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Unexpected Shift in the Market
Tax season is over, spring is quickly moving aside for summer and the real estate selling season is upon us. DL Realty does statistics and reports of what is happening quarterly in the Reno/Sparks multifamily market. While studying this past quarter’s statistics a market shift became evident. As of May 4th 2015 there are 42 active multifamily properties in the Reno Sparks MLS, 14 pending sales and we saw 26 sales closed in the last quarter. What surprised me here? There is more inventory than in previous quarters. We now have nearly 4 months supply of inventory. Prices are escalating… well, almost! Looking at the broad picture and averaging the sales price per square foot of properties actually sold in the past 3 months, we have an average of $98 a square foot and $79,084 per dwelling unit. Averaging the asking prices of the properties currently available we come up with $129 a square foot and $96,069 per unit. This is over a 20% difference between the asking prices and the sold prices, with more properties sitting on the market for a longer time. The Tesla effect has excited both sellers and agents, forcing prices up into numbers buyers are not accepting.
How to price a typical small apartment: Okay, there are no typical properties. Location, construction, ownership and tenants make every property unique, but let me just generalize here. As with larger apartments the price should be based on the income the buyer will receive from the operations of the property. Something that may come as a shock to some is the income should also be paying for the owner’s time for maintenance and management. Typically, in evaluating a property we take the potential gross income, subtract a 5% vacancy rate and a 40% expense ratio, and come up with the net operating income (NOI). Taking the Net Operating Income and dividing it by a capitalization rate (CAP RATE, or the rate of return we would like to see from the investment) we come up with the purchase price. Pretty simple actually, but here the arguments begin, because when talking to the seller or the seller’s agent we often hear that their expense ratio is only 20% because the owner does all the management and maintenance themselves. Well, unless the seller wants to come along for the next 25 years and pull the teddy bear from the toilet at midnight on Christmas, climb up on the roof in a rainstorm to replace shingles or to evict the not so friendly tenant, I am sorry… we are going to apply the 40% expense ratio!
Right now in the short run, sellers are pricing properties higher than buyers are willing to pay. The reality of the Tesla effect on employment has not taken affect yet, so rents have not seen a dramatic rise. The emotion surrounding the Tesla effect is in full swing, driving seller’s asking prices up. Inventories of multifamily properties for sale are rising partially from seasonal adjustments and partially from overpricing.
In the long term, things look rosy. About 1,000 new units are being constructed right now, so we should still remain well behind the curve of demand and continue to have rents driving upwards.
Johnson Perkins Griffin New Website
For those of you familiar with the real estate appraisers & consultants that provide excellent statistics on the Reno-Sparks apartment market you may notice a change in the name from Johnson-Perkins & Associates to Johnson Perkins Griffin, LLC. Along with the name change came a new website and website address which is now http://jpgnv.com/
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