The Retail Market
Oklahoma City real estate is known for its relative stability and slow but steady growth. We typically don’t see the cyclical volatility nor the overexuberance of other markets. The numbers for the first half of the year reflect this even as retail nationally and locally is undergoing transformational change. Occupancy edged up the first half of the year to 90.6 percent from 90.2 percent at year-end. We attribute the improvement to a good but not great economy, the continued growth of discount retailers, and the marijuana industry (see our take on this below).
The transformation of retail has been ongoing for several years now and will continue for several more. Far from being an apocalypse, the changes are invigorating the industry and creating a far more vibrant shopping experience; retail isn’t dying, it is changing to meet customer preferences. Broad trends include a more integrated shopping experience. A majority of consumers now start their shopping on the internet which means retailers are bolstering their digital capabilities and figuring out new ways to combine the internet with their stores. This trend will continue as retailers get better data on how consumers use the internet for shopping and determine the optimal mix of stores and digital. An exciting part of this process is internet retailers that are now opening physical stores as its proven to increase their digital sales in areas that they do.
Experiential retail continues to be a focus of retailers. Don’t get lost in the term. This can be as simple as training sales people to be friendlier or know their products better. It can also mean computer kiosks in stores, interactive displays or a themed store layout. This is how Best Buy turned its performance around, better trained its people, improved its stores and changed its product mix. It shouldn’t be a surprise to anyone that consumers want to enjoy their shopping experience. While not sexy, the success and expansion of discounters continues to be a trend. This includes the TJ Maxx’s and Ross’ of the world but also a new wave of deep discounters such as Ollie’s and Dirt Cheap. Shoppers have become addicted to cheap, sometimes out of necessity. Private equity’s influence on retail has been significant over the past several years. To fund growth, many retailers have loaded up on debt either through Wall Street or leveraged buyouts. This gives retailers less flexibility to weather swings in the market and often incentivizes them to vary from the operating model that made them successful in the first place, adding to the volatility of the industry.
Oklahoma retail is experiencing all these industry-wide trends but is facing headwind on a couple of local fronts. In particular, sluggish population growth and a changing energy industry. Oklahoma City’s population growth has slowed in the last couple of years to 1 percent or less depending on the source; this is a significant decline from the previous five years. This decline may very well be related to changes in the energy industry and the reduction in the number of energy and energy-related jobs. As we have discussed before, energy has always had an outsized influence in the Oklahoma economy, not only from the shear economics but also for consumer optimism. The energy business has gotten much more efficient and can do much more with fewer people. As a result, many of the high-paying energy jobs of the past may never come back.
Mix the national retail trends with the local economic influences and the short-term outlook is for more of the same – stable but no spark for growth.
The Real Estate of Medical Marijuana
Oklahoma’s legalization of medical marijuana has been a boon and a headache for the real estate industry. The fact that marijuana is still illegal nationally creates issues with lenders, some existing tenants have lease provisions that prohibit such uses, particularly larger national tenants, and then there are the moral issues. Add to this the sheer volume of inquiries from people trying to get into the business, many who are new to real estate, and the headaches become clear. The boon is pretty clear as well. A significant square footage of space has been leased or sold to dispensaries in all manner of retail locations. In addition, Oklahoma City has seen an influx of grow operations that rent but more often buy industrial space which has tightened the industrial market even further. It will most likely take another year to eighteen months to ascertain what true demand will be for marijuana and related products and then we’ll see a shakeout that eliminates the weaker operators. Even with this anticipated fallout, many owners are willing to roll the dice to both address vacancy but also to get older or more functionally obsolete properties improved at the tenants’ cost. Should marijuana be legalized nationally, it will create another wave of change as many of the large well-run Canadian companies that have been operating in this space for years move to the states.
Costco opening its first Oklahoma City store at the southeast corner of Memorial Road and Western was probably the biggest news of the first half of the year. Crowds and sales continue to be strong. Costco is close to identifying a second location in the south metro. Sooner Development continues to expand Sooner Rose in Midwest City with the soon to be completed Warren Theater and the Andy’s Altitude indoor play center as well as some restaurants. Burlington & Ulta are being added to Fritts Farm in Moore. Washington Prime is adding two small buildings, one on the former Mamasita’s site and the first new building (housing two restaurants) on the triangle north of Whole Foods. Most of the other new development in the first half of the year was more small strip centers throughout the market.
Oklahoma City has three large, transformative projects in the planning stages and all three made progress in the first half of the year. Chisholm Creek, the 192 acre mixed-use development between Western & Pennsylvania on the Memorial Road Corridor, released renderings of its next phase, which include two larger mixed use buildings with ground-floor retail, office above it and a pedestrian friendly courtyard as well as a hotel and a dinner and a movie concept. Penn Central, (recently renamed “Oak”) the ambitious high-end retail, office and residential project at Pennsylvania and Northwest Highway received Planning Commission approval for its site plan. And, the Cotton Mill project being marketed by Sooner Development is waiting to see if a soccer/multi-use stadium will be included in MAPS 4 which could anchor their retail and entertainment project. None of these projects have broken ground, all would take Oklahoma City retail to a new level.
Survey Footnote: Our survey tracks 30.8 million square feet in 268 buildings of over 25,000 square feet and 15.9 million square feet of stand-alone buildings for a total market of 46.7 million square feet. There continues to be a significant number of smaller strip centers in the market (under 25,000 s.f. in size). We estimate there are close to 11 million square feet of these properties in the market.