The Bascom Group and its partners are now the largest owner in Las Vegas, following its acquisition of a 15-community, 3,918-unit portfolio from Camden.
Its local presence now stands at more than 8,200 units, effectively on-par with Camden’s previous market-share. But the market itself has historically scared off many REITs and institutional investors due to its inherent volatility.
Sin City is still struggling to recover from the massive body-blow it took during the Great Recession, and in many ways, it’s the last multifamily market out of the recession.
So, why Vegas, and why now?
Multifamily Executive recently sat down with Scott McClave, senior principal of acquisitions and finance at Irvine-based The Bascom Group, to get his take on the demographic and economic drivers that should keep the market healthy for years to come.
McClave is no stranger to Vegas—he spent several years there in the mid- to late-1990s with Bascom’s sister land-development company, Chenco Holdings.
“What was amazing to me at that time, especially coming from Southern California, was how business-friendly the local government was,” he says. “It’s a city about making things happen. They’d say ‘How can we help you get it done?’ rather than bureaucratize you to death.”
Of course, that lack of regulation, combined with the subprime fiasco of last decade, accelerated the bust of 2008, so it cuts both ways.
But for Camden, the deal was motivated by “capital recycling”—the assets were nearly twice as old as the average age in its portfolio, and rents were $500 below its typical property. And for Bascom, the boom-and-bust dynamics that characterize Vegas are now becoming a tailwind that will propel the market forward.
The company initially thought about buying its way into Vegas in the early 2000s, “but the market became overheated so quickly—the condo converters, there were a ton of them,” McClave says. As recently as the third quarter of 2012, rents were still 22% off of their 2007 peak.
So Bascom watched, and waited.
“What sold first were the most distressed assets—broken condo deals, or C-quality assets—but when you got into 2013, the market started firming up,” he says. “That’s when we started to get excited, looking at the economic data.”
Rolling the Dice
There were three main forces that propelled the firm's desire.
First, Bascom noticed many Southern California baby boomers were choosing Las Vegas as a retirement destination: its proximity meant a three-hour drive, or 40-minute plane ride, to a place rich in entertainment and natural amenities—hiking and biking trails, for instance.
But what seals the deal for many retirees is the ultra-low cost of living in Nevada—a state with no personal income tax—especially as compared to the Los Angeles or San Diego regions.
Second, Bascom saw a city in the process of diversifying itself, much as San Diego did when military bases began consolidating in the early 1990s. In Las Vegas, civic investments in infrastructure such as a world-class airport, new highways, schools and parks came in tandem with a new medical school, the opening of the Cleveland Clinic for Brain Health, a new VA hospital, and the development of Union Village a $1.2 Billion state-of-the-art medical Village near Henderson.
The Valley has also recently seen tech-related businesses such as the Faraday Future auto factory and the Supernap Data Center flourish—and the possibility of an NFL franchise coming to town. Bascom believes this diversification is a sign of a maturing market that will bring longer term economic growth.
And finally, there are some barriers of entry emerging that make the market a safer bet today. The new construction pipeline has been tempered, a shadow of its former self in the go-go days of the mid-2000s.
Construction costs—particularly labor, and to a lesser extent, materials—have gone through the roof, while water conservation requirements limit growth. Another cost pressure is a pullback in construction lending triggered by new regulations—“so there are all these components conspiring to drive construction prices higher.
We feel very good about the market,” he says. “Our global strategy in Vegas is really no different than what we’ve been buying anywhere already—newer product in well-located neighborhoods, kind of B-plus assets in A locations,” McClave says.
Additionally, the company’s value-add focus means “We bridge the gap between former A product and newer A product.” While some may see this is a contrarian play, to Bascom, its focus on Vegas is a disciplined and measured approach.
“The low cost per-unit and higher cap rates relative to a Southern California market makes it very attractive—both in terms of quality of asset for the money, and operationally, in terms of cash-on-cash ROI.”