Tulsa, Okla.—The rents are going up at Highland Crossing Apartments. The new garden apartments started to lease last July with monthly rents averaging 72 cents per square foot. Now, 92 percent of the units are occupied and rents are 75 cents a square foot.

“Our lease-up was outstanding,” said Greg Wright, vice president for Capital Assets, Inc., Highland’s developer.

And the firm hardly had to offer any extra perks to lure tenants—a big change from the giveaways of televisions and computers, plus a month or more in free rent, that many property managers were offering when the development first started to lease up.

An improving job market, coupled with slim competition from single-family homes and new apartments, should help managers fill their empty units and raise rents for the foreseeable future. Reis, Inc., a New York City-based real estate research firm, predicts the percentage of occupied apartments in the Tulsa area will rise from 89.9 percent at the end of 2006 to 91.5 percent by 2011.

Research America, a local apartment research firm that focuses on investment-quality apartment properties, put the occupancy rate in the first quarter of 2007 slightly higher, at about 92 percent.

“Everybody is expecting to see rental increases and occupancy increases,” said Wright. The cost of construction has risen so much that he, and most other local apartment developers, have decided not to build. “We’d have to have higher rents to make the math work,” Wright said.

It cost Capital Assets $13 million, or $65,000 per unit, to develop Highland Crossing. At today’s construction prices it would cost roughly $1 million more, or $5,000 to $6,000 extra per apartment, to build.

To cover such a cost increase, the project would have to earn rents averaging about 90 cents per square foot. “Our rent rates are not there yet,” Wright said.

Other developers seem to be doing similar math. Despite the recovering rental market here, only 200 new apartments are expected to open their doors in 2007, an increase of just 0.3 percent to the local inventory of about 63,000 apartments, according to Reis.

In contrast, apartment developers finished three communities in and around Tulsa in 2006, totaling 770 new rental units. That amounted to a building boom for this small city, making 2006 the biggest year for rental apartment construction since 2000.

Effective rents grew 2.7 percent in 2006, after years of staying flat or shrinking, and should keep increasing by 2 percent or more a year through 2011, according to Reis.

New job boom

Tulsa lost more than 20,000 jobs after the tech crash and the bankruptcy of Enron in 2001, which indirectly employed thousands of people in the area.

It’s now attracting new jobs, which have pushed the unemployment rate to 4.5 percent in 2006 from 6.5 percent in 2003, according to the Tulsa Metro Chamber of Commerce. The number of people employed in the area should continue to grow by more than 1 percent a year through 2009, the chamber projects.

Even as new jobs bring new renters, local banks are tightening the terms they offer for home loans, making homeownership less attractive. The average home in Tulsa still only costs about $135,000. “Tulsa’s basically a cheap place to live,” said Melanie Richardson, a broker and researcher for Research America.

In fact, it’s so cheap, there’s little market for condominiums. Tulsa is one of the few U.S. cities where no apartments were converted to condominiums over the past few years, according to Reis. That might change, though, if plans for a baseball stadium and hundreds of multifamily units ever go forward.

“There’s a lot of focus downtown right now,” said Angie Boswell, executive director of the Tulsa Apartment Association. Several developers are now considering converting old office buildings into loft apartments, she said. However, for now plans for the stadium are hung up in a battle over land.

A run on apartment properties

In the meantime, investors snapped up 35 apartment properties in 2006, totaling $280 million. That’s a huge number of transactions for a quiet market where only four properties sold in 2004, according to Real Capital Analytics, a New York City-based research firm. “We’ve had a lot of properties sell,” Boswell said. “Sometimes it’s hard to keep track of who owns and manages properties. They change hands two, three times in a year.”

Investors have been drawn to Tulsa by low prices and high capitalization rates. Cap rates, or the income from a property represented as a percentage of the sales price, hover around 8 percent in Tulsa, according to Real Capital Analytics. Prices have grown to an average $37,047 per unit in 2006, a big increase from average price of $29,000, in 2003 and 2004. “Sellers are getting a little proud,” said Richardson of Research America.

Nationwide, the average apartment property sold for $103,000 per unit at an average cap rate of just 5.5 percent in the fourth quarter, according to Real Capital Analytics. That makes Tulsa a bargain compared to the rest of the country.