The Nevada multifamily market, which is primarily made up of Reno and Las Vegas, faced significant challenges in 2023, particularly due to rising interest rates and a slowdown in sales volume.
Rents declined by approximately 8 percent since their peak in the fourth quarter of 2021. Despite these setbacks, investors remain attracted to multifamily properties in Nevada, buoyed by the state’s favorable economic indicators and potential for long-term returns.
However, supply constraints and rising construction costs pose ongoing challenges that could impact future market growth. Nonetheless, the Nevada multifamily market offers promising opportunities for investors amid a dynamic real estate landscape.
Vegas Gambles on Economic Diversification
In Las Vegas, the employment market continues to diversify beyond its traditional focus on tourism, gambling and hospitality. The addition of major sports teams such as the NFL’s Las Vegas Raiders and the NHL’s Las Vegas Golden Knights, along with other professional sports franchises, reflects this diversification trend.
Infrastructure developments like the highspeed bullet train project, known as the Brightline West that will connect Las Vegas to Southern California, further underscore the city’s growth trajectory. The train is estimated to be operational by approximately 2028.
Brightline builds rail lines connecting cities and regions that are too congested to drive and too close to fly, according to the company. The first Brightline passenger rail system opened in 2018, connecting Central and South Florida.
Brightline West will connect Las Vegas and Southern California by a 218-mile, all-electric rail service that will include a flagship station in Las Vegas.
These developments, coupled with high-profile events such as hosting the 2024 Super Bowl and Formula One Grand Prix, contribute to the evolving economic landscape in Las Vegas.
Las Vegas apartment demand has improved so far this year over 2023, but it has not been enough to stop the vacancy rate from reaching double digits for the first time since 2012. About 6,100 units were delivered in the past 12 months, while only 3,900 units were absorbed, sending the vacancy rate to 10.2 percent.
High-income households are keeping occupancy more stable at the top of the market. On average, Class A assets built before 2023 have a vacancy rate below 8 percent. Developers completed more than 6,000 new apartment units in Las Vegas in 2023, an annual record that expanded total inventory by about 3.5 percent. Virtually all new construction is aimed at the high end of the market, with most rents at these properties in the $2,000-plus per unit range.
Approximately 5,600 units are now under construction in the Las Vegas metro area, which would expand the existing inventory by 3 percent once complete. The beltway submarkets of Henderson, Enterprise/South Paradise and Summerlin/Spring Valley are the focus for builders and have been for the past decade.
Strong demand, high asking rents, and availability of land have spurred development in these areas. Nearly all multifamily property sales in 2023 involved smaller players acquiring assets with fewer than 75 units. The Seminole Tribe of Florida’s acquisition of the 228unit Alta Southern Highlands for $79 million ($346,000 per unit) was one of a handful of institutionalgrade investments during the year.
Higher interest rates and lower occupancy levels are not the only factors making deals more difficult to pencil out. Inflated insurance and utility costs are catching many market participants by surprise in 2023. Despite the lack of natural disasters in the region, insurance rates have sometimes doubled. The Las Vegas Valley Water District implemented “excessive use” charges this year, which penalizes account holders who exceed their allotted water threshold. Apartments with large pools or lush landscapes have felt the brunt of this new policy.
Tech Employers Boost Reno’s Population
Reno, about 348 miles northwest of Las Vegas, historically has been characterized by boom-and-bust cycles. But the region has made strides in economic diversification and stability. Efforts by local economic development groups include tax incentives, a lower regulatory environment and access to renewable energy in order to attract high-tech manufacturers like Tesla and Nanotech Energy, bolstering employment opportunities in the region.
Reno has also benefited from domestic migration trends accelerated by the COVID pandemic, with newcomers drawn to the area’s lower cost of living, no state income tax and a quality of life accentuated by proximity to Lake Tahoe and an active arts and culture scene.
Developers in Reno have brought more and more properties to market over the past three years, resulting in the vacancy rate rising to 9.4 percent, the highest in the past 25 years. Deliveries totaled 2,300 units over the past 12 months.
While there has been strong renter demand, it has not been able to match the pace of new deliveries. Unfortunately, construction has yet to slow in the market, as another 2,300 units are currently underway, expanding the market by another 5.1 percent.
Development remains a dominant market theme, but we are seeing signs that construction in Reno is starting to slow. Developers broke ground on another 1,000 units in 2023. Fortunately, this is the lowest total since 2015.
The supply and demand imbalance means competition for renters is fierce, forcing landlords to compete on price. Rents are down by 0.1 percent between the second quarters of 2023 and 2024. This is well below the 12 percent annual rent growth rate of the second quarter of 2021. As far as affordability is concerned, Reno offers a considerably lower cost of living with an average monthly rent of $1,540, significantly less than the national average of $1,690 per month.
Sales activity has slowed, reaching just $356 million from 49 transactions in 2023, falling to levels comparable to 2020 transaction figures. Volume is expected to increase as property values and debt costs come down in the coming year.
Reno has been in a growth cycle for much of the past decade. The region has benefitted from the in-migration of new residents and employers, making it one of the fastest-growing markets in the Western United States. Unlike many Western markets that saw a boom during the pandemic, demand has yet to slow here significantly. Still, there are questions surrounding how long growth can persist and whether the market is being overbuilt.
With interest rates expected to remain stable, the Nevada market is primed for both price escalations and a surge in multifamily asset sales volume in 2024, offering lucrative opportunities for investors. This stability creates an ideal environment for investment, driving confidence and activity in the real estate sector.
Bill Ketcham is vice president of The Mogharebi Group. He can be reached at Bill.Ketcham@Mogharebi.com.