by completing a 1031 exchange for a similar property, but they just aren’t any suitable replacement assets to be found, brokers say.

Investors are hungry for multifamily properties in the Reno-Sparks market and are paying premium prices to gain a foothold in the market. Sundance West on Clover Lane in Reno sold in June of 2015 for $23.5 million. It sold again in February of this year for $60 million. Photo: Marcus & Millichap

 

“It’s tough for sellers — what do they do with the proceeds they are going to make?” Rife said. “Where do they take it? They want to stay in Reno, but it’s already extremely difficult to find an (investment) property. It’s going to be virtually impossible for them to sell and get back into this market.”

Inventory is tight, and sellers who want to exchange only have 45 days from closing to formally identify a 1031 exchange replacement property to the IRS, with a total of 180 days to close on the asset. If sellers can’t meet those timelines, their exchange will be disqualified and they’ll have to pay capital gains taxes, depreciation recapture and other taxes that could significantly erode profit.

RISING RENTAL RATES SHOW NO SIGNS OF SLOWING

Meanwhile, rents in Reno-Sparks continue to raise eyebrows and empty wallets.

Average vacancy fell to just 1.63% in the second quarter of 2021, and rents set records across all property types, according to real estate appraisal firm Johnson Perkins Griffin, which tracks just under 25,000 apartment doors across 11 submarkets in the region.

According to the firm’s Q2 report, the average overall rent stood at a record-high $1,607, a 9.4% increase from Q1’s mark of $1,469, which also was a record. It also represents a 17.4% year-over-year increase from the second quarter of 2020, which saw an average of $1,369.

To break things down further, in Q2 of this year, the average rent for a 1-bedroom, 1-bath apartment was $1,419, a $112 increase from Q1, while the average rent for a 3-bedroom, 2-bath unit came in at $2,174 — that’s up $213 from Q1, according to Johnson Perkins Griffin.

Brokers say rents continue to escalate due to lack of inventory.

“The influx of population growth and job creation, especially in higher-paying jobs, pulls the entire market up,” Rife said. “That not only affects class A but the B and C properties as well. You are going to see strong rent growth as long as the vacancy rate holds strong, and it has been.”

Reno should continue averaging about eight multifamily transactions larger than 100 units each year, Blomsterberg said, but properties may change hands soon as developers with short-term hold plans bring new Class A properties online.

“Compared to the pandemic, our market has opened up considerably as far as activity, being able to tour properties and do inspections,” Blomsterberg said. “We aren’t back to normal yet, but we are getting closer.”

And as some large luxury apartment projects have come online, it remains to be seen if Northern Nevadans, regardless of their roots, will embrace the higher costs associated with luxury apartment rents at projects such as the 209-unit The Deco in downtown Sparks or the 282-unit Emory development at the Reno Experience District (formerly Park Lane) on Plumb Lane, south of midtown.

However, businesses continue to relocate to the region, including technology and related companies bringing good paying jobs for cash-laden transplants desperate to escape the even-higher rents found in other markets, namely the Bay Area.

That means odds are tilting in the house’s favor that enough residents of the Truckee Meadows won’t have an issue paying rent premium at those properties and others to come.

Before the pandemic, said Susy Vasquez, executive director of the Nevada State Apartment Association, Reno-Sparks was primed to experience oversupply in the market.

“We were projecting 18 months with slower rent growth or rent stabilization,” Vasquez said. “Then COVID happened and a ton of people from cities with higher rents came pouring into the area. There went the units we thought would sit empty for a bit.

“The only thing that remains to be seen is if these new residents will remain ‘work from home’ or if there will be a need for them to return to their offices.”

NNBW Editor Kevin MacMillan contributed to this report.

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