In 2011, Price Edwards & Company surveyed 317 market rate, student and senior housing units totaling 62,703 units in the Oklahoma City metropolitan area; of which 266 properties totaling 57,978 units were standard multifamily housing. While much of the United States struggles to emerge from the most severe recession in the post World War II era, Oklahoma City delivered another year of declining vacancy and increased rents. Although not as robust as the mid 2000’s, the economy seems to be a little more solid than in the past two years. Jobs are being modestly added and consumer confidence is slowly increasing; still many issues remain uncertain which causes consumers to opt for renting rather than home ownership. The multifamily sector has proven to the most resilient during economic downturns, delivering superior returns during recessionary periods.
For 2011, properties experienced an increase of 1.1% in occupancy to an average rate of 89% across all classes as compared to 2010. Market rental rates increased across the board for all floor plans, with the efficiency units having the largest increase of 2.5% to the current rate of $0.88 per square foot. One bedroom units had the lowest percentage increase to $0.75 per square foot which is an increase of 2.7% as compared to 2010, two bedrooms up 1.5% to $0.68 per square foot and three bedrooms increased by 3.1% to their current rent of $0.66 per square foot. All property classes, with the exception of Class D, experienced increases in rent occupancy, with the largest increase in Class A properties of almost ten percent in rents alone. This large increase is from a combination of limited construction over the past year and the increased demand for quality rental housing, both of which are expected to continue as fundamentals strengthen on both the supply and demand side over the next few years.
Although the occupancy rate overall was up year-over-year 1.1%, there were some submarkets which fared better than others. Submarkets which posted gains were North Central with a 5.7% increase to 93%, Northwest went from 81% to 83%, an increase of 2.5%, Edmond and Mustang-Yukon both up about 3.3% with Edmond at 96% and Mustang-Yukon just below at 95%. Although three of the submarkets had an increase in vacancy, they were very minimal and all only one percentage point below last year. South Oklahoma City has a rate of 89%, Midwest City-Del City at 88% and Moore-Norman at 91%. It is important to note that although these markets had a slight decrease in overall occupancy, they all had increases in rental rates as indicated above.
We surveyed 25 senior housing properties with a total of 3,380 units. Senior housing occupancy increased 1.1% to 95% as compared to 2010. All unit types were up from 2010 with efficiency units renting at $2.65, one bedroom units at $1.87, two bedrooms at $1.99 and three bedrooms renting for $0.63. Senior properties continue to be priced above market rate properties for rent and sales values primarily due to the higher cost of construction as well as a higher average operating expense. As more baby boomers retire, senior properties will see a surge as more retires opt for some type of assisted or amenity rich senior housing.
Eight student properties were surveyed this year for a total of 1,389 units, or as most student properties are rented, 4,544 beds. Occupancies increased 2.1% from 94% in 2010 to 96% in 2011. Student rental rates also increased by 2.1% from $522 in 2010 to $533 this year, this totals $1,582 per unit on average. Although some experts say the student market is slightly overbuilt, the statistics show that this niche property type is not in decline, rather is stabilized and in demand. Resort style amenities and planned community events are desired features for student housing; with new developments pushing the envelope on what is available. Older properties are going to face challenges to compete, ultimately needing expensive capital investments. To be successful, a property must provide a distinctive and competitive edge that positions the property better than its peer properties. Timing for new construction is crucial and can potentially be a significant blow to the bottom line if not completed before the ever important leasing season just prior to new semesters. Going forward, successful investors will have to have a strong understanding of student property fundamentals needed to rent to college students.
2011 added 805 units of inventory to the overall market with approximately 1,675 scheduled to come online in 2012. Although almost double this year’s new inventory, the 2012 numbers are not too far out of line compared to historical construction; 2011 was just a slow year primarily due to restricted financing for new construction. In addition to the 1,675 being added in 2012, there are another 400-500 units already planned for 2013 giving the appearance that the stall in new construction due to the recession is practically over. Some significant projects of note are the recent approval of the 250 unit mixed use development, The Edge, in Mid-Town that includes a mixture of multifamily, retail and will have amenities like a rooftop terrace and a 500 car parking garage. In addition to the large properties, the Mid-Town district has recently experienced a strong growth in smaller multifamily properties. One specific group recently has added 34 units, which are 100% occupied, and plans to add another 60-70 in 2012, followed by 50-60 in 2013. Most of this added inventory is for rent housing, with a small amount that will be available for purchase.
Just down the street in the Bricktown/Deep Deuce area, construction is ongoing for the 228 unit Level Urban Apartments on the corner of NE 2nd and Walnut and is scheduled to open in 2012. Adjacent to the Level Urban, The Maywood is scheduled to start construction on 2 four-story towers consisting of 139 units above a two story parking garage.
Along Memorial Road several projects are in the planning phase with two expected to be completed in 2012: Brandon Place with 200 units, and the 262 unit Park at Tuscany near Quail Springs Mall. Further west along Memorial, plans have stalled, but are still in the works, for The Shores at K-Rock, a 300 unit planned development near Rockwell and Memorial. Further into Edmond the same developer as Mid-Town’s The Edge and Brandon Place on Memorial Road, is working on another multifamily development near 2nd and Bryant, Legend V. Consisting of 200 Class A units, Legend V is scheduled for completion around fall of 2012. In Norman, phase two of the Links at Norman is scheduled to begin in early 2012 with an addition of 396 units. Also scheduled in late 2012 is the 224 unit (600 bed) student property by Campus Crest Communities near Highway 9 and 12th Avenue Southeast. This student property isn’t scheduled to open until mid 2013.
2011 finished with promising results, marking the first year in positive financial gains after a three–year decline in transaction activity. Twenty-six properties sold with twenty–five units or more, which was down three transactions from 2010, however it equated to a total sales volume of $127,726,011 for 2011, up 19% as compared to 2010. Of the twenty-six properties, there were a total of 4,265 units trading which was an increase of 22.5% year–over–year, providing an average unit price of $29,947. When compared to last year’s average per unit sales price of $30,776, 2011 marked a slight decline in average unit price of 2.7%. However the decline in average price per unit isn’t necessarily a direct reflection of a decline in market value, rather it’s largely due in part to the fact that of all properties sold, 85% were Class C and D. Furthermore, 39% of all properties sold were in some type of distressed situation. When you remove all distressed sales the average price per unit increases to $42,997.
Well–located Class A and B properties were sought after by investors in 2011 given their flight to quality and focus on strong market fundamentals. However, there were very few assets of this quality available in 2011 and only four transactions were actually completed. There were two Class A transactions with 576 units totaling $38,527,511, equating to an average per unit price of $66,888, a decline of 24% when compared to comparable properties sold in 2010. It should be noted the two properties sold this year were slightly older than those sold in 2010; and one property sold in 2010 was a student housing property which typically attains a higher price per unit than a traditional apartment property. Only two properties considered Class B asses sold in 2011, with a total of 588 units bringing $30,944,500, or $52,627 per unit.
Most of the sales activity in 2011 involved Class C assets, which is expected given the fact that approximately 75% of Oklahoma City’s existing inventory is considered Class C units. Furthermore, most Class A, and a large portion of Class B properties, are owned by institutional investors which are historically longer term investors and therefore do not sell as often. Although the 2,605 Class C units sold made up 61% of all units sold in 2011, the aggregate dollars only made up 45% of the total dollars spent on multifamily properties. One item worthy of note, distressed property sales create downward pressure on pricing given the relative unknowns relating to deferred maintenance and capital expense issues. As such, the average price per unit for Class C properties which were not distressed in 2011 was $29,639, more than double that of the distressed sales which averaged $11,982 per unit.
In terms of the Class D properties, there were only 3 sales in 2011. At an average price per unit of $2,752, these 496 units brought a total volume of $1,365,000 down 72% from the total volume of 2010.
Sixty-five percent of the transactions were completed by investors with existing holdings in this market, which could provide an indication that values are at, or near, stabilized levels. Typically, when there are an overwhelmingly large portion of new out-of-state buyers compared to experienced local buyers, the prices trend upwards and signals a seller’s market.
We experienced some modest gains in 2011 and, although the national economy remains stalled, the Oklahoma City economy continues to more than hold its own. As such, the apartment rental industry is doing well. The federal government is trying to stimulate investors’ appetite for investments such as housing, durable consumer goods, business capital equipment and nonresidential real estate with historically low interest rates. Although monetary policy cannot provide the answer to every economic woe, with interest rates at an all-time low, combined with plenty of equity looking for commercial investments, properties that once were marginal deals are now attractive. The key is getting acceptance from the lenders as financing commitments are still relatively hard to come by, particularly for older properties. For those borrowers who have loans maturing, many are left with the decision to sell at a discount or inject significant capital. This dynamic has caused many investors to anticipate the bargain basement pricing on distressed sales. However, some lenders have been reluctant to initiate a foreclosure action against borrowers who have demonstrated an ability to fight the foreclosures in drawn out litigation. Other lenders have worked with borrowers in an effort to bring assets current and thus avoid taking a loss on their loans. Both scenarios have resulted in investors waiting for the “deals” being left empty handed.
As 2012 commences we expect to see more properties actually become available either owned by lenders who successfully completed the foreclosure, or by borrowers who don’t have the capital to inject as needed. Several properties in this situation have recently been brought to market, and some are under contract as we go into 2012, so early indications would point to a transaction volume starting off relatively strong.
Job additions will continue to be key. One factor that has largely gone unnoticed is the pent up demand from young adults now living at home. In 2010, 50% of young adults between the ages of 18-24 were living with their parents, and 13.4% of young adults between the ages of 25-34 were living with their parents; so as jobs recover you will see a lot of these people moving into the rental market place. There is a strong demand from the growing population of echo boomers who are just reaching the ages of 20-29 and have a strong propensity to rent. With flat home values, larger down payments required, and jobs requiring more flexibility there is a more negative sentiment towards home ownership. Home ownership rates have dropped from 69% in 2004 to about 65% today; and each one percent translates to about one million new renters. In addition to renters already in this market, Oklahoma continues to see a migration into the state which leads to more rental demand. We expect the growth of rents and occupancy levels of apartments to push multifamily property values up and for transaction levels to increase as market interest and positive publicity for Oklahoma City continues. Multifamily transactions are heavily driven by the lending community, and currently Freddie Mac and Fannie Mae have the lead in financing. We are, however, beginning to see insurance companies and the re-emergence of securitized lenders. Most of the distressed purchases were financed by local banks, with short term financing in mind. These same trends are expected to continue as distressed properties will be purchased mainly by experienced local buyers using local banks, while the higher quality stabilized properties will be acquired by national or regional players employing longer term financing. Further, we expect the values to remain relatively flat on Class C assets, with an increase in pricing as demand strengthens for Class A and B properties.
Multifamily properties will continue to be the preferred asset for many investors and lenders due to their long track record of having the favorable risk-adjusted investment returns compared to other asset types. Oklahoma City has emergenced as a viable market able to achieve solid investment returns with less downside risk than many other markets across the country.