Investors Heating Up Apartment Market

November 5, 2004

By Jennifer Shubinski / Staff Writer

Stephen Siegel has racked up hundreds, if not thousands, of miles on his car while in Las Vegas over the past few months.

He’s not driving from casino to casino in search of the next hot poker tournament. He’s an investor, looking for apartment complexes to buy.

Siegel, president of the Los Angeles-based Siegel Group Inc. and Sasco Property Management, has bought four apartment complexes, ranging from 51 units to 132 units over the past six months.

The prices for those properties, from $43,000 to $60,000 a door, is a steal when compared with California’s prices, he said.

“In California, prices are so high and out of wack that investors are looking for other places to put their money,” Siegel said.

He said the same property that cost him $60,000 a unit in Las Vegas would easily go for $150,000 to $200,000 a unit in California.

It is investors like Siegel, looking for a place to invest their money and looking toward Las Vegas for that investment, that have pushed Las Vegas Valley apartment sales to $1.575 billion so far this year, said Mike Belnick, broker/ salesperson at Re/Max Central Commercial. Belnick has been tracking the local apartment market for 12 years.

“There’s been so many sales it’s been incredible,” he said.

Belnick said 23,900 apartment units have changed hands through the third quarter of this year, or 13 percent of valley properties with four units or more have sold.

Spence Ballif, first vice president at CB Richard Ellis, Las Vegas, investment properties division, said the reason for the huge interest in Las Vegas is that the “fundamentals are as strong as they’ve ever been and values are as high as they have ever been.”

He said capitalization rates remain strong and interest remains low — a perfect mix.

(The capitalization or cap rate, is a ratio used to estimate the value of income producing properties, often the net operating income divided by the sales price, or value of a property expressed as a percentage. Investors, lenders and appraisers often use cap rates to estimate the purchase price for different types of income producing properties and to measure the income potential of one property against another.)

“There are compelling reasons to buy or sell,” Ballif said. “The market will only continue to get stronger.”

While numerous apartments have been sold so far this year, the apartment vacancy rate continues to fall.

In September, vacancies reached 4.10 percent compared with 6.51 percent in September 2003.

The reason for the decline is many of the apartments sold are being taken off the market, either for apartment-to-condo conversions or to make way for other projects entirely.

Belnick has tracked 2,000 apartment units that have been bought by local casinos to make way for expansion projects or parking lots. Another estimated 11,000 apartment units — although some argue that there are 16,000 to 20,0000 units — have been taken off the market for condo conversions, Ballif said.

Belnick said with the reduced number of apartments, coupled with the declining vacancies, means something’s got to change.

“If at 5 percent (vacancies), we are 100 percent occupied as far as the industry is concerned,” he said. “What’s got to give — it’s got to be rents.”

Ballif expects rents to increase 3 to 4 percent by the end of the year, with reduced concessions for renters.

“The bottom line is it (rents) will be significantly higher than what it was in January,” he said.

Belnick expects rents to go significantly higher, 5 percent to 10 percent, because of the continued job growth and in-migration to the valley and the limited amount of new apartments in the pipeline. He said there are 3,000 to 5,000 apartment units expected to be completed this year and the same next year.

“From my point of view, it’s a good time to own but it’s not a good time to buy, because you’re buying tomorrow’s rents,” he said.

But many investors, despite having money to spend, are now having a hard time finding anything to buy.

“Right now if you talk to investors, there’s not a lot of opportunities to buy, there are very few deals out there” Ballif said. “I think your definitely going to see a slow down (in sales) next year.”

The challenge of finding something to buy is why Siegel spends five days a week in Las Vegas, driving up and down streets, knocking on doors, looking for an opportunity.

Siegel said one way he has been able to put a foothold in the market is because he buys older, rundown properties, with intentions of renting to new tenants and fixing up the properties.

“We’re looking for more in the Las Vegas area. That’s what I do all day long, driving around all day,” he said. “If you don’t have a connection, good luck, there’s nothing.”