Large Apartment / Condo Complex Appraisals are Different

Apartment and condo complex appraisals are usually multiple building assignments.  So appraisers may be physically looking at several multi-story structures.  Some complexes have elevators and some do not.  For many years in Clark County buildings were almost entirely constructed with a number of 2-story structures to avoid the cost of elevators.

Unit types / amenities influence income

Unit types in any given complex can vary and affect the income profile of an apartment complex.  While offering 3-bedroom apartments may provide more income per unit the demand for apartments is solidly in the 2-bedroom category.  My research indicates that 3-bedroom units in an apartment complex often provide a lower income per square foot (SF) than 2-bedroom units, and 1-bedroom apartment consistently provide the highest return per SF.  The apartment mix is a variable that can make a difference to appraisers since it can influence the exiting income from an apartment complex and its future income potential.

Apartment buildings compete with one another with regard to rental rates but many compete by offering superior amenities to their tenants.  Most high end complexes offer; pools, spas, garages, security, gated access, cable TV, ceiling fans, dishwashers, microwaves, washer / dryers, lofts, pet parks, business centers, clubhouses, fitness centers, media centers, WIFI, BBQ areas and some even offer furnished units.  Appraisers often create tables to compare amenities like the one that follows:

Even when amenity comparison tables are not included in an appraisal report appraisers consider the amenities of their subject property to those of the comparable sales.  The fact that one complex has a few extra amenities may make little or no difference in a valuation if the less improved complex has a stronger income stream.  Most apartment buildings are bought and sold based on the durability of their income stream and not their curbside appeal or their list of features. 

While apartment values have been steadily increasing comparisons are the same for appraisers whether they are comparing 10-unit buildings or 425-unit buildings.  When you are appraising a newer apartment or condo complex with say 300 units you are likely looking at a property, at least in Clark County Nevada, with a value in excess of $ 50 million dollars, and sales / market value can in some instances exceed the $ 100 million dollar mark.  So apartment / condo complex valuations are relatively large when compared to many other property types.

I collect market sales data on apartment and condo complexes and in 2018 (to date) there have been a few sales with an average unit prices at or near or over $ 200,000.  The value of some apartment units in high-end complexes is thus closing with the values of low-end detached homes.  So, one may ask, why not just invest in single-family residences?

Apartment Complexes versus SFR Homes

I have in fact seen some buyers purchasing multiple new single-family residential homes (SFR) as investments instead of apartment complexes, but they generally have to hope to make their money on appreciation because they just can’t match the kind of monthly and annual returns that are captured by apartment owners. 

Rents for new SFR homes in this area generally fall around $ 1.00 per SF to $ 1.10 per SF per month triple-net (NNN) while apartment complexes can command combined triple-net rental rates in the $ 1.25 per SF to $ 1.50 per SF per month range.  Plus there is significant ancillary income that can be generated by an apartment complex.  When you combine that higher return with the fact that apartment complexes maintain a 5.0% to 8.0% vacancy rates over extended periods of time and SFR homes can at times become vacant for months, you realize that there is no income competition between the two investments.

Luxury Condos versus Apartments

Luxury condo buildings, most of which are located on or near the Las Vegas Strip in Las Vegas, generally don’t compare well with apartment / condo complexes.  In fact, most of the hi-rise buildings don’t compare well with each other.  They have high to very high HOA fees, their views are often amazing, their services are superior to those offered in apartment / condo building generally and usually their services include a concierge.  They are also purchased by a different type of buyer, the markets for hi-rise building is in my opinion entirely different.

With demand being high in 2018 most apartment / condo complexes are currently enjoying relatively low vacancy rates (or high occupancy rates).  If you read the resident blogs you realize that there is much more to an apartment complex than its appearance and its current revenues.  A complex may look like a great place to live and a great investment to own, from the curb but if management is poor living there can be a negative experience.   Vacancy can increase dramatically when management fails.

Proposed Apartment / Condo Complexes

One of the most difficult things for a lender is having the confidence in an appraiser’s income forecast.  An investor needs to know that an apartment complex can meet its income forecast.  Appraisers estimate the market rental rate and net income of a proposed building based on its; location, quality of construction, proposed finish, unit sizes and proposed amenities.  Of course appraisers complete a sales approach, income approach and a cost approach but there is often still a nagging question.  “Is the appraiser correct about rental rates and occupancy?” 

It’s my opinion that the only way for a new apartment builder to prove that their rental rate forecast is reasonable short of doing a market analysis or rent comparability study is simply to pre-lease the proposed units.

For more appraisal information contact Glenn J. Rigdon MA, MRICS, IFAS, ASA is a Las Vegas / Henderson Nevada based appraiser who can be contacted via email or via his business website known as Appraiser Las Vegas  (http://www.appraiserlasvegas.com), or http://www.horizonvillageappraisal.com, or you can also click on “Contact Us” on the home page of this website or visit my public profile at LinkedIn at http://www.linkedin.com/pub/glenn-rigdon-ma-mrics-asa/1a/30b/879/

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