The author, Glenn J. Rigdon, MA, MRICS, ASA is a commercial appraiser / broker. He was the Economist AZ State Land Department and Staff Specialist ROW - Legal for NDOT. See http://www.horizonvillageappraisal.com/ for more call 1-702-568-6699. The market for apartment buildings in Las Vegas over the last two years has been considerably better than that noted for homes. How will market fundamentals change with negative population growth and large housing inventories?
Real estate markets in Las Vegas have been battered by the economic downturn, and in late 2008 home values have continued to plummet and are now approaching 2004 price levels. Some are saying that the price drops are precipitous and that they have exceeded “market fundamentals.” [1] Others have discussed the fact that homes are now selling below their replacement cost.
The market for apartment buildings in Las Vegas over the last two years has been considerably better than that noted for homes. Past market data indicates that apartments have not suffered the hard landing that we have seen for homes. Multiple family properties are in fact one of the few property types in Las Vegas to remain relatively strong in a free falling real estate market. While financing is tight, sales down and vacancy up, the long-term strength of the Las Vegas market has been weighted by investors and they have continued to accept cap rate returns in the 5.0% to 6.0% range.
What is going to happen in the future? No one has a crystal ball, and the current state of the apartment market is uncertain. A large housing inventory in Las Vegas is a fact that we all must deal with and the recently announced negative population growth statistic is a short-term concern.
It is important to note that with all that has happened in the Las Vegas real estate market to date the demand for apartment housing has kept an overall vacancy of around 7.0% to 7.5%, and the apartment vacancy has not exceeded 9.0% in the last 10 years. The modest vacancy rate experienced to this point has provided a reasonable return to apartment owners in light of economic conditions. Owner / investors in apartments have not seen the massive losses experienced by homeowners, stock owners or those holding uninsured bank assets.
From an appraiser perspective, apartment buildings are usually analyzed by making the “apartment unit” the unit of comparison. By using this unit of comparison appraisers compare a single element within a 50-unit apartment complex with a similar unit in a 70-unit apartment complex. It is common to see brokers and investors talk about apartments at, for example, $ 150,000 per unit. While price per square foot is also considered, it is usually used as a secondary unit of comparison.
Of course income generation, and thus the income approach to valuation, is central to the valuation of apartment buildings. Appraisers deal with actual income and anticipated income as indicators of future benefits and thus future value.
Tracking the direction of the apartment market in Las Vegas is part of an appraiser’s charge. It is my experience that, even when major employer closings in small Midwestern towns devastated their real estate markets, values did not fall without regard for economic returns. So you don’t need to see into the future to realize that, while apartments can be affected by downward trends, apartment values are not likely to follow the 40% annual decline recorded for homes values.