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LAS VEGAS-Could the apartment market in Sin City, one of the biggest epicenters of the housing boom and subsequent decline, be on its way to recovery? According to a report being unveiled this week by the Bentley Group, data for the third quarter 2008 shows an improvement over the performance of prior quarters.

For one, the performance index–which analyzes rents in relation to occupancy–for apartment properties in the market has risen from $826 in Q2 to $834, which is the greatest improvement it’s seen since mid-2006, when the shadow market started to make its presence felt. Meanwhile, average rents alone–which has been hovering in the $888 to the $889 range in the past year–bumped up to $890. Although that uptick is slight, it’s a telling sign that the market is on its way to recovery at a time when most others are seeing their rents decline, according to Christopher D. Bentley, president and broker of record for the firm’s multifamily and hospitality division.

Concurrently, occupancy across the Valley for the three-month period between July and September rose for the third consecutive quarter to 93.7%, up 80 basis points from June and 20 from the same period last year. The multifamily sector is beginning to pull tenants away from the shadow market, where rents are averaging about $200 more per month than traditional apartments. There’s also the risk of having to move out of shadow residences in the event of a foreclosure.

“Over the last few years, our biggest competition was the shadow market,” says Bentley. “It was putting quite a bit of pressure on the apartment market, which should have improved during the bubble much more than it did. Now, the investors are giving the shadow inventory back through foreclosures and sales. Though that’s a negative for single-family housing, it’s a positive for the multifamily market because we’re gaining back that renter inventory. So what was a negative a few years ago for us is now a positive.”

Also of note is the fact that this improvement is occurring in the face of significant job losses. Bentley points out that the market has lost about 12,000 jobs to date, and so far, occupancy has followed suit. This is the first time occupancy has risen despite the decline in employment.

The market isn’t completely rosy, though; Bentley concedes that landlords are offering concessions. The good news is that those incentives are more commonplace in the class C product, rather than class A or B. “New lease-ups are fantastic in the A market,” he says. “For both traditional renters and those who sold their homes at the right time, going down to a C-type product is too much of a jump. We’re seeing more demand for the A product.”

For investors looking for deals in the market today, they are few and far between. According to Bentley, “there are a lot of distressed property funds that are not getting the rewards they’re looking for because apartments are simply not in distress.”

Over the long term, however, the environment for multifamily properties will be increasingly positive, he says, due to an expected housing shortage and corresponding surge in demand. The executive maintains that the supply of residential units in the next several years will ultimately not be able to keep up with the demand for them.

“We are convinced there’s a housing shortage coming,” he explains. Construction funds for apartment buildings, along with single-family homes, are not available. Projects in the pipeline that were commenced before the downturn hit will be completed, but very few planned projects that haven’t yet broken ground will do so.

Once the demand rises, Bentley adds, the climate will ease a bit and developers will begin construction once again. “It’s the period between the stagnancy and the return on new development that is going to create the shortage of space,” he says. “We still have jobs coming in, we still have occupancy growth and hotels are opening up. There is a fear factor that the recession will carry on a little longer than anticipated and have an impact on Vegas tourism. But it’s important to remember that the casino market here is dependent on occupancy, not rates. Hotel and casino operators will lower rates to get people in the door. For our purposes, it’s absolutely irrelevant how much the room goes for–if it’s $200 or $500 a night, it still takes two people to make the beds. While we wish the forecast were different, at the end of the day, the jobs are still going to be there.”

It’s anticipated that the market will gain about 3,500 residential units by 2010, which at this pace is a shortage of about 13,000 units compared to demand. These conditions are creating a climate that is very friendly to investors. The average price per unit in the Valley hit $120,000 per door in 2007, with a peak of $164,773. Current prices are significantly less, so the sector is more affordable. Add to that the fact that rents remain significantly lower than most of markets across the country. The upside opportunity is enticing, says Bentley.

As investors look to reap the cash from their holdings, sales velocity should pick up next year, he states. “That’s something that we saw in 2002,” he points out. “Velocity was down considerably after 9/11, and our short recession here, and it jumped back up significantly in 2003.”

Anyone who comes into the market, however, should be ready to exhibit some patience. Next year will not be a great year, says Bentley, since most of job growth that is expected will occur at the end of 2009. “We forecast 2010 to see a significant performance increase, and that will last for a good three years,” he predicts. Rent growth during that is expected at around 6%, a rate seen only in 2006 year, and occupancy is anticipated to rise to the 95% to 96% range. “It will be another two to three years before the single-family market picks up again, and the apartment sector will flourish until that time.”

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