Sometimes Las Vegas’ reputation precedes it — and that can be a good or bad attribute.
“Everyone remembers 2008,” says Taylor Sims, executive director of the Multifamily Advisory Group at Cushman & Wakefield.
Home prices in Las Vegas plunged by 60 percent during the Great Recession, nearly twice the national rate, according to news affiliate KTNV. The University of Nevada, Las Vegas (UNLV) notes the unemployment rate peaked at 14.5 percent in October 2010.
Like Sims, Michael Albanese, a multifamily specialist at NAI Vegas, knows the rest of the world is well aware of what happened to the Valley — and its real estate — during the last economic downturn.
“Las Vegas has felt very much like a highrisk, high-reward market,” he explains. “When times are good, they are exceptionally good in Las Vegas. But when times have been rough, they’ve been exceptionally rough.”
It’s hard to blame people, then, for wondering what might be in store for this desert oasis — which has been experiencing exceptionally good times as of late — as the market slows. The impact felt from higher borrowing and construction costs and reduced housing values isn’t exclusive to Las Vegas, but the city’s high highs and low lows can put it in a class of its own when the tide turns.
No Shortage of Demand
For all the concern, Jess Molasky, principal and project manager at locally based Ovation Development, believes this market deserves a little perspective.
“In Las Vegas, 47 percent of households are renter-occupied,” he says.
Nevada has the third highest percentage of renters in the nation, according to Worth Insurance. The demand for rental units has boomed since COVID-19 as Las Vegas generally offered a lower cost of living, more square footage, and a business- and tax-friendly environment.
“While there has been an influx of new units, Southern Nevada is still suffering from a lack of multifamily homes,” Molasky continues. “This is especially true given the migration of residents moving to Las Vegas from California, Washington, and East Coast states like New York and New Jersey.”
The migration trend has created a need for more housing, with the National Apartment Association noting Las Vegas requires about 5,000 new apartment units each year to keep up with demand.
Molasky is confident this demand will continue because of two factors.
“The first factor is lifestyle renters,” he says. “Rather than a stop-over to homeownership, there is a growing trend to choose rental life among millennials, Gen X and empty nesters. Not everyone aspires to the white picket fence dream, especially those who have adopted more experiential lifestyles.”
And it doesn’t get much more experiential than living in Las Vegas. Sims notes the Valley has about 250,000 rental units, with annual deliveries typically ranging from 3,500 to 7,000 units per year.
“More than 80 percent of those units are high-end luxury developments,” he adds.
It isn’t just lifestyle renters interested in this supply, either. Investors have shown a large appetite for luxury.
“When we brokered the first sale above $400,000 per unit, there was an immediate response in the market where the mental price ceiling was raised and other assets started transacting at a higher basis as well,” Sims continues. “Then there were multiple other transactions above $400,000 per unit shortly after.”
For example, the 185-unit Moderne at Centennial in North Las Vegas sold for $80 million, or $432,432 per unit, last June. The buyer was a joint venture between Fundrise Interval Fund and Balanced eREIT II.
Banyan Brighton, a build-to-rent townhome community currently under construction in the Valley’s northwest corner, was purchased by Banyan Residential for $61 million, or $485,646 per unit.
Prices haven’t just gone up for luxury product, but across the board. The spike in pricing has spooked some investors, notes Bill Ketcham, vice president of the Mogharebi Group and head of The firm’s Las Vegas office.
“Rents are up 30 percent over pre-pandemic levels,” he says. “This has tempered demand and investor sentiment.”
It’s tempered demand from renters as well.
“After a stretch of huge rent growth that raised concerns about tenants’ ability to keep up, Southern Nevada continues to see rents that are out of reach for many of the city’s workers,” says Molasky.
The Consumer Price Index rose 4 percent in May, down from 4.9 percent in April on a year-overyear basis, down from 5 percent in March and well below the peak of 9.1 percent in June 2022, but well above the Federal Reserve’s target inflation rate of 2 percent.
The vacancy rate has increased to 6.8 percent, according to Colliers’ first-quarter 2023 market report. This is up from 6.23 percent in fourth-quarter 2022 and much above the 2.89 percent vacancy rate the Valley sported one year earlier.
Alex Bacon, vice president of multifamily at Barker Pacific Group, believes Vegas’ historically large swings have weighed on the minds of investors as they consider the current environment.
“Volume has dried up dramatically due to the pricing disparity, or bidask spread between buyers and sellers,” he says. “Las Vegas’ transaction volume has suffered more than most other markets due to the spike in valuations and compressed cap rates at the peak in late 2021 through early 2022, driven by aggressive growth expectations.”
Bacon notes slower-growth markets with less dramatic moves in cap rates have experienced steadier deal volume over the past year as those prices haven’t moved as much.
“Unsurprisingly, this shift in Las Vegas is taking some time for investors to comprehend and incorporate into underwriting,” he continues. “Pricing has fallen dramatically, sometimes 20 percent to 30 percent below peak valuations, primarily due to tempered growth expectations and significant adjustments to in-place and exit cap rates, which are nearly double those seen in 2021.”
Cap rates for Las Vegas multifamily widened by 150 basis points between September 2022 and February 2023, notes Berkadia. Suddenly, deals that were trading in the 3.5 percent range were changing hands north of 5 percent. Such was the case with the 344-unit Monterra along Vegas’ eastern edge. Bridge Investment Group purchased the community in October for $73.2 million.
A similar story played out at the Boulevard, a nearby 296-unit community purchased by DB Capital Management that same month for $64 million.
Some Investors Hit Pause Button
Investment sales have decelerated at a record pace so far this year thanks to rising interest rates and a turbulent capital market environment, notes Sims. The 10-year Treasury yield, a benchmark for permanent, fixed-rate financing in commercial real estate, closed Friday, June 16 at 3.76 percent, up from 1.5 percent at the start of 2022.
Sims counts two sales of multifamily assets with 100 or more units in the Las Vegas market during the first quarter of 2023, compared with were 16 in the first quarter of 2022.
These numbers may turn heads, but Sims attributes them more to the Valley’s peaks and, well, valleys rather than an inherent problem with the market.
“I don’t think this is reflective of investor demand,” he says. “Las Vegas was one of the hottest, if not the hottest, multifamily markets in 2021 and 2022, so we’ve just got a little farther to fall as markets revert to the norm. In turn, there’s a larger bid-ask spread in our market than most others. Thankfully, the [real estate] fundamentals remain strong, and we’ve not seen many sellers needing to meet the market yet.”
Bacon believes “yet” may be the operative word in this market.
“We do expect to see some level of motivation from sellers over the next year due to maturing bridge financing,” he says. “That will allow for some attractive buys with high yields and low leverage points, specifically in more Class B and C properties that don’t fit the box for many investors amid the current flight to quality.”
Ketcham admits institutional investors have moved away from buying in general due to their need to achieve higher returns for investors. In their place are individuals, family money, out-of-state investors and foreign investors.
Oh, and the local guys.
“This provides more opportunities for local players to acquire good properties,” says Mike Ballard, CEO of locally based Camino Verde Group, which acquired the 10-unit Sherwood Apartments in Midtown Las Vegas in late April for an undisclosed sum.
Ballard is incentivized to buy in this market as multifamily housing is in short supply. He is particularly interested in value-add opportunities in areas undergoing redevelopment.
“Right now, there’s a low inventory of affordable multifamily housing for the working class, so we are trying to mitigate that,” he says. “We want to transform these barely inhabitable properties and turn them into places where new and existing residents can have a great place to live and commute easily to and from their jobs.”
Major developments within walking distance of the complex include the construction of the Fontainebleau and the MSG Sphere, as well as renovations at Circus Circus.
Ballard notes his firm continues to be active in this market because he sees these plays as long-term investments.
“We’re actively buying and developing,” he says. “Today, our strategy, like most people, is to try and find the right locations that are enduring.”
In addition to urban infill locations where redevelopment is occurring, Camino Verde is building in emerging areas, such as West Henderson, as well as in downtowns where the municipalities are making large investments.
“We’re building new projects in downtown Henderson and downtown Las Vegas,” he says. “The county and cities are incentivizing new development to revitalize their downtown cores, and we’re taking advantage of those incentives.”
Local player Ovation also remains active. The firm is hard at work on 592 market-rate units throughout the Valley, which it plans to deliver this year, with additional developments in the works for 2024. It will also complete 195 affordable units this year, with another 208 slated to be delivered in 2024, Molasky adds.
“The gap between supply and demand for affordable housing continues to grow,” he says. “The immediate impact of current market conditions is making it difficult for developers to advance projects, further reducing supply that could eventually lead to an increase in rents. We have already seen a reduction and impact on multifamily housing supply given high interest rates and construction costs.”
Overall, deliveries have dropped quarter to quarter. The fourth quarter of 2022 brought nearly 900 units to Las Vegas, while developers only delivered 543 units in the first quarter of 2023. Ketcham notes there are currently about 8,600 units in the Valley’s development pipeline.
“There are 6,500 Class A and B apartments and 2,100 Class C apartments under construction,” he says. “Multifamily transaction volume has contracted as higher interest rates have increased the cost of capital, so investors are being more cautious as they wait to see what happens with the market.”
Local Economy Diversifies
The consensus of economists is that the United States is headed for a recession late this year. Still, many forecasters anticipate the economic downturn won’t be as bad as 2008 because of the low 3.4 percent unemployment rate, strong housing demand and built-up home equity. Las Vegas multifamily experts say the same about their market, noting that the Vegas of today is leaps and bounds different than the Vegas of yesteryear.
“In 2008, 50 percent of Las Vegas’ population was employed by the tourism and hospitality sectors,” says Sims. “Today, that number is less than 25 percent as the city continues to diversify and mature, and the outlook on the city remains positive.”
Outside of leisure, hospitality and gaming, the sectors experiencing the most growth include transportation and utilities employment, warehousing, retail, professional and business services, education and healthcare.
Las Vegas is also evolving. It’s taken on an identity as a sports mecca over the past few years with the addition of the NHL Golden Knights; NFL Raiders; WNBA Aces; XFL Vipers; Lights (soccer); Desert Dogs (lacrosse); and Aviators (minor league baseball). MLB’s Oakland Athletics also announced plans in April to relocate the team to Las Vegas.
“Las Vegas has evolved from an economy based almost solely on gaming and entertainment, known as ‘The Entertainment Capital of the World,’ to ‘The Sports and Entertainment Capital of the World,’” says Molasky.
“Plus, the city has hosted the NFL Draft, the Final Four Regionals (NCAA basketball) and will be the home to the 2024 Super Bowl. This November’s inaugural Formula 1 Las Vegas Grand Prix and the 2024 Super Bowl will have an economic impact of $1.3 billion and $600 million, respectively,” adds Molasky.
Ballard adds that convention attendance — one of the city’s bread-and-butter economic drivers — is also up 20 percent over 2019 levels. Gaming, another Vegas staple, has experienced a record-breaking 23 months of $1 billion-plus revenue.
“Job growth is 2.5 times the national average,” Ballard adds. “Our population growth was 16.3 percent over the last decade, almost triple the national average of 5.8 percent.”
Bacon also believes the city’s economic fundamentals are in good shape.
“We have seen less speculative building, more diversification of the local economy, the addition of job creators like the professional sports teams, MSG Sphere, Formula 1 and an expanding logistics industry,” he says.
“Las Vegas’ chief industry is susceptible to impacts on discretionary spending and consumer sentiment, but recessionary fears have remained centered around financial and technology sectors while hospitality and gaming have remained strong. Las Vegas also ranked first in non-farm payroll job growth last year. We believe the market’s fundamentals will continue to hold up,” according to Bacon.
Among the top 50 metros, Las Vegas experienced a 6.3 percent increase in nonfarm payroll employment from January 2022 to January 2023, ranking it No. 1 in nation, followed by Dallas at 6 percent and Austin at 5.8 percent, according to the Bureau of Labor Statistics.
Defying the Naysayers
Those looking to test the strength of the Valley’s multifamily market only need to look as far as its rent collection stats during COVID, Sims argues.
“Las Vegas’ multifamily market in 2020 fared better than anyone could have predicted,” he says. “Midway through May 2020, collections were 89 percent in Class A assets, 84 percent in Class B assets and 83 percent in Class C assets.”
For perspective, all casinos in Las Vegas were closed from March 17, 2020, until June 4, 2020, due to the pandemic. Numbers like these don’t surprise Albanese. The city is in a completely different place (figuratively) than it was during the last downturn. The identity it’s formed since then can be described in one word.
“Las Vegas has proven itself to be incredibly resilient, despite the countless naysayers whenever we are down,” he says. “Las Vegas is not immune to tough times, but we always come back stronger and stand taller.”
For those active in the city’s multifamily market, they’re expecting nothing less from this desert chameleon.