August 1, 2010Kyle KazanComments 2
In the May 2010 Apartment Reporter I made special mention of the Las Vegas market as the (Western United States) epicenter of the housing bust. On a recent visit I spent time touring single family houses for sale, apartments for sale, meeting with residential and commercial brokers along with property managers and reviewing statistics.
In Chart 1 below, it is clear that the median resale prices of single family residences have dropped dramatically but once they reached the range of approximately $120,000, sales volume increased. Current median resale prices are lower than they were at the end of 2000 and have lost more than 50% of their peak value in less than 3 years.
The building boom fueled by cheap money has ended, leaving too many houses and hotel rooms for the current population living in and traveling to Las Vegas. The national recession’s drag on tourism and the rather abrupt end of construction has caused unemployment to jump as evidenced in Chart 2.
In Chart 3 below, we see that employment and the economy of Las Vegas is clearly supported by tourism. The biggest drops in employment in actual numbers came from losses in construction and then from Leisure and Hospitality.
Much of the gain during the boom period was based on an “if you build it, they will come” philosophy. Many small investors snapped up newly built houses with the idea of flipping them for quick profit. At the same time, institutional investors placed bets on adding hotel rooms to “The Strip” since all previously built properties had been absorbed.
My trip to “Mountains Edge” and “Centennial” to view newer houses for sale, the vast majority selling via short sale (house is sold for less than the current loan(s) and must be approved by the lender(s) since they will be receiving less than they are owed) offered a first hand look at the fallout on the residential side. For the commercial view, I toured City Center (on the Strip) which was the largest privately funded construction project in US history.
In Chart 4 we see that the drop in Las Vegas employment is the worst in over 30 years. Until tourism recovers along with the need for more construction projects, employment will remain under a lot of negative pressure.
While rents have dropped as has occupancy at apartment complexes and in houses for rent, there is demand for single family residential rentals. In discussing demand, I was told by a local property management company which specializes in single family rentals that if priced right, houses can rent quickly. Often, the new tenant is the former owner of the house who sold it in distress. Using the 1% rule (monthly rent is 1% or more of the purchase price of the house) with the very low interest rates available for loans, positive cash flow could be achieved.
My conclusion is that there is an opportunity today to purchase residential property in Las Vegas and make a return on the investment based on the rental income. On the commercial side, I toured some distressed (Class C) apartment complexes, ran the numbers in repositioning the assets and was unable to make good financial sense of the investments.
That said, one should proceed with caution as I believe given the large inventory of houses for sale and the weak employment picture that prices will likely decline further (possibly significantly). Also rents will feel more downward pressure..
While the euphoria that once made Las Vegas real estate the “can’t miss investment” is long over, the negative sentiment on the ground is overwhelming. Right now, I am keeping Las Vegas a “watch, visit and monitor” city. More reports on Sin City to come…