Posted by: Morgan Walsh
Multi-Family Specialist
775 336 4646
Morgan Walsh is a commercial broker with 20 years experience in investment sales, multifamily and specialty sales, representing buyers and sellers, institutional and private developers in market rate apartment sales, mixed-use residential development and the development of affordable housing projects.
Developers, landlords and apartment investors all try to pin down which renter can pay the highest rent and how many can be attracted to a rental property. But everyone knows that high-end renters also have choices which include single-family home ownership. For the subset of high-end renters who can't or won't buy homes, how many are out there and what will they real pay ? Professionals in the apartment business track Class A apartment properties built in the last 5 years which have yet to stabilize at current asking rates. Occupancy can be boosted with concessions, but once they burn off, vacancy creeps up unless rents meet the level at available demand. As 2009 approaches, it's still cheaper to buy than build in every submarket regionally. Developers who model the projected cost and performance of new construction are focused on opportunities to acquire vacant land at drastically low values because development fees, water rights, construction costs and cost of funds are material factors largely beyond their control. By contrast, higher gross rents would sharply expand their return on investment. But how high will the tenant go ? Most landlords don't expect to compete with new construction because demand for their product is determined by the location of their building and the price point they offer tenants. And most tenants still prefer the convenience of proximity to schools, shopping and employment centers. For the tenant who tries to minimize her housing cost in a safe, pleasant environment, some existing apartment properties offer a very good alternative. Apartment investors view the same metrics with an eye to forecasting rent growth and investment performance. Traditionally, Reno/Sparks rents rise with inflation because new construction is not constrained by geography, rent control, density limitations or prohibitive land cost. In 2005, new household formation was projected to increase sharply over the succeeding 15 years. But recession, job loss, a slow exodus of Hispanic families and the dramatic loss of economic mobility among retireds have now reduced demand in all but a few enclave rental submarkets. Currently, the market is telling us most tenants will pay up to $ 1.00/SF in apartment rent, with a median rent of $0.92/SF on a minimum annual income of $ 28,000. Today, twice as many households have income in the range of $10,000 to $ 30,000 as those who have household income in the range of $ 30,000 to $ 50,000. When does the tenant in the latter category convert to home ownership ? Many already own condo and single-family detached product. How many continue to rent ? Will steeply falling home prices further reduce that cohort ? In the current re-sale housing market, foreclosure property at or below a $ 200,000 price point is increasingly available. For the buyer renting at $ 1,050/ mo. who can put down 10% on a home purchase for $ 175,000, financed at 6% (with the benefit of deductible interest roughly off-setting ad valorem real property taxes and the lender or seller paying closing costs) would not see an increase in his effective monthly housing cost. That buyer would qualify at a gross income of $ 35,000/year. But, does the buyer have the down payment, the tenacity to get the deal, the credit and overall debt ratios to satisfy a lender and the desire to own when further price declines are forecast ? Moreover, the typical buyer of distressed for-sale product is the small landlord who plans to add that unit to the shadow market competing for tenants with apartment properties. With isolated exceptions in the central business district and Lake Tahoe, the lifestyle renter who could afford to own and chooses not to is a negligible segment of renter demand. In 2006, the overall vacancy for 3BR/2BA units was under 4% from which average rent has risen 10% to $ 1,130 in 2008. Townhouse rents above $ 1,115 routinely run at vacancy rates above 7%, Of the roughly 25,000 households who have household income in the range of $ 30,000 to $ 50,000, fewer than 2,500 are currently lodging in apartment properties, and those units have an overall vacancy at 8%. What does all this tell us ? The tenant who can comfortably pay more than $ 1.00/SF either converts to buying or accepts lodging at a lower price point than she can afford. We invite your comments and look forward to discussing these trends.
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