The document provides an overview of multifamily real estate trends, fundamentals, and development in Las Vegas. Key points include: - Multifamily has been the top performing asset class due to strong demand from institutional and individual investors seeking yield. - Fundamentals have improved substantially since the recession, with rent growth outpacing other commercial sectors. - Low interest rates, search for yield, and improving fundamentals have driven significant capital into the multifamily sector. - Developers are responding by delivering new luxury and high-end rental projects, focusing on the renter-by-choice market segment.

1. Commercial Research
Las Vegas Multifamily
Trends, Fundamentals, Land Acquisition and Development
Spring 2016
Market IQ

2. Multifamily continued its multi-year run as arguably the most favored asset class by both
institutional investors and individuals. Additionally, developers have returned to Las Vegas and
are delivering some impressive projects, mostly geared towards the luxury and renter-by-choice
market segments.
Clearly developers are responding to fundamentals, which have improved substantially since
the recession. Local rent increases in the sector typically surpass other commercial segments,
such as office, which continues to lag the recovery cycle and industrial and only recently started
a turnaround, albeit with a surprisingly strong drop in vacancies in 2015. Retail remains broadly
challenged despite stronger retail sales locally, presumably because some pockets of retail are
doing great while other centers remain challenged. Additionally, industry trends are shifting and
some anchor tenants had exited the Las Vegas market, including Food 4 Less, Haggen and Fresh
& Easy. The volatility and unique property risks in these sectors likely drives some of the interest in
the multifamily sector by both buyers and financing providers.
In the prolonged low-yield environment, a search for yield has propelled many categories of
investors into the space, including REITs, pension funds, high net-worth individuals and family
office capital. There are simply not a lot of options in which to place money that are considered
mild to intermediate risk. Similarly, the asset class is perceived favorably by many lenders ranging
from community banks to commercial mortgage-backed securities investors, so the cost of
borrowing is relatively cheap, preserving some of the spreads despite compressed cap rates.
Mom and Pop investors continue to be interested in Class C structures but these deals have
become even more sparse in the Las Vegas market with a widening bid/ask spread. Similarly,
Class B properties are paced on the market infrequently and the trades we see are often principal
to principal, rather than using the traditional brokerage channels with many marketed as unpriced
listings. Additionally, a lot of investors want value-add opportunities, however, many sellers of
challenged buildings are pricing them as though they were stabilized. In Las Vegas, the lower-end
YIELD PERSPECTIVES
Globally, yields remain
far below historical levels.
Many central banks
continue to be accommo-
dative in the face of weak
GDP growth and little
inflationary pressure. As a
result, many of the lower
risk dividend and interest
rate instruments remain
priced to a low yield.
To achieve high yields,
one must either move
abruptly on the risk
spectrum (emerging
markets or junk bonds for
example) or accept lower
liquidity (real estate).
Given some of the vanilla
choices, it’s not surprising
commercial real estate
has been receiving a lot
of interest.
Figure 1
Relative Yields Across Asset Classes

3. segment of the market is largely broken with a drought in listings and many buyers, whom range
from professional investors to the largely uniformed. We note just a handful of trades that have
occurred within the Class C segment in Las Vegas for 2015. Smaller buildings with less than 100
units get a lot of buyer interest, but often have issues during inspection so we estimate there is a
multitude of failed escrows over the transactions we actually see close.
Capitalization rates have been relatively low for several years, with cap rates for Class A Las Vegas
properties in the low five percent range on average. Nationally, IRR measures the average U.S
Suburban Class A cap rate at 5.48% and the West Region is posting an average of 4.80%.1
Cap
rates are so low in core markets that many investors are searching in second tier markets like
Las Vegas. Cassidy Turley measured the lowest cap rates in New York at 3.5%, San Francisco at
4.3% and Orange County at 4.4%.2
We also understand sub-4% cap rates have been observed in
San Diego. While rental rates and occupancies have long been strong in these areas, Southern
Nevada has registered strong improvement as well. It is therefore no surprise that investors have
shown interest in Las Vegas. Multifamilyexecutive.com notes that the cap rate spread between
core and secondary markets has narrowed from 200 to 300 basis points and down to as low as 50
basis points. Similarly, we have seen Southern California investors get priced out of their market
and search in Las Vegas.3
When we think in terms of historical spreads between cap rates and the “risk free” rate proxied by
10 year U.S. Treasury bonds, spreads are still wider than they have been in recent years. In 2006,
when nearly everything in the real estate sector was in a bubble, spreads were only about 100
1. IRR Viewpoint: 2016 Commercial Real Estate Trends Report
2. http://news.theregistrysf.com/wp-content/uploads/2014/09/Cassidy_Turley_US_Multifamily_Report_2014_Review_2015_Forecast.pdf
3. http://www.multifamilyexecutive.com/business-finance/debt-equity/chasing-yield-the-2015-dealmaking-outlook_o
Figure 2
Class A and High Quality Class B Going-in Cap Rates
Source: Costar, Clark County NV, Fred II, Coldwell Banker Premier Realty.

4. Figure 3
Las Vegas Apartment Average Asking Rent
Figure 4
Las Vegas Apartment Vacancy Rate
Map 1
Class A Apartment Occupancy
December 2015 snapshot.
Source: Costar, Coldwell Banker Premier Realty.
FUNDAMENTALS
The leasing market is bifurcated between lower quality and higher quality projects. Figure 4 illustrates that significant difference between occupancies in the overall
market, which includes a significant amount of Class C projects. If we could also add a new category “D,” that would be in there in the form of smaller and older
buildings. We know of at least 300 buildings in the urban core that were built before 1970. If we analyze Class A buildings or high-quality Class B (which we consid-
er to be those built after 1990, have more than 200 units and achieve rents of at least $0.85/sq.ft) buildings separately from the overall market, vacancy rates are
as low as they were during the boom days of 2005.
Source: Lied Institute for Real Estate Studies, Costar.Source: Lied Institute for Real Estate Studies, Costar.

5. points. Spreads were probably widest in 2011 and 2012 and with current Treasury yields at 2.06%
that is still about 300 basis points for most Class A projects in Las Vegas.
FUNDAMENTALS
The cap rate spread is only part of the story. Improving fundamentals in the Las Vegas region
are also added to pro forma gains. Although the Las Vegas MSA has not yet returned to the
employment high of 2007, job growth is on the rebound and we are observing some mild wage
growth as well. Additionally, both single family rental rents and Class A and B apartment rents
appear to be growing. Further, occupancies across the Class A segment are very strong with many
buildings in the high 90’s. There is also some evidence that concessions have burned off further
with ALN noting that apartments offering concessions dropped by 21.1% year-over-year (Dec
2015 data). The average concession package was 4.4%, down 16.7% from the same time last year.4
4. alndata.com
Figure 5
Visitor Volume - Clark County NV
Figure 6
Non-Farm Employment - Clark County NV
Additionally, Las Vegas’ major
sector, leisure and hospitality, is
expected to grow further with the
addition of Genting’s Resorts World
Las Vegas, which broke ground in
May. The project is anticipated to
be 3,000 rooms in its initial phase.
The project is estimated to support
more than 13,000 direct and
indirect jobs.5
The Lucky Dragon, a
boutique hotel near Allure Condos
on Sahara, continues construction.
The Las Vegas Convention and
Visitors Authority (LVCVA) is also
expanding into what will ultimately
be the $2.3 Billion Las Vegas Global
Business District. As a testament to
the strength of the LVCVA’s plans,
it purchased the Riviera Hotel and
Casino in 2015 and in November
2015 approved a contract to
demolish the project to make way
for the Global Business District
expansion.
We anticipate that added
construction on the Las Vegas
Strip and Downtown will drive
employment back to it’s 2007
high within a short period of time.
Unemployment rates remain
elevated at 6.3%, however year-
5. http://lasvegassun.com/news/2015/may/05/group-says-new-las-vegas-strip-resort-casino-rise-/
over-year job growth is occurring at a faster rate than the U.S average and is 2.6% for the Las
Vegas MSA compared to 1.9% for the United States.6
The area was hit disproportionately hard
with a combination of a national recession and a deflating housing bubble. Currently, housing
6. nevadaworkforce.com, Nov 2015 data.
Source: Nevadaworkforce.com.
Source: Las Vegas Convention and Visitors Authority.

6. prices have returned to pre-bubble trends and distressed housing inventory is no longer a drag
since the majority of closings are traditional sales. Additionally, visitor volume to Las Vegas has
never been higher than it was in 2014 and that strength continued into 2015, a new record year
with over 42 million visitors.7
Growing employment opportunities have helped return the area to
positive migration and retirement remains a motivation for some individuals.8
Gaming Revenue is not matching the trajectory of visitor volume, revealing a much milder upward
trend. Las Vegas has adapted well to changing consumer tastes, with a sizable nightclub scene
and a greater focus on maximizing hotel and food and beverage revenues. As a result, gaming,
while still important, is of less significance than in the past. For example, MGM Mirage Corporation,
which is the largest single operator in Las Vegas and is a good barometer for the region, has
diversified on-property greatly. In 1994, gaming revenues were 59% of gross revenue compared
to 2014, where gaming revenues were 38% of total revenues. Growing shares of revenue went to
food and beverage, hotel and entertainment and retail according to the company’s annual reports.
Total non-farm employment is now almost 12,000 jobs short of its 2007 high. Measured in
November, on a year-over-year basis, Las Vegas added 23,000 jobs. If this rate continues, we
should be back to peak employment in the next 6-12 months. It has taken a long time to heal
the economy and some lingering issues remain, such as rising but relatively weak wage growth
(inflation-adjusted) and a prevalence of part-time workers that desire full time work, however, the
net result paints a positive picture for the region.
In addition to major gaming projects like Resorts World Las Vegas, we are also seeing non-
gaming growth in the Valley with new entrants like Asurion, which provides mobile phone and
tablet protection insurance, Catamaran RX in the medical space and manufacturing, including
Cannon Safe. Sutherland Global, a business process outsourcing and technology company, is
moving into the shuttered Citibank campus in the Lakes area of Las Vegas. 2,000 employees
are expected to work at the campus. Faraday, which unveiled a concept electric car at the
Consumer Electronics Show in Las Vegas, is expected to build a plant in Apex, an industrial
park in North Las Vegas near the I-15. Tony Hsieh’s affiliated VegasTechFund also continues to
seed startups and continues to have investments in a large portfolio of companies, primarily in
online sales, electronics and education. IKEA, which is opening its first Las Vegas store in 2016, is
already hiring. In the summer of 2015, Fidelity National Financial purchased a 22,000 square foot
office in Summerlin and this represents some positive absorption for some long vacant space.
Barcleycard leased the former Zappos headquarters in Henderson and was anticipated to have
700 employees by now.
Wage growth is not evenly spread out over the employment sectors so Class C will continue to
play an important role in workforce housing. There is still significant vacant supply in this category,
so we don’t anticipate strong rent growth in the next couple of years. We have observed some
owners over-improve for the area but this has not been reflected in stronger rents, implying that
building quality is at best a minor premium located within a challenged area.
On the other side of the quality spectrum, Class A occupancies are best described as stellar and
several of the newer builds have quality and amenities a step above traditional two-story walk-
up buildings. There does appear to be a premium for quality in popular submarkets and those
communities with strong walk-ability. Some traditional design projects are achieving rents as
high as $1.38 per-square foot for 1-bedroom units. The Gramercy, which is a multi-story, amenity
rich mixed-use project, is achieving rents up to $1.80 on 1-bedroom units. The Calida Group has
7. http://vegasinc.com/business/2015/dec/30/las-vegas-set-to-crack-42-million-visitors-this-ye/
8. United Van Lines survey reveals that 57% of the moves they facilitated were inbound to Nevada. Further, electric meter hookups, a proxy for household formation, continues in a positive trend.

7. Figure 7
Homeownership Rate - Las Vegas-Paradise MSA
been delivering amenity rich projects
with interesting architectural elements
and we understand that these recently
delivered projects are performing well,
indicating strength on the upper-end of the
apartment rental market.
The demographic story is positive for
multifamily and many expect a higher
proportion of future new multifamily
deliveries versus single family deliveries
nationally. The aging of baby boomers is
likely to account for some of this shift in
demand.9
Millennials, are finally seeing some job prospects after many delayed the milestone of
moving into their own place. This cohort is generally described as those born between 1982 and
2000 and make up about 95 million Americans. Nationally, Millennials are finally coming off of the
extreme weakness exhibited within the cohort during the recession, where the employment to
population ratio for 25-34 year olds was as low as 73.4% and after a seven year period, has grown
to 76.3% (as of November 2015).10
Locally, developers are tailoring properties to the Millennial
market, in addition to empty nesters. Some projects have almost no families with children.
Importantly, Millennials have a high propensity to rent. Green Street Advisors estimates that
individuals under the age of 35 have a 63% propensity to rent.11
Although it is challenging to define this age cohort, technology, quality gyms and open space
appear to be attractive to many Millennials. In leasing, a strong online presence is important.
All these features are expensive yet many Millennials are paying for it. While many lack
downpayments or credit history to buy a home, high-quality Las Vegas apartments appear to
remain in reach judging by the occupancy levels in many of the higher rent projects.
This age group is important because these individuals are the source of household formation
for the next several years. The Millennial generation’s peak birth-rate occurred in 1990, many of
whom are likely to be renters.12
The generation does have its challenges. Household formations
have been held back in recent years by slack in the labor market and likely student loans. A big
unknown concerning Millennials is what occupations will be in the next ten years. For example,
technology workers are used to moving often and may not like the burden of owning a home,
which they would either have to sell or rent if they moved. Additionally, many Millennials
recognize that homes can be illiquid and therefore fall into the “rent by choice” category, rather
than renting because they lack the ability to finance a home. Employment within this cohort
remains challenged but with an estimate of nearly 75 million nationally, this age group is going to
define a large share of housing demand long-term.13
The Urban Institute recently released a longitudinal of household formation and homeownership
rates, predicting that the homeownership rate would decline through 2030 with the
homeownership rate dropping from 63.7% in Q1 2015 to 61.3% by 2030. The study authors
anticipate a rental surge of 13 million renters and renters will outpace new homeowners over
the next 15 years.14
Projections can often be taken with a grain of salt, however, given that both
9. https://www.kansascityfed.org/publicat/econrev/pdf/13q4Rappaport.pdf
10. http://www.axiometrics.com/blog/young-adults-earnings-growth-pace-lags-job-gains
11. https://www.reit.com/news/reit-magazine/july-august-2014/millennials-move
12. http://www.forbes.com/sites/billgreiner/2015/02/25/how-a-lack-of-income-for-millennials-effects-household-formation/3/
13. http://www.pewresearch.org/fact-tank/2015/01/16/this-year-millennials-will-overtake-baby-boomers/
14. http://www.urban.org/sites/default/files/alfresco/publication-pdfs/2000257-Headship-and-Homeownership-What-Does-the-Future-Hold.pdf
Source: U.S Census.

8. Figure 8
Multifamily Permits - Clark County NV
government support for homeownership
and lax lending in the early 2000’s
contributed to an artificially high
homeownership rate, the author’s forecasts
may have merit.
An additional component of demand
in Las Vegas is likely to remain former
homeowners who lost their homes through
foreclosure or still have tarnished credit
profiles due to a short sale. We have
observed that many prior homeowners
choose to rent single family homes. In
the past, single family rental homes were
usually held by “mom and pop” owners.
Some renters had fear of leasing from an
absentee landlord and tended to gravitate
towards apartments. Today, many homes are held by institutional investors or firms organized as
REITs or are privately owned homes managed professionally by property management firms, so
there are many rental options within Las Vegas.
The degree to which higher-end apartments compete with single family rentals is unknown to
Map 2
Class A Apartment Average Rent Per-Square Foot & Median Household Income
Source: UNLV-LIED,U.S Census.
Source: ESRI,U.S. Census, Costar.

9. Table 2
Under Construction Projects
Table 1
Proposed Apartment Projects
PROPOSED PROJECTS
The table above notes some of the projects that we understand could be delivered within the next three years. We are aware of several parcels that are in escrow that are extremely likely to become either traditional apartments or senior
apartments, however we cannot mention them publicly at this time. As such, we should not consider the above table to be representative of the entire universe of proposed projects.
us, however we suspect that there is mild crossover and that family size and age of householder
remain the primary determinants of who lands in which rental category. Single family rentals
are probably fringe competition for the two and three bedroom units in higher-end apartment
projects.
Some prior homeowners may only be in the rental market for a transitional period and re-enter
ownership after curing credit issues. These are the so-called “boomerang buyers”, of which
it is estimated that 700,000 individuals nationally are now eligible for credit again this in 2015
according to TransUnion.15
The principal question is how many individuals are willing to buy or are
aware that they can buy. Currently, the pendulum that swings between renting and owning is still
swinging towards owning if you examine rent versus mortgage payments on an equivalently sized
home. Ultimately, this will be sensitive to mortgage interest rate increases and in theory, renting
could become financially equivalent to owning in an abrupt fashion. Many of these individuals and
families are likely to be renters for an extended period, gradually trickling back into ownership if
the labor market continues to strengthen.
DEVELOPMENT
Following the global financial crisis, both single family and multifamily construction dropped
15. http://www.cnbc.com/id/102773427
Source: Clark County, City of Henderson, Coldwell Banker Premier Realty.

10. Table 3
Recently Completed Projects
Some developers have departed from the traditional two story walk-up/garden style apartments and are building true luxury apartments
with a greater variation in architecture, amenities and finishes. The left photo shows Calida Group’s Elysian at The District and DG De-
velopment/Fore Property Company’s Volare project, which includes garages and is rare within this market.
sharply. Multifamily construction almost died off completely while many developers focused on
broken condominium projects and other distressed deals.
Recently, multifamily permits have been ticking higher but remain low relative to past
observations. It is important to note where the activity is concentrated, since success of a
particular project is largely determined at the submarket level rather that at the Valley level.
Map 3 illustrates where a lot of the recent activity has been occurring geographically. Notice the
concentration of projects along the southern portion of the 215, in Henderson near major corridors
and on the South Strip. These areas tend to justify projects based on area incomes, proximity
to employment centers and are attractive due to major arterial access. Many of these projects
are amenity rich and relatively expensive, however there appears to be significant demand for
senior housing also and there is obviously a need for affordable options, however this is often
determined by land availability and proximity to existing infrastructure as offsites have become
quite expensive. Margins may be under pressure as land prices have ticked up for both prime
locations and areas for more affordable type projects.
Source: Clark County Assessor.

11. Map 3
Las Vegas Area Planned, Under Construction and Recently Built Apartments
Shown above is Picerne’s project on South Durango and The Warmington Group’s Martin Apartments on Fort Apache. Both projects are
located in the Southwest part of the Valley.
One area that seems to have a major deficit in both recent and planned development is in
Downtown Las Vegas. Higher-end projects like Juhl, The Ogden, Soho Lofts and Newport Lofts
are seeing strong demand for rentals. Of those four, Juhl is the only pure rental project, although
originally conceived as a condominium. Both Juhl and The Ogden have had high occupancies
and even occasional waiting lists. The owners of The Ogden have been offering units for sale
since late last 2014 and a substantial number of closings have occurred. Soho Lofts and Newport
Lofts are condominiums which often are used as rentals, so it is challenging to determine the
size of the market for higher-quality rentals in the area but there does appear to be a shortage of
quality rental units in the Downtown area. We understand that Juhl remains near full occupancy.
The Wolff Company has an approved 226-unit mixed-use project on Fremont St, a strong positive
for tenants who have often found it challenging to find newer space within the submarket.

12. Juhl is one of the more sought after residential
rentals downtown.
The Ogden has made up a large portion of the Downtown
rental pool. Currently the owner is actively marketing
these condominiums on an individual basis.
Newport Lofts are individually owned condos,
however some occasionally become available for
rent. Sale prices have been gradually climbing within
the project.
Table 4
Rent Price Per Square Foot in Downtown
Source: GLVAR multiple listing service, Costar, Coldwell Banker Premier Realty.
*Asking rent. All others are transactions.
Apartment vacancy rates within the redevelopment area are about 10%, which on its own doesn’t
sound great. However, when you parse out what those buildings are, the picture becomes clearer.
Many of the buildings in the area were built between the 1930’s and 60’s. If we look at some of
the more recent buildings from the 1990’s and 2000’s, occupancy is extremely solid with several
fully occupied and some hovering between two and six percent vacant. Towards the end of
2014, we examined the financial reports of a renovated apartment project within the Arts District.
The property was nearly 100% occupied and had an occasional waiting list. Given what we are
observing within Newport Lofts, Soho Lofts, Juhl, The Ogden and the Arts District Apartments, we
expect that if a developer could deliver product geared towards urban Millennials, it would fair
very well. In some Las Vegas submarkets, we see apartment rents in amenity rich apartments as
high as $1,600 for a two bedroom, with several between $900 and $1,200.
The Downtown submarket could probably use a significantly higher supply of modern
apartments, especially with more employment centers on the horizon, such as the nearby Resorts
World Las Vegas (estimated to support more than 13,000 direct and indirect jobs.16
) on the north
strip, The Global Business District and The Federal Justice Tower which is expected to open soon.
Another potential source of renters are the current Zappos employees, many of whom do not
currently live in the area but may have a desire to if they can find suitable housing. Additionally,
we expect the Las Vegas Medical District will gain some traction.
16. http://lasvegassun.com/news/2015/may/05/group-says-new-las-vegas-strip-resort-casino-rise-/

13. Map 4
Apartment Land Sales
Table 5
Apartment Land Purchases in the past 18 months
LAND PURCHASES
Based on price per door or price per acre, it is clear that there is broad variation in pricing. It should be noted that most of the high dollar land purchases were by
luxury apartment developers, a largely new category in the market.
Source: Clark County NV, Costar, Coldwell Banker Premier Realty.
The single most active submarkets are in the Southwest near the 215 curve and in Henderson
near the 215 by both Stephanie Street. and Gibson Road. These areas boast some strong incomes,
and favorable demographics and a good supply of developable land in these areas.
Based on what we are seeing in escrow, we can expect significant development in the next few
years and this may impact occupancy rates in some submarkets. Nevertheless, we believe that
favorable demographics will be in play for most of this forward inventory. As with most projects, it
really comes down to the skill of the developer and the leasing team.

14. * Average Physical Occupancy. MAA reports occupancy at December 2014 and Camden provides the 2014 average.
Source: MAA Communities,Camden Property Trust 10-K.
Table 6
Public Apartment REIT Las Vegas Buildings
Table 7
Sale Panel of Class A and higher quality Class B Apartments 2011 - 2016 YTD
* This sale included undeveloped land.
Source: Costar, Powerbroker Confidential, Colonial Properties Trust 10-Q, Clark County, Coldwell Banker Premier Realty.

15. PERFORMANCE
Map 2 in the fundamentals section illustrates the strong occupancies found in Class A projects
throughout the Valley. With occupancies strong and rents rising, it makes sense for developers
to move forward with several projects. Additionally, relatively low cap rates are generating
more interest by developers, particularly in a national and regional context with both private
equity monies and REITs engaging in ground-up development. Camden Properties Trust
executives discussed their development pipeline at REITWeek 2015. They are planning 85% of
their new pipeline to come from development and repositions rather than acquiring properties.
In recent years, they have been selling properties in order to reallocate resources, such as the
Oasis portfolio in Las Vegas, which they held an interest in and sold to The Wolff Company. On
developments, they noted an expectation of a 7% yield which is substantially better than going
out and buying the cap rate, with the exception of having to take both the construction risk and
the lease-up risk.
Similarly, Lennar, long known for their single family product, has been developing apartments
in recent years and listed 24 communities under construction in Q1, 2015 sold their first two
communities in 2014. In this space, Lennar acts as a merchant builder and uses third-party
institutional capital on a deal specific basis. Lennar stated in their Q4 2015 earnings call that they
completed their Lennar Multifamily Venture, an equity fund which allows them to hold income
producing assets in order to have a recurring income stream. They have a pipeline of over 21,000
apartments. Lennar expects to sell 8 to 10 communities in 2016.17
To get a sense of the returns,
Lennar stated they expect IRRs to exceed 25% with cash multiples larger than two (Q2 2014
17. http://seekingalpha.com/article/3765836-lennar-corporations-len-ceo-stuart-miller-q4-2015-results-earnings-call-transcript?part=single
earnings transcript). We are not aware of any
Lennar apartment projects in Las Vegas but this
gives us an idea of what some builders may
expect, particularly since Lennar has several
projects in high cost California.
While Map 1 gives a sense of occupancies
reported by Costar, there are several publicly
traded operators which own projects in
Las Vegas that provide a deeper sense of
occupancies in the region. MAA Communities
owns two buildings in North Las Vegas, both
acquired through the Colonial Properties Trust
acquisition. Camden Property Trust owns 15
Class A and Class B apartments in Las Vegas,
each with a reported average occupancy near
95% for most of their buildings. This is probably
a pretty good proxy for what a professional
management company can expect. Examining
the sale panel in Table 7 and in Figure 2, one
can see a gradual decline in cap rates over the
past several years. Presumably, even projects
that traded in 2011 or 2012 may even be valued
higher in the market of today. For example, The
Croix Townhomes traded in December 2010 for
a reported 6.5% capitalization rate and traded
Figure 8
Major USD Currency Pairs
MACRO ISSUES
The strengthening of the U.S. Dollar relative to many major currencies may
influence foreign developers and present a challenge to property acquisition.
For current owners of U.S real estate, particularly by Canadians, this may
influence their decision as to whether or not they should re-balance positions
or enjoy relatively better cash flow in repatriated terms.
USD/CAD
EUR/USD
AUD/USD

16. The Gramercy, shown here on the right,
is an example of a project originally
contemplated as for-sale condominiums
and was stalled during the downturn.
The project was completed and
positioned into the luxury rental market.
again in 2014 for 5.3%. In 2015 there was an apparent slowdown in Class A and B transactions
relative to 2014, perhaps indicating that owners are happy sitting on the cash flow or remain
bullish on improving rents under continued strong occupancies.
RISKS AND REWARD
Some investors are beginning to question what happens to cap rates in a rising interest rate
environment. First, despite an announcement in December in which the Federal Reserve
stated they would target short-term rates upward by a quarter point, many Fed observers only
anticipate small increases in rates going forward and possibly no increase in March. Additionally, a
depressing world wide economic outlook may imply safe haven buying in the U.S. and in doing so
keep bond yields from rising. Some positive U.S economic figures, combined with some terrible
figures coming out of Europe and Asia further confuses expectations of where bond yields and
ultimately cap rates will go.
While many owners use 10-year Treasury rates as their performance benchmark, the relationship
between Treasuries and capitalization rates is far from lockstep. Breaking it down further, cap
rates are also a function of local supply and demand factors and a cyclical nature of building
in many local markets, which don’t all ways integrate well into national models of cap rate and
Treasury market trends.
Concerning interest rates, there are a few schools of thought on what needs to be done moving
forward. Some market observers believe that a prolonged period of easy money has led to
Malinvestment, or the purchase or financing of projects that otherwise would not make sense
under most other conditions. As such, they believe that the Fed should attempt rate hikes as part
of a “normalization”, despite the potential for shaking out some of the weaker projects. Others
believe that the Fed will respond to improving economic conditions, so higher rates will in part
be a function of an improving economy. In any case, the natural question remains, will higher
rates damage the commercial real estate sector? If indeed higher rates are a function of a better
economy, the presumed higher cost of capital may be offset by strengthened demand in the
commercial space market and for dwellings. This view may be challenged by observers of foreign
markets like China and Europe and the potential for financial contagion.

17. One cannot look at interest rates and capitalization rates in a vacuum and make broad
conclusions. Another important factor is the overall performance of the debt market. John Duca
and David Ling (2015) of the Dallas Federal Reserve find that cap rates are negatively related to
the availability of credit (more credit availability leads to lower cap rates).18
As a result, commercial
real estate prices can be vulnerable to shocks in the CMBS or other capital market channels and
this was made more obvious by the global financial crisis. It may also make the case for using, if
possible, assumable debt on a building.
Some believe that recent prices are the result more of maintaining reasonable spreads over
the cost of capital or performance benchmarks, rather than from lower risk premiums. So while
current cap rates may not be predicated on a herd mentality which leads to bubbles, financial
market gyrations may lead to a bump in risk premiums built into required rates of return. However,
again, if local market dynamics are favorable and investors expect rent increases, there may be
an offset there. Additionally, multifamily projects tend to offer some inflation protection in the form
of increasing rents, which is harder to achieve in office or industrial buildings which often feature
long-term leases at pre-specified rents.
In the end, there are a lot of unknown causalities and non-linear relationships within the world
of real estate so making simplified conclusions is challenging. However, examining some of
the multifamily REITs that trade publicly, it doesn’t appear as though participants in the equity
market are super concerned about long-term interest rates, which affect REITs and other property
owners since they tend to use more long-term debt than short-term instruments. Although
REITs have been impacted along with the broader stock market, operator specifics appear to
be the overriding cause of movement in share prices.19
Further, any individual property can be
uncorrelated with the major headlines, at least in a short-run sense.
Multifamily projects tend to have less volatility in net operating income when compared to
other property types, hence, lower cap rates in general. Lower cap rates are symptomatic of
investor beliefs in how well net operating income buffers against rising rates and economic
shocks. As occupancy weakens, landlords can adjust pricing quickly to re-optimize given the
new circumstances and then re-adjust over several periods after the economy strengthens. This
is contrary to many retail or industrial projects that can lose large tenants altogether, regardless
of accommodative rents. So this characteristic of apartments is very positive. Nevertheless,
apartments are subject to capital market risk and recent troubles in China and elsewhere point
towards a re-evaluation of risk, which in our minds was a long time coming. Federal banking
regulators have recently expressed concern about the concentration of multifamily loans within
some banks and they are concerned that rising rates could harm the sector. The Comptroller of
the Currency, Thomas J. Curry, notes these issues, but also highlights that credit quality hasn’t
suffered while demand for these loans has increased.20
Finally, much of what works in the commercial real estate world is derived from intimate
knowledge of a particular trade area, along with strong execution in entitlements through
construction and lease-up. In Las Vegas, the market seems to be crowded on the acquisition side
with little play on the sell side. Additionally, there appears to be further room for well-conceived
projects in some submarkets, although several are beginning to get crowded and may influence
short-term occupancies.
18. http://www.dallasfed.org/assets/documents/research/papers/2015/wp1504.pdf
19. https://www.reit.com/news/articles/reits-outpace-broader-market-january
20. http://www.occ.gov/news-issuances/speeches/2015/pub-speech-2015-147.pdf

18. The information contained in this report is deemed reliable but is not guaranteed.
The information and opinions expressed in this document do not constitute investment advice.
Market IQ
Author: John McClelland, Vice President, Research
8290 West Sahara Avenue, Suite 200
Las Vegas, Nevada 89117