Madness in the Market
By David Larson
The second quarter of 2021 has been a barn burner. We have seen the market activity being very strong with buyers coming from both coasts and places in between.
One needs to look no further than the Johnson Perkins Griffin market report to see a market on fire. Of the approximately 25,000 units they survey in the Reno-Sparks area some striking statistics emerge. This quarter, about 1,000 newly constructed units have been added into their survey of the approximately 25,000 units surveyed. Of all units the vacancy factor is 1.63%, this is an incredibly low rate since a healthy market generally hovers around 5% vacancy. There are currently 4,000 new units in various stages of construction and another 5,900 or so in the planning stages. These new units will come online over time and I believe will be staggered enough not to affect the overall market vacancy because we are seeing job growth numbers that could absorb this new construction (except in isolated pockets of the market). New units account for only about 4% of the survey so there was no way that was enough to raise the average rental rates $138 or 9.39% across the board for the quarter.
Covid started and by March 2020 it appeared the sky might be falling. It seems we all knew that Covid would have a detrimental effect on the apartment market. Workers displaced, vacancy and delinquency rates skyrocketing were forbidding signs. What happened was 180 degrees out of sync with the expert’s predictions. Johnson Perkins Griffin in their second quarter report provided their survey participants with a delinquency report. Of the responding complexes a delinquency rate from 0-15%, with a weighted average of 1.73% was observed. This delinquency rate is not far from a normal market. It is interesting the response of up to 15%, I have heard from property managers that in some cases a disgruntled tenant would talk to other tenants in a complex and all would stop paying, the statistics prove this out.
Where are we going from here? Cap rates are falling, prices are rising, rents are rising, and more cash is chasing deals. I do not see this changing much in the short term. With our government printing money some see inflationary times on the horizon. This has caused a rush to real estate assets fueled even further by low interest rates on borrowed money. Enter into our market REITs and other institutional buyers and we have a perfect storm. One thing I am certain of, the current rental and value increase rates in the Reno/Sparks apartment market is not sustainable.