Apartment owners face tough circumstances

By Buck Wargo

Fri, Mar 12, 2010 (3 a.m.)

Nevada is not only at the top of the list when it comes to home foreclosures — the state leads the nation in the percentage of delinquent loans for apartment complexes.

Fitch Ratings calculates that 23 percent of multifamily loans in Nevada that rely on commercial mortgage-backed securities are in arrears, well above the national average that is expected to reach 13 percent soon. In states such as Nevada, where the residential market has suffered, any recovery will be muted, said Mary MacNeill, a managing director at Fitch Ratings.

Rents will take longer to recover because landlords are offering significant concessions to keep occupancy levels up, MacNeill said. High unemployment and a decline in immigration have reduced the demand for apartments and, therefore, cash flows, she said.

“Nevada has a stressed multifamily market,” MacNeill said. “It’s certainly showing a lot higher deterioration than the rest of the country. You have fewer people moving into the area, fewer jobs and fewer people who are staying there.”

Many people who have lived in apartments have rented homes or even bought homes to take advantage of the first-time homebuyer credit and low home prices, analysts said.

Despite the high number of delinquencies, lenders have been reluctant to foreclose on apartment owners, MacNeill said. That would drive down values and drive down rents as well, she said.

Michael Belnick, an apartment market specialist for RE/MAX Central Commercial, said plenty of frustrated investor groups are waiting on the sidelines to gobble up foreclosures, but lenders haven’t been putting them on the market. Many are managing the properties and waiting for the market to recover before selling them at a better price. Lenders are working with apartment owners to help them get through the recession, he said.

“Nothing makes sense right now. We are not getting the amount of product that was anticipated,” Belnick said. “The vulture-fund people with the dollars don’t like it because they don’t have access to the product. They are not getting anywhere.”

Belnick attributes that to federal banking regulators relaxing rules for commercial properties and reserve requirements.

All this has affected the sale of apartment complexes of 100 units or more. Only 11 changed hands in 2009 in Las Vegas after 42 were sold in 2007 and 17 were sold in 2008, according to Belnick.

Much of the activity has been in the fourplex market with 416 sales in 2009 in Las Vegas, nearly doubling the 209 sales in 2008, Belnick said.

Of the properties that are on the market, many transactions have multiple offers and in some instances that drives up the price, Belnick said.

The investor groups, however, are looking for bargains.

“If a property is running at 25 percent vacancy and expenses are running high, they are not going to pay $60,000 per door,” Belnick said. “We have a test of wills going on right now.”

The price per unit for all complexes sold in 2009 in Las Vegas was $40,300, down 44 percent from $72,200 in 2008. It was as high as $108,500 in 2007. That’s a function of rents and occupancy, Belnick said.

Belnick cited the Village at Karen in the southeast valley that is a cluster of fourplexes run as one big complex. In 2007, it charged $690 to $710 a month for a two-bedroom unit but today that’s down to $525 a month and there’s a 25 percent vacancy rate, he said.

Lloyd Sauter, co-owner of the Sauter Cos. real estate brokerage, said he has seen a noticeable increase in interest by investors who think the apartment market has bottomed out and don’t expect any more declines in rental rates.

Many apartment owners are reluctant to sell because they would receive less than it would cost to build a new complex, Sauter said.

Most of the foreclosures have occurred in the older lower-end properties that were bought for $60,000 to $70,000 a unit that are worth about $30,000 today, Sauter said. Owners of newer complexes are in a better financial position to wait out the economy, he said.

“We have a lot of money laying on our desk that wants to invest in Las Vegas,” Sauter said. “What we are saying to aggressive buyers who want to be in Las Vegas for the long term is that they are going to have to adjust and take a little risk. We haven’t convinced heavy-duty buyers to pay more than they are worth today. They are not that excited about that.”

Despite the downturn, Belnick said he’s optimistic about a recovery because he thinks there will be a shortage of apartment units in a couple of years because there is no construction happening. Many people have moved back home or have doubled up with friends or relatives and will ultimately want their own place again, he said.

“I think rents will be higher next year because they don’t want to live with mom and dad,” Belnick said. “They want to get their own places and that will create a change in supply.”

The strongest demand will be for older, more affordable complexes with fewer amenities, which are in shorter supply because much of the construction has been on high-end units, Belnick said.

The apartment market will recover and rents will go up again, Sauter said. But it is tough, he said.

“There are lot of frustrated people out there,” Sauter said. “What we have are a tremendous amount of people in the construction industry who have lost their jobs and can’t pay their rent. They walk from one property to the next.”