Corona Virus Impact to Las Vegas Market

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Today we sent our investors a special update on the impact of Coronavirus to the Las Vegas market. I thought it would be helpful to share it here.

There are multiple canceled events and conferences. Hotel occupancy is defiantly down. When I drive by the casinos on my way to places, the parking lots are not as full as I would expect. Also, for some strange reason, toilet paper is in short supply in the stores, but Kleenex is readily available. So, we are seeing the same panic we read about in other cities.

As to the impact to our segment of the Las Vegas real estate market, we have seen NO (zero) changes. If anything at all, we are seeing an increase in activity. More about this later.

Good properties are still going under contract in 1 to 5 days. Inventory levels continue to fall. Below are some charts for single-family homes from the MLS as of yesterday.

As you can see, demand has not decreased, prices are increasing and inventory continues to decline. However, if the panic caused by the Corona Virus continues for an extended period, I believe it will impact every real estate market. But we are not seeing any impact at this time.

For example, we listed a property for sale yesterday (2020-03-12) morning and had six showings for the day, including three in the first 4 hours after it hit the market. We received a full price cash offer in the evening. We made offers on two properties in the last two days and both are competing with multiple offers (one property had 9 offers and the other an unknown number of offers.) The Las Vegas real estate market today seems to be unaffected by the general panic over the Coronavirus.

On rents and such, we are seeing increases, not decreases. We had a single family home listed 4 days ago and received two rental applications yesterday. And, while the stock market is going crazy, we are not seeing any rent turbulence. Tenants sign one year leases, and they have to have a place to live. Even during the 2008 crash, our clients saw no decrease in rent or vacancies. We target a tenant pool that remains employed in good times and bad.

I think the fear is summarized on the chart below.

As always, the disadvantage of real estate is the lack of liquidity. The advantage is a very stable and reliable income stream with tax advantages and inflation protection combined with appreciation (assuming you buy in a good location). What we are seeing is more interest in a stable and reliable income stream by potential clients. So, if anything, the stock market turmoil is increasing the sales of investment real estate. We think that now is actually a great time to buy investment real estate in a growing market to add stability to your investment portfolio.

Agents, please share what you have been seeing.

I agree with you Eric. While I did have one deal fall apart over stock market concerns, it was put back together quickly. We’ve had an increase in renter traffic on our listings this week. One for sale listing had multiple offers and showings during the rainy days this week. So far, I’m not feeling a slow down. 

Thanks for the update. With all the recently announced cancellations and layoffs, I'd be interested in seeing what happens in the next few weeks and months. We just moved here and I'm betting that the market will see a slow down from this.

Buyers and renters today probably decided to buy or rent months ago. I would think if inventory remains low that helps a lot. The real effects if any would take many months to play out. We are only couple weeks in. If the jobs dry up the ripple effect could be felt and vegas has a decent share of exposure possible like almost every international destination. Either way cycles are a natural part of free markets and we might be entering a very different one soon. Good luck! 

Agreed with both @Phillip Dwyer and @Eric Fernwood , I actually had multiple deals fall apart at the end of last week due to stock market concerns and the economy in general, but they were/will be put back together quickly and I still have tons of activity on listings, receiving multiple offers on most within days. Entry level buyers see completely unfazed. The real test, as others have mentioned, will be to see what happens in 1-2 months and the effect of the layoffs/cancellations.

how do you think it will effect the rental market? with the potential risk of people losing their jobs and not being able to pay rent? i have a unit right now i am in the process of getting ready to rent, but now im worried that this virus might make things more difficult 

Originally posted by @Maurice Smith :

how do you think it will effect the rental market? with the potential risk of people losing their jobs and not being able to pay rent? i have a unit right now i am in the process of getting ready to rent, but now im worried that this virus might make things more difficult 

Since the casinos and such are closed for 30 days? There might be a need for some assistance before this implodes on some landlords who rent to the service types. If it goes longer, I imagine some rents could be adjusted for a bit or until this comes back to business as usual. Vegas might have been the most exposed city outside of some Disney stuff in Orlando area. Idk perhaps unemployment and Trump checks will allow this to maintain instead. That would be best case I think. Good luck!  

I think the Vegas economy has changed considerably in the past 72-96 hours. 

Now all non-essential businesses are shut down and the whole strip is shut down. There are about a million people who directly work on the strip. I think this city might have a 50% unemployment rate by this Friday. Vegas has a higher percentage of renters compared to other states and a  lot of them are close to minimum wage. With a definite shutdown till the end of this month, I think a lot of landlords are going to see delayed rents next month.

Julia. Until you stop using this brand new account and go back to your real account, what you want doesn’t really mean much does it?

But I do love how you call a guy who owns 1 fourplex mr vegas.

I own rental properties in Henderson and Boulder City, all very nicely renovated. The past 2 weeks I've signed 7 or 8 leases to qualified tenants at full market rents, including one that paid a year up front. I am not certain what is going on or if I am a lucky anomaly, but am guessing that if sales die down, rents will be stable on the B/C class properties. I have seen very little online that forecasts a drop in rents and am looking for indications. I have also fielded a few messages from tenants, though a very small amount so far, regarding jobs being suspended.

Cause and effect. The cause is Coronavirus. The effect fear and panic. The results stock market goes down, jobs lost, economy goes down. The virus will run its course, similar to a bell curve on a graph. Those who currently own real estate in Las Vegas will be affected in the short term. The reason the stock market went down so fast is because stock buy and sell are done in a matter of seconds. Real estate takes 30-60 days. Also, other factors include, jobs, local economy, interest rates, inventory, housing shortage, etc.

Now, like stocks and real estate, there is no loss unless you sell. You panic and sell, then you have a realized gain or loss. You hold, then ride out this turbulence, then you should be okay. 

Warren Buffet said it best, be fearful when others are greedy, and greedy when others are fearful.

Terry

Hello,

Lots of good comments on this thread. I will respond to some of the threads and update with what we are seeing in the Las Vegas market this week. I will also comment about why you buy investment properties for the bad times.

Responses

@julia on "Vegas investments generating 0.00", the minimum rate of return for our properties is 3%, most are higher. This is all inclusive return (management, debt service, taxes, insurance, maintenance, etc.) If you can provide (DM) your property's address I will be able to comment on the property. It may be the property you purchased and nothing to do with Las Vegas in general.

@Paul Collingwood  - It depends on the tenant pool you target. If your property targets low wage workers, you are likely correct. Most of our target tenant pool is salaried so we do not expect delayed rent.

@Julia Jabronski - on "worse than Great Recession". I do not agree. This is not a financial crisis, it is a spending and confidence crisis. The US economy is currently the strongest economy in the world. The EU, with a -.5% interest rate, is driving investors to US markets. Business was booming here and likely to get even better. For example, Amazon just announced that they will hire an additional 100,000 workers. Last year $1T was repatriated back to the US from off shore. $1T in federal hands would most likely be wasted. $1T in private hands will be invested in expansion. So, I just do not see the reason for panic. We will have a bad 2 or 3 months but, assuming the corona virus is brought under control, things will sort themselves out fairly rapidly.

@Caleb Brown  - So far, we have seen NO (zero) changes for the property profile we target. If anything at all, we are seeing an increase in activity. @Nicholas B. stated his properties are renting well. Our own experience is also very positive. We listed two properties for rent this week and both had strong applications in 3 days. Note that both are A class properties.

Some observations:

  • This week we are starting to see some properties coming onto market at attractive prices thus yielding excellent returns. They are going under contract rapidly, usually in 1-5 days.
  • The property managers we work with have had calls from tenants in C Class properties and they are asking for reduced rent for April or getting out of the lease early with no penalty. So far, zero calls from tenants in our client's (A Class) properties.

Buy Investment Properties for the Bad Times

"Those who fail to learn from the past are doomed to repeat it." - based on a quote from George Santayana

There is a lot of anxiety expressed on this thread and other places about what the short and long term impact the corona virus will have on investment properties. In my opinion, the tenant pool the property targeted will have a major impact on what will happen. I will explain using the diagram below.

The total pool of renters can be grouped by their monthly income (and thus the rent they are willing and able to pay).

Transient Renters - This tenant pool segment is largely minimum wage, or near minimum wage, hourly workers. They tend to live cash based lives. Most do not have bank accounts, credit cards or unsecured loans. Since there is no dependency on credit, skips, evictions and even damage judgements have little or no present or future impact. They tend to move frequently. We have found that property damage is common and tends to be expensive. They are also the first to be laid off and the last to be rehired. In economic downturns, this is the least desirable tenant pool. Also, C Class properties tend to be older, need more maintenance and are typically located in high crime areas. If this tenant pool is unable to pay April's rent, they are unlikely to ever pay it. They do not earn enough to "catch up". If you own such properties, you could get hit very hard. As I mentioned earlier, the property managers we work with reported many of the C Class property tenants will have problems paying April's rent.

Permanent Renters - This tenant pool is credit based and typically are the mission critical workers. The only time companies let this segment go is when the company is permanently shutting down. Since they are credit based, they know that if they make a late payment, have a skip, eviction or a damage judgement, they will be hurt financially for years to come. They tend to abide by the lease, pay bills on time and take good care of the property (since they know they will have to pay for it if they do not). This is the tenant pool we've focused on since 2006 and, with a property population of over 200, have had 4 evictions in the last 10 years. Also, our clients had zero decrease in rent and no vacancies during the 2008 crash. This population also tends to be long term renters. This tenant pool is unlikely to pay the rent late in April. So far, the property managers we work with have reported zero calls out of occupants of Class A properties concerning issues paying April's rent.

Transitional Renters - These are people who are also credit based but make enough income that they are, in most cases, home buyers. Our experience is that they tend to stay only one or two years before they buy a home. They are also frequently laid off during difficult economic times since they are not in mission critical positions. Our clients have very few properties that target this tenant pool. This tenant pool is unlikely to pay the rent late in April.

The lesson is that while you have no control over the property's market value, if you buy properties that target the right tenant pool, you greatly reduce the odds of income reductions. The key is to only buy properties that target credit based tenants (segment 2 above). When you buy investment properties, buy for the bad times and you will likely do well during both good times and bad.

@Eric Fernwood I also think that if the government plan of providing full salary compensation up to $550/day based on 2018 tax returns does in fact happen, or anything remotely similar to this, a lot of the worry will go away, not just for property owners but for the economy at large. EU seems to be working on a similar plan. It is being treated like a war as it should be. 

https://www.reviewjournal.com/business/housing/las-vegas-housing-market-facing-risky-times-as-valley-shuts-down-1987736/

News about Las Vegas Market Trend from our Las Vegas Realtor Association (Tom Blanchard), Las Vegas housing tracker president of Home Builders (Andrew Smith), National Association of Realtors (Lawrance Yun), and senior economist at Zillow (Cheryl Young).

In the last 2 days, three of my tenants have told me that they just lost their job due to the shut down.  

Originally posted by @Bill Brandt :

Julia. Until you stop using this brand new account and go back to your real account, what you want doesn’t really mean much does it?

But I do love how you call a guy who owns 1 fourplex mr vegas.

Is that Julia Gore ? your talking about :)