PEER Perspective
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“Since the last recession, the emergence and penetration of institutional ownership has instilled an enhanced level of dependability on the market. Blackstone’s purchase of the Bellagio is an excellent example.”
Las Vegas is a much different market than it was in the last cycle, and it means longevity and better protection against a recession. There are handful of reasons the market is stronger today, including better workforce dynamics, new economic drivers and new capital players in the real estate market that have helped to catalyze more growth.
“Since the last recession, the emergence and penetration of institutional ownership has instilled an enhanced level of dependability on the market. Blackstone’s purchase of the Bellagio is an excellent example,” Eytan Peer, VP of acquisitions at Oak Residential Partners, and active buyer in Las Vegas, tells GlobeSt.com. “Fundamentals have changed significantly since the start of this most recent cycle. The culmination of several dynamics are the primary reasons Las Vegas is more protected this cycle, than previous.”
Las Vegas has a lot going for it, but at the heart of its growth is a pro-business and attractive tax environment, which has helped it capture companies and residents from neighboring California.
“A favorable and pro-business tax environment is another one of the major factors promoting Las Vegas’s fortified growth,” says Peer. California’s restrictive tax policies, reducing the amount of total deductions for local residents as well the generally high property tax rates have boded well for Vegas. This contrasted low-tax, pro-business label was forming during the last cycle, but was sidetracked as a result of the downturn. It’s finally picked up where it left off and is now fueling the diversified business climate, supporting a more stable long term outlook.”
This pro-business environment has helped fuel a new kind of job growth in the market. Much different from the market dynamics in 2008, Las Vegas now has a diversified labor force, which will help protect a major impact during the next recession.
“During the last cycle a large component of the labor force was comprised of short-term, construction jobs, which were highly sensitive to the health of the national economy,” says Peer. “At present, the amount construction employment is half of what it was at its peak, while the employment base is significantly larger.”
As a result, investors are finding opportunities across asset classes. “While the economy is still heavily dependent on tourism and hospitality, we’ve seen tremendous growth in healthcare, as an aging population has migrated away from California into more cost-effective and affordable destinations such as Las Vegas; industrial, which, especially when considering trade and logistics, is nearly demanded as much as multifamily; and technology, which has had a 35% in its labor force over the last five years,” says Peer.
The biggest change in Las Vegas, however, isn’t exclusive to the market, but to the real estate industry as a whole. “The excessive subprime lending, which led to oversupply during the last cycle, doesn’t exist in today,” says Peer. “The single-family housing market is currently being driven on market fundamentals. Tempered single-family home construction, as well as increased labor and input costs, will act as governance for overall levels of housing supply and prevent market saturation.”
“This market presents its own unique and specific challenges, often making it more important to know where to buy rather than what to buy. We’ve successfully accumulated several assets in and around Henderson with the intent of achieving a critical mass, and greater economies of scale.”
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Chicago-based investment firm Oak Residential recently acquired its third property in the Las Vegas market in the last two years. While it identified the city as a target market, it is proceeding with caution. Because Las Vegas opportunities can vary block-by-block, making due diligence is crucial.
“Las Vegas is a highly segmented market and locations can vary block by block,” Eytan Peer, VP of acquisitions at Oak Residential, tells GlobeSt.com. “This market presents its own unique and specific challenges, often making it more important to know where to buy rather than what to buy. We’ve successfully accumulated several assets in and around Henderson with the intent of achieving a critical mass, and greater economies of scale.”
For this reason, the firm has remained active in the market, although not aggressive in terms of acquisition activity. It is currently actively perusing opportunities in the Northwest and Southwest submarkets, where Peer says there is localized growth. “Once we identify a location we’re intent to focus on, we target assets that are 150-500 units in size and generally built from 1980-2010,” he adds. “Assets that present themselves with physical value-add opportunities, lacking in interior finishes and exterior amenities relative to its competitive set, are ideal but rare at this point in the cycle. As a result, we take a forensic approach to identifying inefficiencies in operations, whether it be through the asset’s income or expenses, and seek to add value establishing an institutional business model. Conservative strategies can sometimes result in extended periods of time between acquisitions.”
While Oak is caution and conservative, the Las Vegas fundamentals present good investment opportunities. “Mitigated supply relative to demand, unprecedented employment growth, further diversification in the economy, and migratory patterns, which suggest a flight to affordability, are all essential components in our investment thesis,” he says. “Some of these factors have contributed to the recent year-over-year rent growth of 8.9%, which has caught the attention of many groups nationally and fueled a tremendous wave of new entrants and investment capital to flood the market.”
Oak has a proprietary predictive analytics model and has identified Las Vegas as a market with an extended rental runway. “As of Q2 2019 the median annual income in Las Vegas is $57,189 and median effective rents are $1,086, which contemplates an affordability ratio of 23%,” says Peer. “Conversely, residents living in coastal markets are spending more than 40% of their income on rent, generating a wide delta between the rental runway Las Vegas and its western alternatives. Employment growth patterns are highly correlated with population flows, and job growth remains to be an intrinsic catalyst for multifamily demand. Las Vegas ranked second nationally in job growth as of May 2019 with 2.9% overall increase in employment figures. The long-term outlook for population growth suggests that Las Vegas will add more than 60,000 residents annually through 2026.”
