Multifamily dwellings can be found in high numbers throughout every major city in America and Nevada is no exception to this rule. Choosing to rent a home instead of purchasing a home can result from a variety of different circumstances. These reasons can be income driven, lifestyle preference or it could simply be a timing issue where an apartment is quicker to settle into for a new job than purchasing a home. The job market in Nevada has seen the same explosive growth as the population, and they are both closely tied to one another.
Johnson Perkins Griffin, a real estate appraisal and consultant firm out of Reno, just completed an apartment survey for the fourth quarter of 2023. According to this report, major metropolitan areas in Nevada have experienced tremendous job growth since November of 2022. In that time Las Vegas saw an increase of 42,600 jobs, Reno saw an increase of 7,200 jobs and Carson City saw an increase of 1,000 jobs. In total this is more than 50,000 jobs added to the Nevada economy in just over a year. Renters and consumers can rest easy as this growth is not currently correlating with a rental price increase or a lack of supply.
Fluctuating Rents and Rising Vacancies
During the COVID pandemic rents rose significantly across Nevada, with renters in Las Vegas seeing an approximate 30 percent increase. There are several factors that were involved in the rapidly rising rents, but the pandemic’s guidelines on evictions was one of the primary drivers.
“The eviction moratorium created an imbalance in supply and demand by constraining supply synthetically. This resulted in rapidly rising rents, and we may have pushed rents too far at that time,” said Devin Lee, former CCIM president and current director of multifamily investments at Northcap Commercial.
It wasn’t just the pandemic that caused the rental rates to rise. They have been steadily increasing over the last ten years. These rates coincided with a rise in the average median income (AMI) per household across the state. Alan Molasky, chairman and founder of Ovation Development, shared data that shows the AMI of a Las Vegas household increased 34 percent since 2013, while the average rent for a one-bedroom apartment increased 94 percent during the same time.
In 2013, the average rent for a one-bedroom apartment in Las Vegas was $655 and now it’s $1,271. Now that the impact of the global pandemic is beginning to lessen, Nevadans are seeing a bit of relief even though rental prices are still higher than they were pre-pandemic.
According to Ben Nelson, senior vice president at Kidder Mathews, the average rent for a studio apartment decreased from $1,248 to $1,099 per month from the end of 2023 to now. In that same time, the average rental price for a three-bedroom apartment in Reno decreased from $2,202 to $2,123.
“Ten years ago, people were spending about 18 percent of their salary on rent, now they’re spending about 25 percent of their salary on rent. The industry norm is around 30 percent, so Las Vegas is still healthy and affordable for a household making 100 percent of the AMI,” said Molasky.
Vacancies for multifamily dwellings are up, but this may not be a direct result of the rental prices themselves. “Vacancies by and large are currently elevated, and rents are soft, mainly because qualified applicants are difficult to find. Credit is challenged when many in the current rental pool have past collections issues,” said Lee. One of the trends in multifamily investment today aims to target lower-income households for some much-needed relief.
Affordable Housing
The Low-Income Housing Tax Credit (LIHTC) was created by the 1986 Tax Reform Act. The program provides government tax credits that are used specifically to rehabilitate or construct multifamily housing for lower-income households. Strict criteria is in place to ensure these credits are being used to properly combat the need for affordable housing. Developers will claim the credits over a ten-year period, but the multifamily dwelling they are used on must be maintained as affordable housing for 30 years. The target percentile for these credits is the units must be affordable for households who earn approximately 60 percent of the AMI and rent is limited to 30 percent of a qualified applicant’s income. The goal of this program is to reduce the number of homeless Americans nationwide.
“If people can’t afford a home and you have people on the streets, it’s a real problem. The government is looking at how they can help,” said Molasky.
The affordable housing sector of multifamily development in Nevada is growing stronger every year, with organizations and developers joining the trend. Molasky and Ovation Development have completed 14 affordable housing projects that total 2,066 units.
Nevada Hand, which is Nevada’s largest nonprofit organization that deals with affordable housing, uses the LIHTC program to ensure they are developing high quality affordable housing. In addition to Nevada Hand, Molasky and Ovation have also worked with George Gekakis who is responsible for developing many senior living apartment communities in the Las Vegas area. Affordable housing isn’t just trending in southern Nevada, there is movement up north as well.
“Affordable and LIHTC properties are really the name of the game and the local housing groups are doing a number of these projects in the Reno/Sparks area,” said Nelson.
An Investment Friendly State
Nevada stands out among the other west coast states as being more landlord friendly for investments in multifamily dwellings. “Most of the recent proposed legislation has been negative for landlords, and we have always been a preferred place to invest because we have favorable landlord laws compared to other west coast states,” said Lee.
Governor Lombardo vetoed several bills recently that were leaning in favor of tenants rather than landlords. Senate Bills 335, 78 and 371 were all vetoed, as well as Assembly Bills 340, 218 and 396. Governor Lombardo has stated that his vetoes were not a result of a favorable position on landlords, but his belief that the housing crisis is due to the lack of land availability in Nevada. Evidence to this point can be found in the number of investors and companies coming from out of state to invest in multifsly properties in Nevada.
“Roughly 80 percent of investors are coming from west coast states,” said Lee. Nelson recently conducted the sale of Quail Manor Apartments in Reno to a private investor out of San Jose, CA. According to a Kidder Mathews report, the buyer was coming out of a 1031 exchange in San Jose and achieved their financing through Plumas Bank.
On the Horizon
Investors and developers throughout Nevada, and some from out of state, are projected to open several multifamily dwellings soon. Ovation development just opened Aspire at Flamingo Grand and Aspire Redwood, which are both market-rate housing projects. These two projects join the 37 other projects completed by Ovation that total 9,768 units in Las Vegas. In addition to these market-rate housing projects, Ovation has completed 14 affordable housing projects totaling 2,066 units. According to Molasky, Ovation also plans to break ground on Torrey Pines, another affordable housing community, within the next six months. Torrey Pines joins 15 total planned projects for Ovation that will add 3,944 units to Las Vegas.
Kidder Mathews’ report includes some projects under construction in Reno, and one that was recently completed. Integra Peaks in southeast Reno was recently finished and has a total of 300 units. Just down the street from Integra Peaks is Palomino in Southeast Reno. This multifamily project is under construction and when completed will add 482 units. Seasons at Stonebrook in East Sparks will add 396 units when it is completed. Unfortunately, the planned construction of the apartments at Reno City Center have experienced a setback. 530 units were planned for this project, but according to the city of Reno, the project has recently filed for Chapter 11 bankruptcy.
With rents down and vacancies experiencing a slight uptick, the question needs to be asked: Are multifamily dwellings a good investment?
To Invest or Not to Invest
Investors and developers are still operating despite rising costs and increased operating expenses. Construction costs have also added barriers to new developments, with costs that have risen by 74 percent from 2016-2023, according to Molasky. Molasky adds that the price per unit to develop and construct a multifamily project used to be approximately $150,000, and that price has increased to approximately $280,000. This means the total cost of constructing a 300-unit multifamily dwelling would be more than $80 million.
“The multifamily space would be continuing to rock and roll if the debt markets were not where they are today,” said Nelson. One thing that Molasky and Nelson both agree on is that investors need to come in with a lot more cash or equity to ensure these projects can be funded.
Rising interest rates are making it difficult to achieve a return on investment right now. Nelson said, “If interest rates dropped by even 1 percent then deals would begin falling left and right. To the point, multifamily commercial real estate is still a great investment.”
Molasky agrees, though he may disagree on the timing of the investment. “Right now is not a good time to start a new investment, but I am confident that interest rates will come down, and costs will stabilize. In 12-24 months, people will start building again.”
Multifamily commercial real estate continues to persevere through recent struggles, and with projects planned on the horizon, it does not appear that multifamily dwellings are going anywhere in Nevada.
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