The City of Sin has edged out Detroit for the title of America's most abandoned city with a 16 percent rental vacancy rate and a 4.7 percent homeowner vacancy rate, according to Forbes' annual ranking of the country's emptiest cities.

Not a title to be proud of.

The rankings are based on a combination of rental and homeowner vacancy rates from the U.S. Census Bureau's fourth quarter 2008 data. The report covered the 75 largest metropolitan statistical areas in the country. After Las Vegas and Detroit came Atlanta, followed by Greensboro, N.C., and Dayton, Ohio. (For a complete list of rankings, click here.)

Rondetta Troutman, executive vice president of Phoenix, Ariz.-based Picerne Real Estate Group, was surprised that the tourist destination landed the top spot on Forbes' list. "I was in Las Vegas attending the local multi-housing association's 2009 market trends event when I heard about this report," she says. "When leaving the city that evening, every Southwest flight was completely booked, and the airport was very busy. I certainly did not feel it was abandoned.

"I have been doing business in Las Vegas since 1988, and I have found that numbers are often taken out of context in that market," Troutman continues. "Las Vegas has led the country in population and job growth for so many years that just looking at statistics can be misleading. When you have been soaring so high in numbers then drop to more normal levels, the percentages make the drop appear larger than normal when actually the city is still performing better than most parts of the country."

Still, the Vegas multifamily market has been hit hard by the nation's economic crisis. The apartment vacancy rate for the city reached a whopping 10.96 percent in December, the highest levels since brokerage firm CB Richard Ellis (CBRE) began tracking the market in the 1980s. The rate decreased slightly in January to 10.63 percent.

"I think the market is going to get worse in the first, second, and third quarter [of 2009], and it will stabilize in the fourth," says Spencer Ballif, a senior vice president at CBRE's Las Vegas office. "It is really hard to predict because we do have a lot of jobs being created in the fourth quarter through [the development of] City Center, Fontainebleau, and Cosmopolitan. What remains to be seen is if we lose a significant amount of jobs in the first, second, and third quarter, are we really adding new jobs in the fourth quarter or are we replacing jobs that have been lost due to layoffs?"

The apartment market also will have to contend with a sizeable number of new product expected to come online this year?6,000 units, to be exact, according to CBRE. "This worries me considering the market conditions right now," Ballif says. "If the housing market was stable, 6,000 units being built is not a crazy number for Las Vegas. [But] the units were put into the pipeline two or three years ago in anticipation of 33,000 new hotel units opening. Now, that number is 14,000." On top of new construction, the existing apartment stock is competing with a fairly large shadow market of single-family homes and condo units.

Due to the market pressure, rental collections have fallen by as much as 10 percent in some submarkets as concessions have grown, according to CBRE. At the end of 2007, the typical concession was one month of free rent on a one-year lease. Today, properties are offering up to two months of free rent on top of reduced rental prices.

Picerne knows all too well about concessions. In the second half of 2008, the firm offered a number of concessions throughout its predominantly Class A portfolio of 5,923 units, giving away up to two months of free rent during lease-up for some properties or one-half to one month of free rent with gift cards of $100 to $1,000, based on the unit type and lease term. Fortunately, the firm has been able to move away from concessions on all but lease-up properties and is offering primarily reduced rents.

Market conditions are expected to improve in 2010 for a couple of reasons. First, new construction will slow due to limited lending availability (deliveries are expected to fall below 3,000 units next year). And secondly, big-name projects such as City Center will likely bring new employment opportunities to Vegas.

"Certain submarkets will fare much better than others," Troutman adds. "The Henderson market has been very strong for us last year and this year. We completed record lease-up absorption at our last two projects in this city. We opened our Palladium project in mid-November and filled those 390 units to 97 percent by August of 2008. We received our last certificate of occupancy on our 181-unit Passage project in September and hit 97 percent there in December 2008."

Maybe Las Vegas is worth the gamble after all.

Downward Spiral

Vacancy rates have been creeping steadily upwards throughout 2008.

January 8.99%
February 8.39%
March 7.98%
April 8.03%
May 7.74%
June 8.24%
July 8.44%
August 8.35%
September 8.62%
October 9.43%
November 9.93%
December 10.96%

Source: CB Richard Ellis