2004 Oklahoma City Mid-Year Apartment Report. July 2004

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1 Mid-Year Apartment Report July 2004 Providing professional apartment brokerage and marketing services in Oklahoma for over 19 years Aaron Hargrove 1831 East 71st Street Tulsa, Oklahoma Phone: Mike Buhl 2425 Wilcox Drive Norman, Oklahoma Phone:

2 Mid-year report It appears that the Oklahoma City apartment market is now officially on the radar screen for many California investors. Interest from the Golden State has reached unprecedented levels. From small to large, California investors are looking to Oklahoma to generate cash flow returns that they cannot otherwise achieve. The theory is that the California market may be reaching a peak. Since many investors are expecting their returns to come from the capital appreciation of the property and not through cash flow, the time has come to apparently cash out. How does this effect Oklahoma City? The unprecedented level of interest has caused a skirmish among investors to find replacement properties to qualify for 1031 exchanges. Many of these investors will settle for subperforming properties or returns simply to avoid paying taxes on their profits. Consequently, virtually any property in any location is a candidate for a 1031 investor who is running out of time, which has helped to sustain transactional activity and values in Oklahoma City. This has been a growing trend over the past several years, but has taken on new proportion in With regard to historical values, here are some interesting figures from the Assessors office. They report that apartment values are up 37 percent from 1999 to a record $1.2 billion in They also report that the actual taxes paid on the apartment properties in Oklahoma County is estimated at $13 million, up 44 percent since The other contributing factor to rising values has been interest rates, which have been at 45-year lows. It is easy for investors to justify higher values when they can finance at such low rates. Who would have ever thought then that higher interest rates could be a blessing? But with higher interest rates on the horizon, this may finally signal the long awaited turnaround in operating fundamentals. Record-low interest rates over the past few years have led many apartment tenants to vacate their units in favor of homeownership, which has led to increased vacancy and concessions throughout the market. Although higher interest rates are being forecasted, don't expect the home-buying frenzy to come to an abrupt standstill. As interest rates trend higher it will lesson the impact, but it will certainly be a gradual process. At this point though, the residential numbers still look fairly strong. For the first six months of 2004, there were 3,465 building permits in the metro area, compared to 3,048 for the first half of So whether it is a gradual process or not, any movement will be a welcome sign to the multifamily market. The most important factor to a full turnaround in property fundamentals will be job growth. According to the Oklahoma Employment Security Commission, the unemployment rate for the Oklahoma City MSA was 4.0% in April 2004, as compared to 4.8% in April As a whole, the unemployment rate for Oklahoma was 4.5% in April 2004, which was at its lowest point since October The Oklahoma City MSA added 3,000 non-farm jobs in May 2004, and employment has increased by 6,100 jobs since May The state's labor market continues to improve, which is also a welcome sign to the multifamily market. Data shows that statewide employment has improved every month so far this year. Small job gains and a stabilized workforce are the overriding themes. According to a survey by the Economic Research & Analysis division, more than 80 percent of the 1,471 employers surveyed indicated that they expect to make no change to the size of their workforce in Continued volatility in the stock market will also help the real estate market. Today, a 10 percent return for a multifamily property looks better than the potential of losing principal in the stock market or settling for a sub-4 percent return on Treasury investments. There is still inherent risk with cycles in the real estate market, but the long-term prospects for the multifamily sector look reasonably bright.

3 Mid-year report Although we are finally seeing some positive signs for the multifamily market in terms of interest rates and job growth, concessions and vacancies do remain prevalent factors that should not be overlooked in the underwriting process. Rental rates have remained flat during 2004 and are not expected to show any noticeable improvement during the second half of the year. It is expected that concessions and move-in specials will continue throughout the year and occupancy levels will remain in the range of 88% to 91% throughout the metro area. I have noticed several pending foreclosures, which means for some owners there will be no more time to wait for a turnaround. I think we may see some foreclosures in the market simply because of investors who over paid too early in the cycle. This will not be a wide spread problem and the chance for significant foreclosures has probably already passed with the sale of the Trinity Portfolio, which will be discussed below. New construction will be covered in greater detail in our year-end report. As a quick summary, however, there have been approximately 8,100 units since 1995 that have been built or that are currently under construction in the metro area. By the end of 2004, this number could increase to around 9,250-units, which will keep the average at approximately 1,000 new units added to the metro area each year. Norman continues to be in the spotlight with the number of new communities that are being built for students at the University of Oklahoma. The Campus Lodge Apartments at 1800 Beaumont will contain 192-units and The Reserve on Stinson will contain another 400-units. Also planned are Crimson Park with 268-units and a planned development by the University of Oklahoma, which will contain around 400 more units. In addition to the over 1,200-units of student housing being added to the market, Norman is also experiencing an influx of new duplex developments. This will add several hundred more units to an inventory that is already showing some signs of slower absorption. There were 36 transactions during the first half of 2004 for a total of 4,610 units. This almost exceeded the entire number of units sold in all of 2003, which stood at 4,677 units. As in 2003, ninety-five percent of the transactional activity in 2004 has occurred in the Pre-1980's category. The average for this category was $15,747 per unit, which is down 22% from $20,082 per unit recorded at year-end The decline is fully attributable to the sale of the defunct Trinity bond portfolio. The Trinity portfolio involved 12 properties and 1,872 units for a total price of $18,560,500 or $9,915 per unit. As one might expect, the buyer of the Trinity portfolio was an investor based in California. For a closer look at the impact, if you were to remove the Trinity sale from the figures, you would come up with 22 transactions on 2,414 units and an average of $20,269 per unit. Excluding the Trinity sale, values for the first six months of 2004 were actually trending higher than in Unfortunately, even though the Trinity deal was considered a distressed sale, it must be included in the figures due to its size and significance in the market. The average for this category will begin to rebound as these Trinity properties are renovated and sold at higher values. The challenge for investors in this category is to find good properties in good locations at prices that have not been artificially inflated by overzealous sellers. For Post-1980's properties, there has been little activity in the past twenty-four months. The only sale involved a 30-unit property, making this category again fairly insignificant. There will continue to be low transactional activity in this category, as owners will find it hard to locate similar quality replacement property and will remain

4 Mid-year report reluctant to sell. Following last years sale of Montclair Parc at over $60,000 per unit, the Deep Deuce Apartments in downtown Oklahoma City was sold by First Worthing, marking the first sale this year of a Post-1990's vintage property. The sale of Deep Deuce has set a record at $75,170 per unit, making it the highest price ever paid for a multifamily property in Oklahoma City. Deep Deuce is located in the Bricktown area of downtown at NE 2nd Street and Walnut. The property features views of the downtown skyline, attached garages, state-of-the-art fitness center, garden bathtubs and French doors. Now that the bar has been raised, we will see other owners try to capitalize on this benchmark price. It was recently announced that another 2000 vintage property is now being marketed at over $80,000 per unit. The remainder of 2004 should produce much of the same results, flat rents, concessions and overall weak operating fundamentals. Citywide occupancy is expected to remain steady at between 88 to 91 percent. With the exception of distressed sales as noted above, values will remain stable or trend slightly higher in the second half of the year. Anticipated higher interest rates will be a welcome sign to owners as it slows the homeownership rate. As the labor market continues to show improvement, hopefully we will see more announcements from recognizable companies like Dell, who just recently chose Oklahoma as the site of a new customer contact center. Dell plans to build a permanent facility next year within the Oklahoma City metro area. Recent Sales Highlights Property Name Address Price No. of Units Price Per Unit Spanish Cove 716 SE 59 th Street $1,225, $20,082 Sierra Pointe 5107 N. Hammond $2,225, $26,488 Trinity Portfolio 12 Properties $18,560,500 1,872 $9,915 Cherrywood 7209 W. Melrose $900, $18,750 Heritage 7550 NW 10 th Street $1,680, $15,000 RIF 1101 W. I-240 Service Road $2,690, $24,018 Elm Creek 4201 N. Youngs Blvd. $2,150, $21,717 Hidden Village 3621 Wynn Drive, Edmond $3,251, $32,510 Moore Manor 830 NW 12 th Street, Moore $1,925, $18,689 Cedar Creek 404 S. 2 nd Street, Yukon $1,300, $32,500 Monterey Square 3764 N. Nicklas $1,030, $25,122 Westpark Village N. Western $4,000, $18,182 Calico Corners 2212 Felix Place, MWC $1,560, $21,081 Oak Crest Park 1901 S. Grand Blvd. $6,300, $16,112 Lakeside Village 6370 W. Wilshire Blvd. $3,142, $20,950 Spring Tree 7020 E. Reno, MWC $2,760, $19,034 Quail Creek Springhollow Road $3,780, $30,000 Lakewood 1911 Twisted Oak Drive, Norman $3,150, $22,500

5 2004 Oklahoma city Apartment Sales Highlights Oklahoma City Metropolitan Area Apartment Communities in Excess of 25 Units Number of Transactions Total Number of Units Sold ,610 Average Sale Price $19,647 per unit Average Sale Price of Pre-1980's Properties Average Sale Price of Post-1980's Properties Average Sale Price of Post-1990's Properties $15,747 per unit $32,767 per unit $75,170 per unit BREAKDOWN OF PRE-1980'S PROPERTIES Total Number of Transactions Total Number of Units ,286 Number of Sales in Oklahoma City Number of Sales in Norman Number of Sales in Edmond Number of Sales in Moore Number of Sales in Yukon Number of Sales in MWC Del City Price Per Unit: High $32,510 Low $9,915 Buyer Profile: Private Investors and Syndicators: (34) Non-Profit's: (0) Seller Profile: Private: (22) REIT's: (0) Institutional: (0) Receivership: (12) BREAKDOWN OF POST-1980'S PROPERTIES Total Number of Transactions Total Number of Units Number of Sales in Oklahoma City Price Per Unit: High $32,767 Low $0 Buyer Profile: Private Investors and Syndicators: (1) Non-Profit's: (0) Seller Profile: Private: (1) REIT's: (0) Institutional: (0) BREAKDOWN OF POST-1990'S PROPERTIES Total Number of Transactions Total Number of Units Number of Sales in Oklahoma City Price Per Unit: High $75,170 Low $0 Buyer Profile: Institutional: (1) Non-Profit's: (0) Seller Profile: Private: (0) REIT's: (0) Institutional: (1)

6 COMMERCIAL REALTY RESOURCES CO Mid - Year Apartment Report 8,455 9,169 7,428 7,728 6,729 7,544 5,995 4,569 4,651 3,241 4,677 4,

7 COMMERCIAL REALTY RESOURCES CO Mid - Year Apartment Report Post-1990's Post-1980's Pre-1980's $75, $60, $54, $43, $19,012 $21,235 $23,938 $26,822 $24,065 $31,766 $29,592 $27,173 17,750 16,694 16,162 $27,222 20,154 $30,208 21,356 $29,327 20,082 $32,767 15, ,035 11,249 9,451 12,498 11,575 Per Unit