After Nearly a Decade, Apartment Rents Fall

Average occupancy fell 120 basis points from the third quarter to 92%--well below the 5- and 10-year historical averages, which are both in the 94% range, according to the report. Average asking rents fell 1% for the quarter and the year to $881 per unit per month. The North, West, Southwest and Southeast are reporting higher than average asking rents while the Northwest, Northeast, Central/East and South reported lower than average rents, according to the report.

"Within the for-sale residential market, bank-owned properties represented the lion's share of sales activity and prices have plummeted to below replacement cost," says Applied Analysis principal Brian Gordon. "Competitive pricing within the for-sale market and a deteriorating employment picture have apartment landlords struggling to maintain occupancies and price points. This trend is likely to continue in the near term."

Marcus & Millichap, which pegs current apartment vacancy at 8.3%, is forecasting that vacancy will rise by an additional 60 basis points to 9% in 2009. It predicts that average asking rents will fall slightly to $873 per month and that effective rents will come down 3.2% to $804 per month.

"The outlying areas of Henderson and North Las Vegas, where homebuilding efforts were robust during the boom years, will record some of the market's highest apartment vacancy rates as a result of single-family homes competing as rentals," M&M predicts. "Shadow stock may affect class B/C operations in these areas as more lower-income residents double up. Class A units also will be impacts by shadow stock, but tenants are becoming wary of renting a home that could be foreclosed upon before lease term expires."

On the investment front, Real Capital Analytics' transactions database shows only two apartment property changing since Oct. 1, 2008. "Tight capital markets, softening effective rents and a handful of projects that remain under water all have the potential to place downward pressure on pricing for investors," Gordon says. "While it is difficult to quantify current values as little to no sales transactions have taken place in the past several months, market average prices have likely peaked out and a return to values that align with net operating incomes will prevail."

Last month, a 75-unit, circa 1988 property in Henderson called Woodceek Village changed hands for $7.5 million, or approximately $750,000 more than it traded for in 2005. In December, Arabella, a circa 1989 garden-style complex also in Henderson, NV, with 120 units sold for $10.4 million, or approximately $100,000 less than it sold for in 2005, in a deal that included seller financing. The $86,667 per-unit acquisition price represented a 6.2% cap rate on then pro forma 2009 returns, according to RCA. CB Richard Ellis brokers Jeff Swinger and Spence Ballif brokered the deal.