Investor Demand Rises for Apartment Assets in Oklahoma City

by Taylor Williams

As expected and much anticipated, the global rise in oil prices has given the petroleum industry a significant boost and spurred Oklahoma City’s economic recovery. The resurgence, demonstrated in part by a three-year-high in hiring this year, is drawing out-of-state multifamily investors and bringing greater interest from companies looking to relocate or expand.

In mid-October, FedEx more than doubled its warehouse space with the opening of a new 270,000-square-foot distribution facility in north Oklahoma City. The expansion came in response to the increase in outbound e-commerce volume, another indication that the local economy has turned a corner.

Derek Wilson, Marcus & Millichap

Most of the new jobs created in Oklahoma City through September 2018 were professional and business positions. The sector grew by 4.4 percent year-over-year, easily the widest margin of any employment sector.

Overall, the total number of jobs filled during that same period was 13,500, an increase of 2.1 percent. For the complete year, employers anticipate adding about 14,000 new positions. The rebound in hiring has led to the unemployment rate dropping to 3.2 percent, nearly its lowest level in a decade.

Supply-Demand Balance

The city’s economic recovery is particularly well-timed for multifamily investors, as it coincides with a reduction in the metro’s apartment construction pipeline. This marks a big change from 2015 and 2016 when a record 3,500 units were completed.

In contrast, just 690 apartments will be completed in 2018. One of the largest projects is the 303-unit Terra at University North Park, situated just outside of Oklahoma City in Norman, south of West Tecumseh Road.

The Intown submarket is slated to receive 234 units, and the West Oklahoma City submarket will receive 150 rentals. This year, the pace of completions will result in the lowest annual total since 2009.

Since the start of this year, the favorable combination of more jobs and fewer completions has led to the steady absorption of apartments and lowered the vacancy rate. After reaching a high of 8.8 percent in 2017, it is expected that Oklahoma City’s 2018 vacancy rate will finish 2018 at 8.4 percent.

With fewer vacant units on the market, demand for rentals has supported a rise in average effective rent to $725 per month. These rental rates, which were falling two years ago, are now appreciating by more than 3 percent for Class A and Class B properties. This growth builds on the 2 percent gain reported last year and is expected to continue as the average effective rate rises to $733 per month in 2018.

Investment Outlook

On the investment front, Oklahoma City distinguishes itself from nearby markets with lower prices and higher yields. Sales activity remains above the market’s velocity from three years ago, and since 2014, more trades have come from out-of-state buyers.

Investors from California, Washington, New York and Texas are enticed by assets that offer initial returns up to 100 to 200 basis points above what a comparable property would earn back home, at a fraction of the entry cost.

The average sales price per unit rose for the fourth straight year and cap rates in the state capital now average 7 percent. Most trades involve Class C buildings with fewer than 200 rentals that were completed prior to 1990. Many of these acquisitions are situated in the north/central part of the city.

Properties in that zone traded at below-market-average prices and cap rates in the low 7 percent area. Several transactions were also made for Oakcliff-Parkview assets, which are located near Tinker Air Force Base. Units there are priced even lower, with correspondingly higher yields in the low 8-percent zone.

— By Derek Wilson, associate, Marcus & Millichap. This article first appeared in the December 2018 issue of Texas Real Estate Business magazine. 

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