REGIONAL MARKETS: SOUTH CENTRAL

APARTMENT FINANCE TODAY • MAY 2008

One to Watch

The rental market in Oklahoma City is doing better than you might think.

By Dana Enfinger

The apartment market here has been quietly gaining momentum. We’ve had our eye on it since APARTMENT FINANCE TODAY found in its analysis of the top multifamily markets last October that the area’s scores in five important criteria placed it well in front of apartment markets in Florida’s coastal markets and all markets in Texas we analyzed, with the exception of Abilene, Texas.

Just how well is the Oklahoma City apartment market doing? As of December 2007, the year-over-year rent growth in Oklahoma City was 5.2 percent, a level equaled in only a few prosperous West Coast markets, said Caroline Latham, CEO of RealFacts, an apartment research firm based in Novato, Calif.

“We asked managers to give us their take on the strength of the market, and many mentioned evidence of strong demand, especially increased traffic when vacant units were advertised,” said Latham.

“A factor frequently cited was the existence of new projects. Although the conventional wisdom is that new construction puts older units under economic stress, we have often noticed the opposite effect; when a new apartment complex is able to fill its units at a higher price than managers formerly believed possible, older complexes then achieve rent increases that put them just under the new units, and therefore still a bargain in the eyes of prospective residents,” she added.

Latham said that rent increases of $10 to $25 a month were common when managers were surveyed there in February.

“[In a city] where rents are generally in the $500 range, that is a large percentage increase,” said Latham.

Over the past decade, the Oklahoma City multifamily market had absorbed roughly 1,000 new units per year. But in 2006, only 575 new units came online. In 2007, new construction had increased somewhat: A total of 1,031 new units were absorbed with another 728 new units in construction last year and 622 new units in the planning stages, according to a report from Price, Edwards & Co., a locally based commercial real estate firm.

“There has been a little bit more new construction, but I wouldn’t say it’s happening at breakneck speed,” said David Bohanon, a senior associate with Marcus & Millichap’s Oklahoma City office.

Inner-city development

It’s not so much the number of new units that have people talking in Oklahoma City. It’s where a large number of new units are planned.

Gardner Tanenbaum Group, the developer of The Lincoln at Central Park, a fully leased luxury community, is planning a second phase of 432 additional units—less than a year after the first phase of the project opened.

The area along Central Park Drive was once notorious as a haunt of prostitutes and their clientele. Located about four miles from downtown, the site is hemmed in by a freeway and patches of mostly industrial land.

The firm’s CEO, Richard Tanenbaum, is convinced that he is creating demand, mostly for people who work close to downtown and want to cut the costs of commuting.

One of the main reasons that Oklahoma City seems to be faring well (and why units filled up so quickly at The Lincoln) in the current credit crisis is the record high price of oil—a situation that is helping the Baton Rouge rental market also stay afloat.

“We have a real strong energy sector,” said Bohanon. “That’s really the main part of our economy.”

It’s not just Oklahoma City; the entire state’s economy is looking good thanks to high oil prices and a more diverse economy than in past years.

“The city has not been as negatively affected by the subprime nightmare as a lot of the other markets because we didn’t have a whole lot of home buying going on,” said Bohanon.

Good values

In 2007, multifamily sales volume reached a new high of more than $307 million, with 9,771 units selling in 46 transactions, according to a report from Price, Edwards & Co. The average transaction price was $31,472. In 2006, sales volume came in at $218 million on 49 closed transactions. The average 2006 sales price on multifamily properties was $27,520. In comparing price per unit from 2006 to 2007, value climbed 12.6 percent.

Out-of-state investors are expected to set the pace for multifamily sales in this market as rental rates are expected to improve. Still lenders will likely be more conservative in underwriting loans this year, as they are in other markets.

Overall, it’s a bright picture for 2008—one that’s A-OK for apartment owners and investors in Oklahoma City.