Las Vegas’ apartment sector has heated up the past few years, with rising rents, shrinking vacancies, increased construction and higher investment prices.
But given that the city is still recovering from last decade’s housing boom and bust, is the market overheating?
Industry insiders say no, but they figure business has to slow at some point.
Amid a national apartment boom, Southern Nevada’s multifamily market has bounced back from the recession faster than other segments of the real estate industry. Property pros, however, expect rent growth to slow and vacancies to tick higher, amid questions over the depth of Las Vegas’ renter pool and whether investors are building too many higher-end projects.
Slower rent growth would help tenants save money and let them better afford certain properties — especially if landlords have trouble filling buildings amid the rising number of competing projects, which could send rental prices down. But it would cause heartburn for investors, who are betting on and fueling Southern Nevada’s expanded apartment market with new construction and more-expensive purchases.
“I don’t know if our demand (for rentals) will keep up with our supply,” said broker Garry Cuff, a vice president with Colliers International.
Still, few expect the market to crash. Las Vegas’ economy isn’t as healthy as other cities’ but it is on the mend. The population is growing, the valley’s rental market isn’t heated as in other metro areas in terms of rent increases and amount of construction, and developers have built more apartments here in years past than they’re doing today, executives say.
The Las Vegas area’s average asking rent in the first quarter was $918, up 13 percent from 2010. Nationally, the average asking rent was $1,239 last quarter, up 21 percent from 2009, according to New York-based Reis Inc., a real estate research firm.
About 3,000 new apartments hit the local market last year, and 4,500 are expected this year. That’s up from a low of about 370 in 2013, but well below a peak of roughly 7,750 in 1999, according to Las Vegas broker Spencer Ballif, a senior vice president with CBRE Group.
According to Reis, in the first quarter alone, U.S. developers brought to market more than 42,000 units, the highest first-quarter tally since at least 1999.
Real estate is prone to cycles, perhaps more so than other industries, said John Restrepo, founder of Las Vegas-based RCG Economics. If demand for apartments goes up, for instance, rents climb and developers build properties — then other investors might pile in and overbuild, pushing vacancies up and rents down.
Demand for rentals has been fueled in large part by younger adults who show no interest in buying a home anytime soon, and by people who can’t afford to buy a house because the recession wrecked their finances, Restrepo noted.
He said he didn’t see signs of “major overbuilding” akin to the housing bubble of a decade ago, and wasn’t expecting the rental market to collapse. Still, vacancy rates won’t stay at 4 or 5 percent forever, he noted.
“At some point, there will be a cooling-off,” he said.
Ryan Severino senior economist and director of research at Reis, said construction nationally was “starting to become” overheated — with more units being developed than rented, vacancies rising and rent-growth slowing.
“It’s not like there’s this impending doom, necessarily,” he said, but the market was undergoing “some fallout” from the current development craze.
Las Vegas’ vacancy rate fell to 4.2 percent last quarter, down from 11.2 percent in 2009. The U.S. vacancy rate last quarter, 4.5 percent, was down from 8 percent in 2009 but up from 4.3 percent in both 2013 and 2014, Reis found.
Locally, developers are building a lot of higher-end projects “all at once,” and vacancy rates might rise a bit, said John Stater, Las Vegas research manager for Colliers. But the rising population — Clark County grew 8.4 percent from 2010 to 2015, to 2.1 million people, Census data show — would help keep the market from overheating “at least at the moment,” he said.
Las Vegas has long had a big apartment sector, he said, and the often-transient population, with its base of lower-paid casino-resort workers, creates a pool of potential renters.
“Right now, things look like they’re going pretty well,” Stater said.
Today, most apartment construction is along the 215 Beltway in Henderson and southwest Las Vegas. Many new properties offer amenities that often cater to younger adults — poolside cabanas, bike rentals, game rooms — and charge above-average rents.
One new project in the pipeline — one of the few that’s not in the suburbs — is a 295-unit complex off Spring Mountain Road a mile west of the Strip. Developer Jonathan Fore has laid out plans for a poolside DJ booth, a rooftop deck, a massage room, two swimming pools, granite and quartz countertops and keyless-entry doors.
Fore has said the average unit would be 860 square feet and charge $1.60 per square foot. That’s around $1,375 per month, 50 percent above the valley’s average rental rate.
Ballif noted that Las Vegas’ workforce has grown faster than other metro areas’ but said the depth of the higher-end rental market “will be tested,” adding: “We’re probably overcooking it a little bit.”
Broker Patrick Sauter, managing partner of NAI Vegas, said nearly all developers were “building basically the same product,” going after the same customer base and targeting the valley’s same two submarkets.
He figures there “might be a little bit of a glut” of new projects and that rent-growth could slow. But he doesn’t expect prices to tumble, and if landlords keep packing higher-end properties with tenants, “you won’t see too much else being built.”
Investors, meanwhile, are paying top dollar for these and other rental properties.
In January, for instance, real estate powerhouse Hines bought Domain, a 308-unit Henderson complex, for $58.2 million, or about $189,000 per unit. By comparison, investors paid an average of about $72,000 per unit for Southern Nevada rental properties last year, according to Colliers.
It was Houston-based Hines’ first acquisition of an existing apartment complex in its nearly 60-year history. Around the time of the sale, Domain was 95 percent occupied and monthly rent for available units ranged from $970 to $1,399.
Last month, in an apartment sale that might be the most lucrative ever in Las Vegas, Houston-based Camden Property Trust announced that it sold 15 complexes — comprising 4,918 units — as well as a commercial center and about 20 acres of land for $630 million combined. The buyers were the Bascom Group and Oaktree Capital Management, both of Southern California.
It was Camden’s second local portfolio sale in three years, but the prices varied greatly. In spring 2013, Camden and New York’s DRA Advisors sold 14 Las Vegas-area complexes, comprising some 3,100 units, for $200 million.
Last month’s deal marked Camden’s exit from the valley. Severino, for one, says investment prices in general might be approaching their peak or have already reached it.
The 15 complexes were an average 95 percent occupied in the fourth quarter of 2015, on par with Camden’s other U.S. properties. But the complexes’ combined average rental rate, 92 cents per square foot, was the lowest among Camden’s state portfolios, a securities filing shows.
Camden President Keith Oden said the 15 properties generated about $500 per unit less in monthly revenue than the company’s other holdings, and that they were an average 23 years old, well above the typical range it aims for, 12 to 14 years old.
He also noted that most of Camden’s other markets had recovered “more rapidly” from the recession than Las Vegas, which has continued to suffer some of the highest rates of foreclosures, underwater borrowers and unemployment among large metro areas.
But overall, Oden said the valley’s apartment market was “doing great.” Camden’s rents were up 7 percent year-over-year in Las Vegas in the first quarter, compared with 4.5 percent in its other markets combined, he said. Construction also had been “very modest” here compared with other big cities, and if there were more development, rents wouldn’t be growing as fast as they are, he said.
Camden typically wants to own at least 2,500 to 3,000 units in markets where it operates. At least for now, however, it has no plans to be a local landlord again.
“Never say never,” Oden said, “but not anytime soon.”