Rent control
Experts: Improving older properties is the way to go
For apartment investors, buying, improving and selling older rental properties is increasingly the way to go.
Apartment developers are building too high for average renters and average investors, so the best venture in 2017 is to buy, upgrade, stabilize and meet the growing demand for affordable housing.
That’s the gist of the forecast portion of Commercial Realty Resources Co.’s 2016 apartment report — not that valueadd investing is anything new.
But with all but the biggest risk-averse, institutional investors priced out of the top of the multifamily market, buying, improving and selling older properties is increasingly the way to go, according to CRRC, a statewide brokerage based in Norman.
Older properties dominated sales in 2016, with 33 of 46 transactions in the Oklahoma City area involving pre-1980 apartments, according to CRRC, which tracks apartment complexes with more than 25 units.
‘Functional obsolescence’
Value-add investing in older properties requires more than surface knowledge of a given market.
“It’s really about submarket locations and specific opportunities that exist within the submarkets, as opposed to blanket-brushing the entire metro areas,” according to the report, available online at www. crrc.us.
With most new apartments aimed at the luxury rental market, 1960s-1980s-era complexes provide good opportunities for return as well as improving the multifamily housing stock, CRRC said.
“Many of these older communities and apartment units exhibit functional obsolescence if their design features are outdated, not useful or not competitive with new and more modern designs,” the firm said. “Owners that have become ‘stagnant’ will view these outdated units to be in good condition and perfectly livable.
“To reduce the decline of affordable housing inventory, investors and owners will need to take a different approach and tackle functional obsolescence with upgraded units that meet today’s standards.”
In Oklahoma City, transactions were off in 2016 compared with the year before — 46, down from 52 — and the total sales volume of $308 million for 6,000 units was a 30-percent decrease from 2015, CRRC reported.
The average price unit was the “bright spot” — $51,333, down 1 percent.
In Tulsa, 16 sales involving 2,725 units fetched a combined $112.7 million, a decrease in sales volume of 34 percent, CRRC reported.
Rents will continue to rise
Looking ahead? Growing inventory at the top end will continue to bring average rents up, reducing the relative supply of moderately priced apartments,” CRRC brokerowner Mike Buhl said.
“New construction has taken this market to a different level in terms of rents, occupancy, pricing, the whole bit,” Buhl said.
Not everyone can afford what is being built now, he said.
“Developers will continue to produce higherend multifamily as the cost to produce each unit has been going up as a result of higher construction and labor costs,” Buhl said in the CRRC report. “Consequently, there will be a growing demand for more affordable apartments in our metro-area markets.
“And it goes beyond just using government programs like the federal low-income housing tax credit that can be used for so many different things. It involves creating housing for the range of incomes.”
High-end developers are missing much of the renter market, CRRC said.
“Downtown markets like OKC and the Inner Dispersal Loop in Tulsa are especially susceptible. Why? Because developers think they want to create glorious facilities that look really, really good, but the problem is it costs a lot of money to do that,” the firm said. “When it costs a lot of money to build, you have to charge that back in rent.
“There is not much availability for the group that is in the $25,000to-$40,000 annual wage range and this group cannot afford to pay $1,000 to $2,000 a month for an apartment.”