2005 Oklahoma City Mid-Year Apartment Report

Transcription

1 2005 Oklahoma City Mid-Year Apartment Report July 2005 Providing professional apartment brokerage and marketing services for over 20 years Mike Buhl Aaron Hargrove 2425 Wilcox Drive Norman, Oklahoma Phone: Brad James 1831 East 71st Street Tulsa, Oklahoma Phone: South Waldren Rd, 304C Fort Smith, Arkansas Phone:

2 2005 OKC With a near record breaking year in 2004 and consecutive gains in multifamily values over the past decade, the question is where are we in the real estate cycle? Or should we even be concerned about a cycle? Some would argue that the traditional trends of boom and bust periods in Oklahoma City are over. I am not sure I'm willing to subscribe to this theory, although it is becoming hard to dispute when you look at market conditions. The market has shown that multifamily values have continued to rise over an extended period of time. The most striking thing is that this is occurring in an environment of weak fundamentals. Vacancies may in fact be falling somewhat and if rents are not rising, they are at least stable. But neither has moved far enough to justify the high prices being paid for some apartment properties. Here is an example to illustrate my point. A 70-unit property in Oklahoma City sold for $1,300,000 in July of 2002, then for $1,500,000 in April of 2003 and most recently for $2,150,000 in May of This is a 22% annual increase over the past three years. This sale, as others like it, was not driven by rental rates or job growth, but by the demand for apartment acquisitions. In short, rent and job growth in Oklahoma City has not increased by the same 22% over the past three years. If, therefore, the fundamentals do not support this type of inflation, what does? The demand to buy is simply abnormally high. This is due to the flood of money going into real estate. Some say this will not ease up because of the lack of interest in the stock market. They theorize that money will continue to flow into real estate, and thus the boom and bust periods are over. Others predict that this situation cannot last and that rising interest rates will cause values to fall. Meaning that as interest rates rise so will cap rates. And when cap rates rise, all else being equal, property values will fall. My own view is somewhere in between. I tend to believe that nothing lasts forever, which means in my opinion there will be an end to the current seller's market. Also, the market is mostly being driven by a single category of buyer, Californians. So what will happen to the market if the California buyers decide to exit the market and invest elsewhere? It depends on where we are in the cycle. Clearly we are seeing investors building a recovery in fundamentals into the purchase price, as illustrated above. Ultimately, however, investors may be forced to lower their expectations if the fundamentals do not improve as fast as hoped. If they must sell to soon, they may find themselves stuck with an illiquid asset or realizing a loss in order to sell. Depending on timing and the real estate cycle, it may prove easier for many of these investors to get into this market than to get out. The bottom line is that current values are just simply stronger than what the property fundamentals will support. I have spoken with many owners and have conducted varied evaluations that support this statement. Historically low interest rates have caused this disconnect. It is fairly common for an investor to get a ten- percent return on a sub-8 cap rate. Until interest rates move upward, this trend will continue and buyer demand for apartments will remain robust throughout Rental Rates are expected to remain flat throughout 2005 with varied levels of concessions and move-in specials. Citywide occupancy is expected to remain in the range of 88% to 91%. Regarding fundamentals, why are they weak and when will they get better? Operating fundamentals are weak because it is difficult to sustain occupancy when tenants are moving to buy single family homes. Historically low interest rates have also driven the single-family residential market to new highs. During the first 4 months of 2005, there were 2,072 single-family building permits issued in Oklahoma City, Midwest City, Edmond, Moore and Norman. Compounding the problem is that rent concessions and higher expenses are eating away at the bottom line. The fundamentals will improve once we see a sustained pickup in job growth, which is a key element of apartment demand. The good news is that total non-farm employment for the Oklahoma City Metropolitan Statistical Area was up by 10,600 jobs, from May 2004 to May 2005, according to the Oklahoma Employment Security Commission. By comparison, Tulsa gained 3,700 jobs during the same period. Government agencies accounted for roughly 21 percent of the jobs in the Oklahoma City area. Oklahoma also ranked in the top one-third of states in personal income growth in the first quarter of 2005, according to the U.S. Bureau of Economic Analysis. It appears the job market is performing very well, which is good news for the apartment market and a good indicator for improving fundamentals within the industry.

3 2005 OKC Here is a recap of There were more units sold in 2004 than the previous two years combined. Sales volume in 2004 exceeded $198 million, a 77% increase over There were 8,669 units sold in 2004, which is now ranked as the second highest level in the past twelve years. So what is happening in 2005? Total volume at mid-year stands at $115,499,462 for 4,484 units. The overall average on apartment communities with 25 units or more is $25,758, which is a sizable increase over the 2004 average of $22,950 per unit. Keep in mind, however, there were fairly significant increases in the Post 80's and 90's categories, which helped drive this overall average. Inventory also remains fairly strong. A look at listings of over 25 units posted on LoopNet shows that there is in excess of $114 million in active listings for a combined total of 4,196 units. The average listing price is therefore $27,275 per unit. The average per unit price in the Pre-1980's category was $19,450 at mid-year 2005, which is up 2.5 percent from $19,008 at year-end Values are actually moving ahead very nicely in 2005 considering how the Trinity transaction impacted the market in The Trinity deal, at below $10,000 per unit, accounted for 27% of the total units sold in the Pre- 1980's category in So far, sixty-eight percent of the units sold in 2005 have occurred within the Pre- 1980's category. There have been 23 transactions on 2,807 units for a combined total of $54,596,460 in volume. The only notable thing in this category was that several of the transactions in 2005 have been foreclosure sales by lenders. For Post-1980's properties, 2005 is starting out to be as active as 2004 ended. There have been ten transactions for a combined 1,449 units. The volume of sales has exceeded $42 million for an average price per unit of $29,286. This is up a solid 11 percent from year-end 2004 and returned the category back to the levels we saw in 2002 and The notable transaction for this category was the sale of the Concord Apartments in Midwest City, which exceeded $40,000 per unit. Concord is a 128-unit community that was built in The property is comprised of 80 one-bedroom units and 48 two-bedroom units and was purchased by a California investor. For Post-1990's properties, there was only one sale involving the Renaissance Apartments in Norman. Renaissance is a 228-unit community that was built in The property sold for $18,468,000 representing $81,000 per unit, which is a new record for the highest price paid for a multifamily property in the Oklahoma City metro area. The sale of Renaissance exceeds the previous record set by the Deep Deuce Apartments in downtown Oklahoma City, which sold in 2004 at around $75,000 per unit. The sale of Renaissance also far exceeded the sale of Sterling University Greens in Norman, which sold in 2004 for $67,256 per unit. Sterling was built in 1999 and contains 172 units and is leased by the bedroom to students at the University of Oklahoma. Renaissance has many amenities including, garages, 9' ceilings with crown molding, full-size washer/dryer connections, state-of-the-art fitness center and a resort style pool. The unique aspect of the Renaissance sale is that it was a tenant-in-common acquisition. TIC ownership has become a popular structure nationally because it allows the small investor to acquire a fractional interest in an institutional grade property. As in the case of Renaissance, the smallest investor entered the structure with only $89,000. The TIC structure provides an opportunity for buyers with 1031 exchange funds, especially the small investor. Small investors typically have a desire to get out of managing their small properties and move to more institutional type assets that can be managed by third-party providers. Is there controversy and uncertainty to the TIC? According to an article by Joe Gose in the June 2005 issue of National Real Estate Investor, apparently so. He states in his article that "there is widespread speculation that sponsors may have an easy time passing struggling properties off as top performers to unsuspecting 1031 tax-deferred exchange buyers, investors who are eager to defer capital gains taxes and who are driving the demand for TICs. What's more, TICs have yet to face falling property values, bankruptcies or capital calls, critics say, and it's uncertain how the TIC structure would weather those storms". In looking back at the Renaissance transaction, they must

4 2005 OKC have had a fairly optimistic view of the market to pay an all time record price within a rental market that is seeing more multifamily development than it has over the past 20 years. Time will tell the level of success for the TIC structure, but it does bring me back to my earlier comment about the risks associated with building a recovery into the price. In instances like the Renaissance, it may prove difficult to find a buyer who is willing to pay more than $81,000 per unit in order for the current owner(s) to exit the market, should they desire to do so. Here is a staggering number. According to the same article in NREI, it is estimated that TICs could acquire $15 billion in commercial properties this year. What does this mean for Oklahoma City? As a buying group, TICs will likely be pursuing more investments in the local multifamily sector. The simple fact that there is more demand for apartments than there is supply should help increase activity and sustain values through the end of Improving fundamentals, including declining vacancies, increased rents and a brightening employment picture, will be the true test to determine if the market will continue or reverse its upward cycle. As for today, the huge investor appetite for apartments makes this an ideal time to sell. Without making any specific predictions about when or if the market will cycle, it is my opinion that these unusual conditions will not last forever. Recent Apartment Sales Property Name Address Price No. of Units Price Per Unit Aaron's Courtyard 3817 N. Geraldine 1,900, ,000 Concord 9300 Orchard Blvd. MWC 5,150, ,234 Almonte 5901 S. May 7,500, ,042 Tiffany House 5505 N. Brookline (High Rise) 4,000, ,303 Riverchase N. Pennsylvania 6,150, ,405 Windsong 7255 S. Walker 2,750, ,768 Grandville 727 N. MacArthur 4,180, ,417 Hunters Pointe 230 Hal Muldrow, Norman 2,661, ,346 Chateau DeVille 2351 NW 22 nd Street 1,250, ,000 Regal Garden 6600 NW 16 th Street 2,920, ,250 Renaissance 1600 Ann Branden Blvd. Norman 18,468, ,000 Uptowne Square 1601 NW 30 th Street 2,700, ,547 Cambridge Landing 8800 S. Drexel 11,210, ,025

5 2005 Oklahoma City Highlights AVERAGE SALE PRICE PER UNIT Apartment Communities in Excess of 25 Units Number of Transactions- 34 Total Number of Units Sold 4,484 Average Sale Price Per Unit Average Sale Price of Pre-1980's Properties Average Sale Price of 1980's Properties Average Sale Price of Post-1990's Properties $25,758 per unit $19,450 per unit $29,286 per unit $81,000 per unit BREAKDOWN OF PRE-1980'S PROPERTIES Total Number of Transactions 23 Total Number of Units 2,087 Number of Sales in Oklahoma City 20 Number of Sales in Norman 1 Number of Sales in Edmond 1 Number of Sales in Moore 0 Number of Sales in Yukon 0 Number of Sales in MWC Del City 1 Price Per Unit: High $45,000 Low $7,143 BREAKDOWN OF POST-1980'S PROPERTIES Total Number of Transactions 10 Total Number of Units 1,449 Number of Sales in Oklahoma City 8 Number of Sales in MWC 1 Number of Sales in El Reno 1 Price Per Unit: High $46,667 Low $22,222 BREAKDOWN OF POST-1990'S PROPERTIES Total Number of Transactions 1 Total Number of Units 228 Number of Sales in Oklahoma City 0 Number of Sales in Norman 1 Price Per Unit: High $81,000 Low $81,000

6 COMMERCIAL REALTY RESOURCES CO Mid - Year Apartment Report 8,455 9,169 8,669 7,428 7,728 6,729 7,544 5,995 4,569 4,651 4,677 4,484 3,

7 COMMERCIAL REALTY RESOURCES CO Mid - Year Apartment Report Post-1990's Post-1980's Pre-1980's $81,000 $72,249 $60,833 $54,782 $43,281 $29,592 $31,766 $27,222 $30,208 $29,327 $29,286 $19,012 $21,235 $23,938 $26,822 $24,065 $27,173 16,694 17,750 16,162 20,154 21,356 20,082 $26,333 19,008 19,450 9,035 11,249 9,451 12,498 11,