Image Bar

Tulsa Real Estate Passes the Stress TestPaul Coury

Tulsa World, April 16, 2009

By PAUL COURY Business Viewpoint

The national economic crisis that started in late 2008 has many similar dynamics to the recession that Tulsans witnessed in the late 1980s through early '90s.

As they were two decades ago, declining housing values and high energy prices played a key role in the start of our current downturn. This was followed by failing brokerage houses, hedge funds' liquidity issues and a 50 percent decline in the stock market.

However, many factors are different for the Tulsa area this time around, and they stand to put us in a stronger position as we recover.

With the national recession of the late '80s, Tulsa had a dozen national oil companies with major operations. We had an over-supply of housing and commercial office space. Inflation was high, and the value of commercial real estate had accelerated.

The downturn resulted in the loss of several oil companies and more than 30,000 white-collar jobs. Real estate values fell by 40 percent to 50 percent, and housing a 30 percent decline. All of this had a lasting, negative impact on Tulsa.

The current downturn has not seen the same loss of employers, but rather a drop of 5 percent to 10 percent in the employment base.

Consequently, we have not realized the same stress to the housing or office inventory as in the '80s. Real estate values have held firm, with a swing either way of 5 percent.

Home prices in Tulsa have seen a gradual increase since the recovery in the mid-1990s; values have not seen the hyper-growth of many markets.

Hence, our city has seen very little correction to our residential values or commercial real estate.

Effectively, our slow growth kept our sales below construction replacement cost and may be our saving grace in the current recession.

In fact, many statistical resources indicate that Tulsa is one of the "best value" housing markets in the country.

Little new office inventory has been added in the last 15 years, with most of it owner-occupied. Retail property has seen the most growth over the last 15 years, but there is not much excess inventory.

Apartment demand has remained strong, with rents holding their own. The apartment sector should feel the least amount of pressure of all real estate types, followed by the industrial market.

New construction can be seen sporadically around the city, as most of the projects were under way or substantially planned before the recession.

The good news is that not a large amount of inventory exists in any specific sector. Therefore, our market space should absorb any speculative inventory within two years.

Construction costs have stopped their double-digit climb and are starting to decline, particularly in labor and profit margins. Additionally, petroleum-derived materials have begun to reflect even more aggressive declines.

The biggest obstacle to market recovery and to Tulsa is the debt market.

Money center banks have quit making loans, and local banks don't know how regulators will treat existing real estate loan portfolios. In fact, many banks are requiring substantial pay-downs when loans renew.

New loan-to-value ratios are expected to be in the range of 60 percent to 70 percent. Again, this is more realistic in Tulsa, which did not have a free-fall in home and commercial real estate values.

The recession comes on the heels of one of the most balanced years in Tulsa's real estate history. Our city is poised to realize a minimal decline and continue with its methodical growth.

Looking ahead, Tulsa's bond-like real estate market could make our city a target for acquisitions over the next several years.