They’re about 300 miles apart, but in terms of recovery, they’re much farther away from each other.

Throughout the downturn, Las Vegas and Phoenix were linked together as the poster children of distress. And while each market still presents its share of challenges, Phoenix has bounced back much more swiftly than its sandy cohort.

“When you’re investing in Phoenix, you can price in some rent growth or, at the least, population growth,” says Ben Thypin, a senior market analyst for New York–based market research firm Real Capital Analytics (RCA). “Whereas in Vegas, the economic outlook is just so uncertain.” 

Las Vegas
Sin City is still struggling to absorb a glut of overbuilding that came on line throughout the credit crisis. In 2006, the vacancy rate was just 4.6 percent. Then, an average of about 2,830 rental units were delivered annually from 2007 to 2010 as the metro area lost a staggering 132,830 jobs. By the first quarter of 2010, the vacancy rate reached a high of 11.8 percent, according to New York–based market analysis firm Reis. This year, however, employment has stabilized, the first year without net job losses since 2007.

“To start healing, you first have to stop bleeding—Vegas has finally stopped bleeding, and the healing process might take a little while,” says Christopher Bentley, a Las Vegas–based principal for Apartment Realty Advisors. “We think we’re a year or 18 months behind Phoenix in our recovery.”

Indeed, Vegas is late to the party. In the third quarter, rent growth was seen in 81 of the 82 markets that Reis tracks—only Las Vegas was left out. And a look at the recent transaction market also tells the tale. There were 21 sales this year of $2.8 million or more through early October, and, of those, a lender or servicer was the seller in 12, according to RCA.

The volume of distressed apartment properties in Vegas is huge relative to overall supply. There was more than $2.1 billion in distressed apartment communities (delinquent, in default, or REO) across 116 assets in Vegas in the third quarter, according to RCA. That places the market third behind only the nation’s largest apartment market, Manhattan, and Phoenix in terms of troubled volume.

Unfortunately, the pipeline is still healthy. More than 1,000 units came on line this year, and Reis projects that another 1,500 units will be on the market next year. With a vacancy rate currently in the 8 percent range, that could be too much for the market to handle.

“On a five- to seven-year horizon, Vegas is going to be fine,” says Bentley. “The question is, what’s going to happen in the short term? We expect some job growth, but we’re not expecting miracles.” 

The Phoenix apartment market has truly risen from the ashes after becoming one of the biggest casualties of the downturn. Employment stabilized this year; the vacancy rate fell about 200 basis points, to 7.5 percent; and rent growth returned, to the tune of nearly 4 percent, according to Reis.

And the proof was in the transaction market. The Phoenix area had seen 87 sales of more than $4 million year to date as of mid-October. In all, Phoenix has recorded $1.4 billion in transaction volume over the past year, with an average cap rate of 6.09 percent, according to RCA.

“Cap rates have moved lower, price per unit has moved up, and there might not be as many offers now, because it’s starting to reach the price point of, where do we go from here?” says Rocco Mandala, a Phoenix-based executive vice president at CBRE Capital Markets. “In the stronger submarkets, you’re not buying below replacement cost anymore, and it’s starting to make more sense to develop.”

There have been 22 sales of more than $20 million in Phoenix this year. The market has now seen two consecutive years with 100 or more multifamily trades—though about half of all trades are still considered distressed.

“Phoenix valuations have already recovered; they’ve already factored in the recovery,” says Jay Hiemenz, CFO of Phoenix-based Alliance Residential. “Concessions have almost gone down to zero on the in-town stuff, though the suburban stuff is still a little softer in places.”

While high-quality product is trading at healthy prices, the overhang of distressed properties remains significant. The overall market has more than $2.2 billion in distressed volume among 168 properties, according to RCA.

Still, this has been the first year of job growth in Phoenix since 2007, at 1.5 percent, which should accelerate to 2 percent in 2012, according to Reis.

“We had a large construction employment base, so when the construction stopped, we needed to correct to continue to grow,” says Mandala. “We got hit pretty hard pretty fast, but we corrected as fast as any market in the country.”