Later this month, what’s being billed as the largest commercial real estate auction in U.S. history will occur in Las Vegas.

More than $1 billion in distressed Nevada assets and delinquent notes—mostly located in Sin City itself—will be on the block May 17-19 through, with many of the items coming from special servicer LNR.

Among the items is a $50 million nonperforming note on The Fountains at Flamingo, a 524-unit complex in Las Vegas, as well as a $38 million note on the 420-unit Montego Bay Apartments in Henderson.

But outside the auction doors, a few buyers have been busy the last eight months scooping up Class A deals at deep distress discounts in the city. Since October, there have been 10 transactions of more than $2.5 million in Las Vegas, and either the FDIC or a lending institution has been the seller in seven of those 10.

“I’m very bullish long term on the market, I just don’t think many investors have the stomach for Vegas right now,” says Dan Fasulo, managing director of New York-based market research firm Real Capital Analytics. “There’s a general move toward secondary markets among many investors, but it remains to be seen how much of that secondary markets capital Las Vegas will get.”

Slow Velocity
Phoenix-based Alliance Residential was the buyer in two of those last 10 Las Vegas transactions. In fact, over the last five years, Alliance has built about 1,500 units in Las Vegas, and now owns about 3,500 units throughout the Las Vegas Valley.

In April, the company purchased an unfinished condominium project called The Pueblos in North Las Vegas, for $3 million—a deep discount when you consider that the outstanding balance on the construction loan at the time of foreclosure was $8.7 million. And in October, Alliance purchased the Reserve at Arrow Canyon, a 426-unit property built in 2007 as condominiums, for $37 million.

“We understand Las Vegas pretty well. It’s volatile, and you’re certainly in the down part of the cycle, but across the board, our portfolio stands at about 94 percent,” says Dan McCadden, partner and managing director of development at Alliance. “All markets recover to the mean, so Vegas will pick back up.”

Alliance isn’t alone. Last December, Cornerstone Real Estate Advisors purchased the Croix Townhomes in nearby Henderson, paying $19.6 million for the 137-unit asset, or $143,065 a door. And in March, Colonial Properties Trust also made a big splash, buying the 341-unit Acapella, a 4-year old Class A property in North Las Vegas, for $41.2 million, or $120,821 per unit.

Industry watchers estimate the cap rate on the Croix transaction to be below 6 percent based on trailing-12 month collection numbers. And Colonial’s Acapella transaction likely had a cap rate in the mid- to high-6 percent range.

“The Colonial deal is kind of a template for secondary market apartments in Vegas, for institutional quality assets,” Fasulo says. “For a brand-new complex built in 2007, that type of cap rate doesn’t exist anywhere in the country.”

The Pueblo Deal
Alliance was very familiar with The Pueblos long before it purchased it. Alliance built a new community right next door, called Broadstone Sonata, which came online 18 months ago. Sonata and Pueblos share property lines, and even used some of the same design consultants.

The former developer of The Pueblos had only finished 40 of the planned 152 units when construction was stopped in 2008. Alliance tried to buy the property back then, first from the developer, then from the original lender, Tier One Bank. But Tier One was seized by the FDIC in June 2010, the loan was foreclosed on in November, and Alliance finally closed on the property at the end of March.

Alliance will break ground June 1 to finish construction on the remaining 112 units, and including the acquisition price, the entire process should cost between $14 million and $15 million. The company estimates replacement costs at $130,000 per door, but will build at less than $100,000 per. The units are large, averaging 1,240 square feet, and have attached garages and high-end finishes: condo-quality specs that probably wouldn’t have penciled out if it were built as a rental.

“We can deliver a product at significantly under replacement cost and the units are of the highest quality available in the marketplace,” McCadden says. “It’s a product type that typically would never get built as a rental property.”

Stabilizing Fundamentals
Las Vegas certainly has been a laggard in the multifamily industry’s recovery. Rampant speculative over-building in the for-sale market combined with continued high unemployment has made it the poster child of distress.

But there are some green shoots emerging. Area employers slashed 3,100 jobs in the last year, but employment in Las Vegas is expected to increase 1.8 percent his year, or 14,000 positions—the first year of job growth since 2007. In the first quarter, this trend was already under way, as payrolls expanded by 1,700 jobs.

Asking and effective rents are also expected to tick up very modestly this year, 0.5 percent and 0.3 percent respectively, according to Marcus & Millichap. Even so, that would be the first annual increase since 2008. And vacancy is forecast to decrease 110 basis points (bps) this year, to 8 percent, after falling 210 bps in 2010.