Could Immigration Trends Hurt Las Vegas Apartments?

During a recent market study I noticed an alarming new trend. A trend that was confirmed by a recent phone conversation I had with a client, a substantial apartment owner here in Las Vegas and Phoenix. The trend of a slowing economy coupled by new immigration laws that are beginning spreading throughout the southwestern U.S., (i.e. Arizona & Texas) has suddenly caused properties with Hispanic demographics to increase in vacancies.This dilemma was brought further to light recently with the decision from Framers Branch, a suburb of Dallas Texas in their recent Ordinance 2952. Farmers Branch City Council unanimously approved the ordinance which would require all renters to pay $5 fee and claim US citizenship or legal immigration status to obtain an occupancy license from the city.

This new ordinance will bar illegal immigrants from renting homes and apartments in Farmer Branch. Key provisions:

*Prospective tenants would have to apply for an occupancy license.
*The application form will ask whether the person is in the U.S. legally.
*Anyone who completes the form and pays $5 will get a license and be allowed to move in.
*The city will verify noncitizens’ legal status through a federal database.
*Anyone identified as being in the U.S. illegally will get 60 days to prove otherwise.Violators – tenants or landlords – will face fines of $500 a day.

http://www.dallasnews.com/sharedcontent/dws/dn/latestnews/stories/012308dnmetfbrentals.2c1fcca.html

The State of Arizona as well, has a new law that went into effect January 1st, with strong penalties for employers hiring workers without legal status. Today, Arizona Employers hiring these workers could suffer a suspension of their business license for 10-days on the first offense plus fines; revocation of their business license on the second occurrence. Many hardworking Latino workers have begun leaving the Sun Devil State in the past few weeks, seeking employment elsewhere.

There are no such laws that I'm aware of in Las Vegas....Yet...but the word on the street is many employers are cracking-down on documentation for employment. When combining the slow-down in local housing construction where a great many Latino workers where employed and this budding trend against immigration. It is easy to build a hypothesis for higher vacancies going forward for Class - B/C apartments in Las Vegas. In today's apartment investment environment, investors demand purchasing buildings on actual operating income and expenses. Gone are the days of acquisitions based upon Pro Forma (a method of betting on the future) and higher vacancies equate to higher risks. 2008 could experience a widening spread in capitalization rates between Class - B/C apartments and their Class - A counterparts.

As reported by the RERC/CCIM report, surveyed institutional investors responses found the required going in capitalization rate for Las Vegas apartments is 6.0% as of 3Q2007. The terminal (exit) capitalization rate is 6.8%. The required pre-tax yield for Las Vegas apartment properties is 8.5%, a 20 percent increase from 2Q2007. I would suspect in 2008 Class – B/C properties should see an increase in spread of 130 basis points beyond a typical Class – A property. That would equate to approximately 7.3% capitalization rates for 2008 transactions. Guess what?...we’re already there and beyond!