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Gaming Guru

Hubble Smith

Las Vegas Third Nationally in Apartment Index

7 February 2006

Apartment rents throughout Las Vegas are expected to increase 5 percent this year to average of $834 a month.

The Las Vegas apartment market will benefit from low housing affordability, strong job growth and condominium conversions, a report from Marcus & Millichap brokerage said.

Las Vegas moved up one spot to No. 3 in the firm's National Apartment Index, a snapshot analysis that ranks 42 apartment markets based on a series of 12-month forward-looking supply and demand indicators such as rental and vacancy rates.

Asking rents are forecast to rise by 5 percent this year to an average of $834 a month, while effective rents, which account for concessions such as a month's free rent, increased 7.4 percent to $817 a month, Marcus & Millichap reported. Vacancy is projected to drop by 40 basis points to 3.3 percent.

"Investor demand for Las Vegas apartments will remain strong this year," said Christopher LoBello, regional manager for Marcus & Millichap in Las Vegas. "Purchases for condo conversions have pushed prices and transaction volume to new highs over the past year."

He said the reduction in rental inventory tbeen extreme in some submarkets, which has allowed remaining owners to dramatically im-prove cash flow.

Michael Belnick, an apartment broker with ReMax Central, said dollar volume for Las Vegas apartment transactions increased 6 percent to $2.71 billion in 2005 and price per unit increased 29 percent to $88,700.

The number of units sold dropped 18 percent to 30,602, but the increase in pricing pushed dollar volume to a record.

Belnick said all segments of the market, from four-unit complexes to 100-plus units, showed an increase in prices.

"The fourplex market continues to show good strength and is only limited in sales by the lack of product for sale," he said. "And we may never build this type of product again."

That segment saw a 2 percent decrease in buildings and units sold and a 27 percent increase in dollar volume to $234.6 million.

"Another astounding number is the rate of turnover for apartment sales," Belnick said. "Over 40 percent of the total inventory has been sold in the last two years. And I am only showing 2,010 new units have entered the marketplace in 2005."

Strong absorption and a reduction in apartment supply because of condo conversions will lead to the improvement in occupancy, LoBello said.

Market fundamentals will drive rents higher. Las Vegas employment grew 5.3 percent last year and is expected to climb 3.1 percent this year, an addition of 28,000 jobs. The transitory construction and leisure and hospitality sectors are projected to add the most positions this year.

Belnick said the inventory of apartments for rent has shrunk from 190,000 units in March to about 179,000 at the end of the year. Meanwhile, demand continues to increase.

"The next year will be interesting because of the demand-supply equation. The cost of building apartments does not compare to the returns developers can receive today building other product like condos and townhouses," he said. "The plus side is that current owners should start having a better mix of renters and increasing rents due to lack of supply."

Developers are expected to complete 2,315 units this year, up from 1,820 units in 2005, Marcus & Millichap projects. Construction is likely to increase in coming years as multifamily developers who switched to the overheated condo market return to apartments.

Properties that can be repositioned to "Class A" status will be of particular interest, with those in the Spring Valley and Summerlin submarkets garnering the most attention, LoBello said.

Orange County, Calif., claimed the top spot in the apartment index, surpassing last year's leader, Riverside-San Bernardino, Calif. The region's median home price of more than $700,000 makes Orange County one of the least affordable housing markets in the country, which will keep renter demand at high levels. Fort Lauderdale, Fla., occupies the No. 2 position because of job growth and low vacancy.