By Kenneth Blomsterberg, Senior Managing Director of Investments, Marcus & Millichap
Reno saw strong job creation last year. This was bolstered by the company’s growth at the Tahoe-Reno Industrial Center in Sparks, which houses Tesla’s Gigafactory, Apple and Switch data centers, in addition to a collection of fulfillment and distribution centers. The remarkable pace of employment growth has supported the highest rates of net migration and household formation during this cycle, increasing local demand for housing. With an average mortgage payment for a single-family home hovering around $ 2,100 per month throughout the past year, leasing was the preferred choice for new residents despite rapidly rising rents across all apartment categories. .
In response, the developers completed 1,350 units in 2019, building on the 1,400 rentals delivered in 2018. Completions over the two-year period were concentrated in the southern neighborhoods of Reno and Sparks. These are areas where the new offering has been well received, as evidenced by the low 4% and 4% Class A vacancy rates of submarkets as we move into 2020.
Investors have also been active over the past 12 months, driven by strong economic growth and a historically tight Class C vacancy. Significant demand has been registered by outside value-added investors, with California buyers accounting for about half. of the total flow of transactions. These parties, along with local investors, were most active in downtown Reno. They often deployed less than $ 100,000 per unit for small properties that provided first year returns of between 4 and 5 percent.
South of downtown, smaller resorts along or near Virginia Street have also been sought after by this group of private buyers. Here, and in the neighborhoods adjacent to the University of Nevada, Reno (UNR), opportunities to achieve average high 4-5% returns via capital deployments of less than $ 3 million were common, with prices rarely exceeding $ 150,000 per unit.
Going forward, healthy job growth is expected for Reno, as Google is expected to complete a major data center this year and several healthcare tech companies bolster the downtown payroll. Persistent job creation will support another solid year of offshoring and household formation, sustaining multi-family demand during a period of rising supply.
Developers are currently underway on at least 4,800 apartments, many of which will be delivered in the coming quarters. Like the previous two years, this year’s completions are concentrated in the Sparks and Reno South neighborhoods, with a set of properties each comprising over 300 units. Outside of these locations, a 768 unit development dubbed the Lemmon Valley Lakes accounts for most of the remaining apartments under construction.
This influx of larger-scale properties is likely to impact overall vacancy and increase concession utilization. However, strong tenant demand will amount to a high percentage of these units being filled within a year. Rental activity in these newly constructed projects, coupled with strong demand for lower cost rentals, is expected to keep apartment availability historically tight and below the national rate. This could justify a sixth consecutive year of solid rental growth.
Sustained tenant demand for Class B and C complexes is also expected to preserve buyer confidence, with sales activity only hampered by a drop in listing volume. Competition among regional value-added investors is expected to be significant for the few larger garden-style properties that become available. In these complexes, implementing full property upgrades after acquisition can result in noticeable growth in NOI. Smaller assets in downtown and southern Reno, including some with deferred maintenance, will continue to drive the overall speed of sales as these properties represent an attractive investment for 1,031 swap buyers who have already upgraded apartments. older.
– This article originally appeared in the April 2020 issue of Western Real Estate Business.