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September 24, 2017

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Reno rent market at record-high prices, near-zero vacancy

RENO — It's a journey that most people eventually take.

Fifteen years ago, Anne Carte decided to leave the familiar comforts of home and family to move out on her own.

For Carte, who was 20 years old at the time, moving to the Biggest Little City from San Jose, California, represented an exciting and crucial juncture in her life.

"I moved to Reno to grow up and be an adult," Carte said.

The year 2002 had its fair share of memorable moments. That same year, "Star Wars: Episode II" debuted in theaters, Tiger Woods won the 66th Masters Tournament and "American Idol" premiered on television.

One thing Carte specifically remembers was the cost of rent. Back then, the monthly rate for Carte's first studio in Sparks was only $495. For a young person who just moved out of home and landed an entry-level job at Target, an affordable place to stay was not a luxury. It was a basic necessity.

These days, Carte lives in a two-bedroom, two-bath apartment in Reno with her son. Unlike her initial foray into independence, the excitement of moving out has since faded for the 35-year-old. Instead, Carte says she's just trying to survive and provide for her child.

When Carte first moved into her Reno apartment six years ago, her rent was $750. As Northern Nevada started to enjoy an economic development renaissance in the last few years, however, residents like Carte found themselves caught in the costly wake of Reno's housing crunch.

The recent influx of new workers combined with near-zero residential development during the recession gave birth to a classic supply-and-demand scenario that saw the cost of housing skyrocket in the Biggest Little City. Just this July, the median price for an existing single-family home in Reno hit an all-time high of $387,250, eclipsing the previous record of $380,000 set in January 2006.

Apartments are no exception.

In the second quarter of 2017, the average rent in the greater Reno-Sparks metro area hit $1,194, according to the latest multifamily report from Johnson Perkins Griffin. Vacancies, meanwhile, fell all the way down to 1.17 percent. Both are all-time records for an area that has hovered among the top metros in the country for increasing rents in several national lists.

"The average rent and current vacancy rates we're seeing are historical," said Scott Griffin, a principal and co-founder of real estate appraisal and consulting firm Johnson Perkins Griffin.

It's a trend that spells bad news for many residents. Not only are many tenants being squeezed by rising rents, some are also finding themselves becoming potential targets of no-cause evictions as property owners capitalize on strong demand by remodeling apartments and charging higher rent.

Carte is no exception. Last April, her rent rose once again, reflecting the realities of a multifamily market that continues to surge. Today, the same apartment that cost her $750 per month six years ago is up to $1,140 per month. Carte does not even want to think about what might happen next year if rising rents from the last few years continue to be a trend.

"My rent has been going up every year by $100 and it now takes over pretty much half of my paycheck," the 35-year-old Carte said. "I'm getting really scared with what's going on."

SEEDS OF AN APARTMENT CRUNCH

Reno's rental market is a far cry from where it was just a few years ago.

After peaking in early 2006, the area's hot residential real estate bubble popped, sparking a downward spiral that sent Nevada tumbling into the worst recession in its history.

As the overheated housing market crumbled under its own weight and many homeowners started defaulting on their mortgages, the resulting economic malaise and high unemployment caused Reno's multifamily sector to experience its own slump as well.

Rents would ultimately bottom out at $822 during the fourth quarter of 2011 and first quarter of 2012, said Aiman Noursoultanova, senior vice president of investment properties for commercial real estate firm CBRE. Apartment vacancies, meanwhile, peaked at 9.63 percent. Typically, a balanced market should have a vacancy rate of about 5 percent or so, according to several industry analysts interviewed for this story.

Then the Gigafactory happened.

"We came off five to seven years of zero construction," said Ted Stoever, senior vice president of land and investment properties for Colliers International in Reno. "Then came the Tesla announcement and everybody knows the story of the Tesla effect.

"We created immediate huge demand and supply just can't catch up fast enough."

The Gigafactory announcement was just one of several deals both big and small that would put northern Nevada on the map not just nationally but globally. Almost overnight, the greater Reno-Sparks area became a data center player, boasting facilities not just by Apple and Google but also the biggest data center project in the world in the Switch Citadel.

Advanced manufacturing, logistics and healthcare growth also allowed the area to further diversify away from gaming and tourism, a development that should help soften the impact of future recessions, according to economic development advocates.

The influx of new jobs reversed the region's ailing jobless rate from the recession. Nevada unemployment reached a historical high of 13.7 percent unemployment in November 2010, according to the Bureau of Labor and Statistics. By June this year, the jobless rate was down to 4.7 percent, with employment reaching a little over 1.34 million jobs — a record for the state. Nevada also posted the strongest year-to-date decline in unemployment nationwide as well as 78 straight months of year-over-year job growth, according to the state's Department of Employment, Training and Rehabilitation.

The result is robust growth that sports a different profile from the boom years that led to the recession, especially in Northern Nevada, CBRE's Noursoultanova said. Reno's last growth cycle was fueled by an unhealthy residential and construction bubble backed by shaky loans.

"This time shows a market demographic shift spurred not just by job growth but quality job growth," Noursoultanova said. "The primary top two growth industries are advanced manufacturing and health care, which are higher-paying industries that attract employees looking for attractive places to live with amenities."

With many developers and builders still shell-shocked from the recession, however, it did not take long for the increased demand to gobble up what was left of market inventory. Add a construction labor shortage, rising labor costs and the vagaries of the permitting process and the result is a perfect storm for Reno housing.

Prior to the Tesla and Panasonic Gigafactory announcement, the best locations for the most attractive multifamily or apartment projects — designated as "Class A" — cost $4 a foot, Stoever said. After the Tesla announcement, the same land jumped between $7 to $12 a foot, sometimes even $15. Meanwhile, the "easy" land, which includes parcels that were already graded and prepped prior to being thrown in limbo by the recession, have all been accounted for since then. Finding new locations to develop from scratch within Reno's limited "bowl" is more of a challenge from a cost and logistics perspective, even as billions of private investment dollars enter the region, according to Stoever.

"A lot of people are kicking tires and projects are going where they can," Stoever said. "There's no shortage of demand, there's no shortage of capital and there's no shortage of developers who are willing to put projects out so it's just a matter of being able to deliver products as quickly as they can."

RENT CONTROL CONUNDRUM

For regular listeners of "Reno's Rock Station 104.5," on-air personality Shane Whitecloud's radio voice is a familiar comfort.

As Whitecloud talked over the phone during a recent Tuesday afternoon, however, his trademark silky voice shook with palpable frustration.

In addition to his radio gig, Whitecloud wears another hat as a corporate outreach specialist for the Veterans Resource Centers of America. Part of that job involves helping veterans — including those with disabilities — find housing in Reno-Sparks.

In the last few months, Whitecloud says he noticed a disturbing pattern emerge in the apartment market.

"They're basically putting no-cause evictions on people's doors so they can get them out to refurbish the apartments and charge higher rent," Whitecloud said. "I've seen four veterans get kicked out in the past three months and I'm like, 'man I can't believe they're doing this.'

"It's something I've never seen before and I don't understand how it's even legal."

In each case, the veterans and families kicked out were never late with their rent and never caused trouble. One of those evictions involved a disabled veteran who had a wife and three kids and had been living in the same apartment for three years.

There is no doubt that the multifamily market is seeing a lot of remodeling activity, said Griffin of Johnson Perkins Griffin. When you have a market that is this hot, activity typically trickles down from the Class A properties to some of the older apartments as well. This is especially true with projects being purchased by investors, said Griffin, whose company tracks larger projects with 80 units or more.

"A lot of new owners and potential purchasers of apartments are looking for a value-added component . and will complete renovations if it generates higher rent," Griffin said. "We are aware of several projects that have already undergone renovations and more are also planning on doing it."

Landlords say the renovations are a byproduct of the lack of activity during the recession, which hit the multifamily industry hard. The impact included double-digit drops in rents and skyrocketing vacancies.

Gregory Peek, vice president of property management firm ERGS Properties in Reno, said his company reduced its rents by 20 percent across the board as it saw its vacancies shoot past the 20 percent mark.

"During the downturn, many apartment complexes went into bankruptcy (and) projects were lost to banks," Peek said. "It took the apartment industry nearly a decade to get back to the same rental rates we were before the bubble burst."

With rents returning to healthy levels, many apartment owners are taking the opportunity to work on maintenance and improvements that were deferred during the recession, Peek said.

The impact of rising rents on lower and middle-income residents and families is also causing people such as Whitecloud to bring up the need for controlling rents. Rent control was a hot topic at a Reno city council meeting in July, where Councilman Paul McKenzie demanded a legal opinion on whether the city could implement them. The city of Reno confirmed recently that it is looking into the matter but has yet to provide an opinion.

Although McKenzie remains interested in finding out what the city's legal options are for rent control, the council member softened his tone when reached by phone on August 11. Simply broaching the subject at a city council meeting has already resulted in a couple of "unintended consequences," according to McKenzie.

"I know that our decision just to look into rent control has caused a jump in rents from people saying, 'OK, if they're going to do it, then we want to get ahead of it and raise rents up now,'" McKenzie said.

The rent control discussion has also placed a chilling effect on developers looking to invest in multifamily projects. McKenzie says this includes workforce or affordable housing projects aimed at assisting tenants who need the most help in finding a place that they can actually afford.

"That's exactly what we're trying to prevent," McKenzie said. "(Access to housing) is one of the No. 1 issues that we have to address right now."

Peek pushed back against the idea of rent control, which he says goes against the free-market system and could make the problem worse if it discourages development.

If politicians just let market forces work as intended, the supply and demand issue will rectify itself the same way it always has in the past, according to Peek. One only needs to look at the increase in development being seen in the area, which shows that the return on investment for multifamily properties has finally overcome risk, Peek said.

Peek also questioned the fairness of targeting landlords now when the industry did not get any assistance when it struggled while the market favored renters during the recession.

"Why only rent control?" Peek said. "If you're suggesting rent control, why not apply price controls to home sales too?"

HOT MARKETS

Just how tight is Reno's apartment market?

Supply is so constrained that several Gigafactory employees are staying at campus dorms of the University of Nevada, Reno for the summer. Although the university is no stranger to renting out its space to youth groups, renting to businesses could be a more common occurrence in the future, it said.

Reno's rising rents have yet to show signs of calming down this year.

The average rent in the area rose by $83 or nearly 7.5 percent in the second quarter of 2017, according to Johnson Perkins Griffin — one of the largest jumps that firm has ever seen. RentCafe, meanwhile, ranked Reno fourth in the nation for its 12.4 percent jump in rents year-over-year in July. Another apartment tracker, Abodo, placed Reno sixth in the nation during August, citing a 5.2 increase in rent from the previous month. The same ranking had Reno in second place for the largest swing in apartment rates nationwide in June.

Part of the issue involves a tight residential market and challenges with homeownership, a trend that is also being observed in other markets in the United States.

"Some industry experts have suggested that landlords are feeling pressured because of increased demand for units while inventory is low," said Abodo spokesman Sam Rabdil. "With homeownership rates falling, it makes sense for landlords to continue to raise pricing on their rental units, especially in markets with tighter inventory."

The problem is especially exacerbated in Reno. Housing supply in the greater Reno-Sparks metro area was at 1.6 months in July. The number represents an improvement over June's record low of 1.4 months but is still far under the typical six-month benchmark for a balanced market.

Approximately 75 percent of the Reno-Sparks' market's inventory is also under contract while listings are down by 15 percent year-over-year, said John Graham, president of the Reno/Sparks Association of Realtors.

"Things have fallen off a cliff," Graham said. "We're selling more homes than we have inventory (entering) the market."

The tight residential housing market is translating into the record-low 1.17 percent vacancy for apartments in the area. Of the 11 apartment submarkets in Reno-Sparks, four — Northeast Reno, Southeast Reno, Brinkby/Grove and the Airport area — have vacancies below 1 percent, according to the quarterly Johnson Perkins Griffin report.

Southeast Reno has the lowest vacancy at 0.49 percent. Apartments with two bedrooms and one bathroom posted the lowest vacancy rate in the first six months of the year. The last time Reno-Sparks vacancy rates were above 3 percent was during the end of 2014.

"Anytime you're below 3 percent, that's almost no vacancy because you're only dealing with turnover at that point," Griffin said. "Rents just keep going up and up and up . and that just tells me that (apartments) are able to ask whatever they want."

Affordability is a big concern in Reno, particularly for tenants such as Carte who already spend half of their income on rent. Typically, 30 percent is seen as the threshold that a household can comfortably spend on housing out of its total income while still having enough money left over for incidentals and other expenditures. This threshold was established over the years as an evolution of the National Housing Act of 1937, according to the U.S. Census Bureau.

In Nevada, a household earner must earn $18.01 per hour in order to afford the 2017 fair market rent for a two-bedroom apartment in the state without paying more than 30 percent of income, according to the National Low Income Housing Coalition. This places the threshold out of reach of households with two minimum wage earners. The minimum wage in Nevada is $8.25 — or $7.25 for jobs that offer health benefits.

The problem is worse for Reno-Sparks, where the average rent is higher than it is in the Las Vegas area. The average rent in Las Vegas during the second quarter of this year was $937, according to the Lied Insititute of Real Estate Studies at the University of Nevada, Las Vegas.

Renters should not even think about depending on concessions.

"There aren't any," Stoever said.

In the first quarter of 2011, more than 82 percent of apartments offered concessions such as a free month's rent and discounted deposits. In the second quarter of this year, only 2.35 percent did so, according to Johnson Perkins Griffin.

Traditionally, northwest and southwest Reno have been the area leaders for rent growth, CBRE's Noursoultanova said. East Sparks, however, posted the highest average rent in the second quarter among all submarkets at $1,475. That represents a year-over-year jump of more than 25 percent compared to 16 percent for the overall Reno-Sparks market.

Noursoultanova cited proximity to Tesla's Gigafactory, which is about 20 miles away from Sparks, as a key reason for the growth.

"For the last few years, East Sparks has been the strongest submarket," Noursoultanova said. "You have newer properties with nice amenities but it's also closest to the Gigafactory (among Reno-Sparks apartment submarkets) so it's a bit of a no-brainer."

A NEW NORMAL

Carte casually brushes back the hair on the left side of her face before catching herself midway and pausing.

She smiles nervously and lets her hair fall forward again.

"I don't know if you were able to see it," Carte said.

A long scar runs along Carte's hairline from a previous brain surgery. Although the scar has started to fade, the $120,000 procedure continues to leave a financial mark on the Reno resident. Between her medical bills and rising rent, Carte has barely enough money left each month to make ends meet.

Fifteen years after moving away from home, Carte's journey toward independence has not quite unfolded the way she hoped it would. Right now, one of her top priorities is staying in the same neighborhood so her son could go to the same school as his friends.

"He's in special education and it's hard for him to make friends on an everyday basis who he can hang out with," Carte said. "I want him to be able to go to school with the friends that he's familiar with because I worry that he might get bullied."

If rents keep increasing, however, staying in her current neighborhood could be a problem for Carte. Given the current situation with supply and demand, rents will likely continue to go up, sources such as Griffin, Stoever and Noursoultanova agreed.

Currently, there are 12 large apartment projects totaling 3,361 units such as Sierra Vista and Summit Club that are under construction in Reno-Sparks. An additional 7,822 units are expected to be added from 19 other projects, but those are still in the planning stages and could take years to complete.

"Frankly, I'm not quite convinced that the supply in the pipeline right now will result in higher vacancies," Griffin said. "We're going to need more than 3,300 units at this point just based on what (the Economic Development Authority of Western Nevada) is predicting for job growth."

EDAWN has been forecasting growth of 55,000 jobs from 2013 to 2019 for the region.

From restaurants and construction workers to mom-and-pop operations and big companies, economic growth is something that Reno-Sparks thrives on, Stoever said. At the same time, it puts pressure on infrastructure, especially after a recession that saw little to no investment on things like housing.

With most units full and demand continuing to increase, apartment owners hold all the cards. It's obvious that some are taking advantage of the situation, Reno City Council Member McKenzie said.

"It would be nice if landlords would think about renters before things like profit margin but that's never going to happen as long as people are in business," McKenzie said. "People don't get in business to not make money."

Critics such as Whitecloud, meanwhile, say there should be a limit to how far rent increases can go. While Whitecloud understands that apartments are a business, there's a difference between making a healthy profit and taking advantage of a tight rental market.

Finding an apartment these days for struggling veterans on disability is already "extremely difficult" and seeing some veterans get served no-cause evictions only adds insult to injury, Whitecloud said.

"It's horrible and I can't stand it," Whitecloud said. "It makes me sick to my stomach."

Some developers, meanwhile, are also facing difficulties in introducing workforce or affordable housing as projects get pushback from residents who don't want such facilities near their neighborhoods due to the stigma associated with them.

One such project is the Summit Club, which will be comprised of 80 percent market rate housing and 20 percent workforce housing.

Chip Bowlby, a managing partner with Summit Club apartment developer Reno Land Inc., says housing for workers is one of the top concerns he hears about when talking to representatives of companies such as Tesla and Switch. Workforce housing is one way developers such as himself are finding ways to help address the housing affordability issue, Bowlby said. In addition to its lower rents, Bowlby pointed out that workforce housing is not susceptible to the high rent increases seen in some traditional apartments because its rates need to conform to the affordable guidelines set by U.S. Housing and Urban Development or HUD.

Despite its benefits, however, workforce housing comes with challenges, too.

"Affordable housing is a word that has a negative connotation and it really shouldn't," Bowlby said.

In places where rents are skyrocketing, the people who need workforce or affordable housing are the same people in your neighborhood — teachers, clerks, restaurant workers, service workers, according to Bowlby.

Meanwhile, issues surrounding construction costs, access to labor and permitting hurdles continue to serve as bottlenecks for new development in the area. These can put a stop to developments, especially those aimed at providing more affordable options, because the projects no longer pencil out financially, Bowlby said.

In some cases, something as seemingly simple as fire hydrants can put a snag on new housing developments. During the recession, investment in public infrastructure took a hit as city and state coffers came under financial pressure.

Many existing water lines, for example, do not have the capacity to support additional fire hydrants, said Mike McGonagle, a principal with MAC Associates, Inc. New transformers and their required clearances also occupy valuable ground space, he added.

"Our public infrastructure has not been maintained with the capacity that would allow cost effective dense infill housing projects," McGonagle said.

Even if a project moves forward, timing could still be an issue. Depending on size and complexity, new projects can take anywhere from 18 months to 20 months to make it from contract to completion in Reno, Stoever said. That is "lightning fast" compared to bigger cities but still is not fast enough to quickly make a dent in Reno's apartment shortage, Stoever added.

Others noted that the whole equation could change depending on where Reno's growth goes from here.

"If this growth is sustained and becomes prolonged, then this type of demand might become the new norm," Noursoultanova said. "It's hard to say but whether this becomes the new normal or not remains to be seen."

For people like Carte, that's bad news. Carte would prefer to stay in Reno but is looking at all her options. One option is to go full circle on the journey she started 15 years ago.

"If my rent starts taking three-quarters of my paycheck, then I'm screwed," Carte said.

"I'm almost 40 and I can't afford to live on my own. I might just go back home."

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