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Reinventing Reno: Apartment Development Lags Economic Growth

Reinventing Reno: Apartment Development Lags Economic Growth

Reno has transformed into an intriguing, under the radar market. The local economy, traditionally reliant on casino tourism, is positioned for significant diversification, growing with the additions of several big name employers and a burgeoning startup community. This has created strong demand for housing. Single-family home developers have responded, but recent multifamily permit and construction figures do not align with the story of the metro’s economy. That’s somewhat surprising, given the apartment market’s strong performance of late.

Reno has maintained occupancy of 97% or higher since mid-2015. Meanwhile, rents have surged, increasing around 6% to 9% annually in each quarter since 2nd quarter 2015. Rent growth has been particularly strong in Class A product, with quick lease-up of new, high-end product. Despite explosive revenue growth, both for the overall market and for high-end product, apartment development appears to have topped out at modest levels and has even showed signs of easing.

The single-family housing market has seen similar progress, with sales and pricing both surging. However, the difference between the for-sale and rental markets: Significant numbers of new homes are coming to the single-family market. Single-family developers are obtaining permits at levels not seen since 2007 to address the recent shortage of new single-family homes. Available inventory is below one month supply, according to Metrostudy. Meanwhile, the number of homes under construction increased nearly 40% year-over-year in 1st quarter 2015 with more of those homes priced under the $300,000 median in Reno.

By contrast, multifamily permits peaked at just over 1,000 units in the year-ending 2nd quarter 2015, and have steadily decline in each of the following three quarters. In the year-ending 1st quarter 2016, permits were down about 33% from the 2015 peak.

Reno Apartment Market

Significant Economic Momentum

Traditionally, multifamily developers and their financial backers have been cautious around smaller markets, which are more volatile than larger metros with larger, more diverse economies. However, the recent progress in Reno could ease some concerns.

The city of Reno has cashed in on their recent campaign promoting a business-friendly environment aimed at stimulating economic development after the recession. Reno’s substantial tax incentives attracted Apple to the area in 2012, and the company recently announced plans to build another data center there. Other big name companies like Tesla, Switch, Zulilly, Petco, and Rackspace followed Apple’s arrival. The abundance of land and the massive Tahoe-Reno Industrial Center makes Reno a destination for large factory, warehouse and distribution centers, as well as data centers. As the industrial market expands with well-known companies, Reno is coming into the spotlight as a go-to business destination for companies with large space requirements and infrastructure needs.

Perhaps the biggest move, both in size and publicity, involves Tesla, which received a tax incentive package of $1.3 billion over the next 20 years. The company is constructing a 5.6 million-square-foot Gigafactory in the Tahoe-Reno Industrial Center. Tesla plans to hire 6,500 employees by 2020 when the factory is anticipated to be fully operational. Currently, the company employs around 300 to 400 employees at the Gigafactory, not including construction workers. To put the sheer impact of Tesla’s job creation into perspective, if no other jobs were to be created, the addition of Tesla’s 6,500 jobs would expand the metro’s employment base by 2.9%. Those employees’ average incomes are also expected to be around 3.3% greater than the metro’s median income. Tesla’s name recognition will also provide a boost to the economy as other companies look for possible expansions or relocations.

Another emerging business trend in Reno is the large startup community. The so-called Startup Row is a strip of startup companies that have set up shop along First Street in downtown Reno. Dozens of entrepreneurs in a variety of industries have opened locations in the area. The appeal of Startup Row is that the companies are not limited to any one sector, and close proximity allows for easy networking among the companies. The growing prominence of Startup Row attracts investment activity and accelerator funds. Additionally, the variety in companies provides more diversity in the employment sector, in contrast to Reno’s traditional economy that was built upon casinos and the hospitality industry. The startups also provide exciting opportunities for local college students.

Such additions in recent years jump-started Reno’s economy. While Reno struggled with staggering unemployment rates earlier in the recovery that peaked at 13.9% in 2011, strong employment growth – which averaged 3.5% annually over the past two years – brought unemployment down to 5.4% in February 2016. As the employment base expands at a solid rate, Reno’s economy grew 7.4% annually in 1st quarter 2016, adjusted for inflation.

Will Apartment Development Follow?

So why hasn’t apartment development followed the same trajectory? While there are some efforts to bring multifamily units to the area, including a $1.2 billion urban redevelopment project dubbed West 2nd District, they seem to be in the distant future. Furthermore, there has been talk of the Reno area seeing an uptick in the architectural services, but this has not translated to increased permit volumes.

The lack of multifamily construction is likely due to many factors. First, developers may have limited access to financing. Reno is a secondary market and smaller markets have a more difficult time accessing funding because of market volatility. In addition to its size, Reno was also hit hard by the recession, escalating the amount of caution that developers and financiers have when considering building in the metro.

That being said, strong apartment fundamentals do not show signs of fading in the near term, and the area continues to evolve and diversify. Reno is definitely a metro to watch over the next year or two. Time will tell if developers are willing to take a chance on the metro or if the gamble is too great for investors to back.

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