Las Vegas 2019 Investor Outlook

At the start of each year I publish my forecast for Las Vegas investors, incorporating national and world events that could have positive or negative impacts.

Before I start I will explain why the data you will see in this paper is probably different than what you see in the national press.

The Data

Most news articles are primarily sound bites, providing generalized high level assessments and broad metro area averages because they have neither sufficient print space nor readers who are willing to invest the time to consider a detailed analysis. For example, if two homes sold in an area: one for $10,000,000 and the other for $50,000; a reporter would mathematically calculate that the average price of homes sold today at $5,000,000 (($10,000,000 + $50,000) / 2 = $5,025,000). While the information is mathematically correct it is meaningless due to over simplification and improper use of averages.

This paper strikes a balance between the highly detailed data my firm uses for mining properties (subdivision/individual property level) and the broad generalizations in newspapers by focusing on a specific property profile in the areas where our clients own properties.

We track a relatively narrow set of properties in specific areas.

• Single family
• 3 bedrooms
• 2+ baths
• 2 car garage
• Built after 1985
• One or two story

Having established the data basis, let's first review 2018.

2018 in Review

Note: The source for most of the data in this section is the Las Vegas MLS.

In 2018, our investors saw significant increases in both rents and property prices. Below is a chart showing $/SqFt for rent growth for conforming properties in the primary zip codes we recommend. According to Core Logic, Las Vegas had the highest year-over-year rent price increase of any major US city at 6.6 percent.

Demand remains high, with the time to rent ranging between 15 and 30 days, mainly because there are relatively few good properties available for rent. Larger homes (>3,000SqFt, 5+ bedroom) normally take longer to rent (~45 days) but these tenants tend to stay in the properties for extended periods. Our average tenant stay is between 5 and 6 years.

Some articles claim that Las Vegas prices are "over heated". I do not agree. Las Vegas home prices are still about 20% below June 2006 peak prices. See the chart below. In fact, I consider that Las Vegas prices are still recovering and have a long way to go.

It has also been claimed that housing prices are dropping in Las Vegas in the 4th quarter. Once again, the properties we target are the ones in the highest demand with no prices decreases.

Inventories have risen for conforming properties and because of this we are seeing some very good deals and less competition. Below is months of supply for 2017 and 2018.

What I Expect in 2019

Time for the crystal ball with the two following caveats:

"Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." ...Peter Drucker

"Predicting anything beyond yesterday is guessing." ...Eric Fernwood

Significant Appreciation and Rent Increases

The Las Vegas Market is healthy and will continue to grow: Las Vegas housing prices have risen 66% since 2008 yet home prices are still the lowest of any major US city. Also, despite the large increases, Las Vegas home prices are still 20% below June 2006 peak prices. Las Vegas is still in recovery mode, the market is not over heated. Also, while inventories have increased in the last three months, they are still low compared to 2017 and prices are not decreasing.

Rising Property Prices

Property prices should rise significantly during 2019, starting off slow in the first half and accelerating in the second half as Californians and others realize the impact of the 2018 Tax Act. Bloomberg is projecting a 7.9% increase in Las Vegas property prices. According to GO Banking Rates: "Home values in Nevada are expected to rise 14.4 percent between 2018 and 2019 — the largest percent increase of all the states." A significant number of people will be fleeing California and other blue states to Las Vegas, which will drive up prices and rents significantly.

Rising Rents

Rents will rise at a faster rate in 2019 than they did in 2018, given the declining inventory of available rental houses, rising interest rates and an increasing number of people migrating to Las Vegas in 2019. I expect the rise in 2019 to be between 6% to 8%.

My forecast is based on the following:

Las Vegas Growth Drivers in 2019

• The broader US economy is slowing but not crashing as in 2008. For example, in 2008, sub-prime mortgages and other economic insanities were the norm. The situation is entirely different today. So, no wave of mortgage defaults like in 2008.
• Interest rates are not expected to rise significantly in 2019.

Las Vegas will do well for investors in 2019 because of the following growth drivers:

2018 Tax Act

Many people in blue states like California will experience huge increases in taxes on April 14th due to the $10,000 local tax cap imposed by the 2018 Tax Act. Note that in 2018, one third of all property sales were to Californians but these were due to the soaring housing prices and high cost of living. The impact of the tax act hasn't hit yet.

Consider the impact of even a small increase in migration from California to Las Vegas on real estate prices. If 0.25% of the 6 million retired Californians decide to relocate to Las Vegas, and one residence is needed for every two people: 0.25% x 6,000,000 / 2 = 7,500 residences. Only about 35,000 residences were sold in 2017 so an additional 7,500 would drive up sales and rental prices significantly.

Below is a chart from the Investing Channel showing the top migration states.

Land Shortage

When people see the vast open space around Las Vegas they assume there is infinite room for expansion. This is absolutely not the case. Las Vegas is an island surrounded by federal land. Approximately 84% of all land in Nevada and 87% of Clark County (in which Las Vegas is located) is owned by the federal government. See the map below for what has happened between 1984 and 2016. Note that 2017 and 2018 were huge growth years for Las Vegas so even less land is available now.

Since there is limited room for expansion, Las Vegas can not have urban sprawl, the only growth path is redevelopment. This is a huge advantage for investors. In most cities urban sprawl leaves formerly desirable areas "behind" and they tend to decline with increased crime. Not the case for Las Vegas:

• Class A properties will stay class A in the future.
• Due to the lack of expansion room, increased demand created by people and companies migrating to Las Vegas will almost guarantee price and rent increases.

Major Projects

Las Vegas has a large number of major projects that drives present and future growth. Below are the biggest projects under construction. Remember that all this money is in a city with a 2.2M population, not in a large state.

• Sphere Las Vegas - $75M, will create 4,400 permanent jobs.
• Resorts World Las Vegas - $7B
• Drew Las Vegas - $3B
• Raider's Stadium - $2B
• Wynn Resorts World - $1.9B
• Las Vegas convention center expansion - $750M

These major projects are creating or will create thousands of short term and long term jobs. There are also other developments underway that were designed to diversify the economy.

Job Creation

• Las Vegas is either #3 or #5 in the nation for job creation.
• Nevada is a right to work state. Jobs and disposable income has grown much faster in right to work states than non right to work states.

Low Business Operating Costs

Many companies are also fleeing California to Las Vegas due to the lower cost of doing business, reduced regulations and proximity to California. Below are just five examples of the cost difference.

The types of businesses that will choose Las Vegas will primarily be infrastructure and tech. For example, construction has started on a 750,000 SqFt data center. This is in addition to the ongoing expansions of Switch, which when completed will have 5.2M SqFt of server space.

Some other factors that will drive business growth in Las Vegas:

• Las Vegas is one of the few cities with dual sources of electric power (California and Hoover dam). Uninterrupted power is critical for modern manufacturing and computer centers.
• Computer infrastructure growth will continue in part because the fiber optic lines connecting Southern California and the East coast go under Las Vegas.
• Las Vegas is within two days drive time of 20% of the US population - an important factor for services and manufacturing.
• Los Angeles cost of living is 62.4% more expensive than Las Vegas. This is a big attraction for "property wealthy cash poor" Californians.
• Some of the funds that companies are repatriating from overseas will go into infrastructure, some is expected to end up in Las Vegas.
• There is a shortage of affordable family housing in costal California. It is expected that an increased proportion of workers will telecommute from home. Las Vegas is an hour's flight to either LA or the Bay Area and would be an excellent location for telecommuters.

Real Estate Investors

• Extremely volatile stock market

With all gains wiped out in the 4th quarter of 2018, more people will shift money into real estate due to the non-volitale nature of real estate. Investing in the right properties will greatly reduce the impact of even severe market crashes like 2008. For example, during the 2008 crash, our clients' properties dropped in market value but rents did not decrease. As the following charts indicate, rents remained basically flat even though sales prices fell.

• The Eurozone's instability will divert more investment to the US.
• Las Vegas has had significant appreciation since 2013. In 2018, the year to year appreciation was 13.5%. This will attract even more investors, both domestic and international.
• Real estate and landlord laws and regulations favor property owners in Las Vegas. For example, in Las Vegas an eviction typically takes less than 30 days and costs less than $500. Tenants know this so there are relatively few evictions. We have only had 3 evictions since 2006 in our class A properties.
• Las Vegas is one of the few locations in the US where you can buy class A properties with financing and have a positive cash flow.
• While Las Vegas home prices have risen, they are still well below peak prices in 2006/7.
• Many investors with California properties have negative cash flows plus newly passed legislation will make the situation worse. We expect an increase in 1031 Exchanges in 2019.
• Low cost of managing properties. It is not how much money the property generates, it is how much you net after all expenses. For example, maintenance costs are very low in Las Vegas due to the climate and resulting construction.

Growth Driver Summary

A large number of people and companies and investment funds are pouring into Las Vegas. Las Vegas is a relatively small city of 2.2M people with limited land for expansion. It is a well managed, business friendly city actively diversifying its economic base.

However, there are factors that could derail the US economy and Las Vegas including the following.

• Significant interest rate increases.
• An economic collapse in China, though the likelihood is small. 
• A Democrat led government could increase the business burden.

Investor Considerations

For people who are already invested, increases in rent will continue to drive up returns. For those looking to do 1031s or refinance, rising property prices will be very advantageous. For people planning to buy properties in 2019, I recommend buying earlier in the year as opposed to later in the year. If you buy later in the year you may face the combination of higher interest rates and higher prices.

Summary

2019 will be another great year for investors and I believe the Las Vegas investor market will continue to be good for the foreseeable future.

Thank you for taking the time to read this report. I hope you find it useful and as always, I welcome your feedback.

I wish you the best,