Town Hall CRE Update

Town Hall Commercial Real Estate Update

March 6, 2024

Thank you for allowing me to come and update you on the Oklahoma commercial real estate market. The process I have taken in preparation for today’s talk is to try to create a narrative from conversations with Brokers and Analysts in the industry, and develop a story by combing through data, charts, and graphs.

So, in the end, I prepared a brief statement or narrative about each sector of the commercial real estate industry and followed that up with a few charts and graphs that support the story. You will see a bit of a review of 2023 and some prediction for 2024 and beyond.

In this way, I hope that it will help you and your business prepare for the future and limit risk going forward. I have broken down the information for both Tulsa and Oklahoma City. I wasn’t sure how many folks work in, or are from, Tulsa. In the interest of time, I will focus most of the comments on Oklahoma City. You can get the entire presentation at jdavidchapman.com.

I break today’s presentation into Retail, Multifamily, Office and Industrial.

Let’s jump right into Retail. For retail, I draw my conclusions and back them up with coffee and conversation with the best in the business – Jim Parrack from Price Edwards.

2023 was a good year for retail, better than expected. Sales were up and national vacancy is at all-time lows driven by both consumer disposable income and limited new construction as well as a stronger than anticipated economy. Locally the same dynamics were in play, vacancy ended the year at 8.9 percent, up from 8.5 percent at the end of last year. Most of the uptick in vacancy was either space coming onto the market from bankruptcies – Tuesday Morning, Party City, David’s Bridal – or some small tenant closures in older centers. It should be noted that most of the closures from national bankruptcies have either already been back-filled or deals are in process; Party City and David’s Bridal also kept a number of their stores open. There is a growing gap between the haves and the have-nots in Oklahoma City retail both in terms of vacancy and rent. If you dig into the numbers, newer, well-located centers are almost all 95 percent occupied or above. Rents on new construction, particularly restaurants, can reach $40 per square foot or more. Conversely, older centers who are not as well located have seen some slippage in occupancy and little improvement in rent over the past few years. While the local economy has held up well on an aggregate basis, there is significant uncertainty which tends to hurt smaller, local tenants more than national tenants.

The harder part is figuring out where our market goes from here. There are some real concerns about whether consumers can continue to spend at the level they have been the last few years. Savings, which have been higher than prior to the pandemic, are dwindling, consumers have been increasing borrowing, and the wage increases of the last two years are moderating. Add to that continued high interest rates, a Presidential election and a general unrest in the country and you get the concerns for retail in 2024. Alternatively, unemployment is still low, inflation may be under control, there is still wage growth for now, and limited new construction which creates some optimism for the year. It's easy to see why analysts are split on what lies ahead.

The two areas of the retail market that have definitely slowed are investment sales and new construction. The rapid rise in interest rates has dramatically slowed sales, particularly since operating performance has stayed strong. There continue to be significantly more buyers than sellers. Regarding new construction, the combination of higher interest rates and still high construction costs just make the numbers hard to work on new construction. But, one large new construction project we have – Oak @ Northwest Expressway & Penn – is impressive. It’s the kins of urban, mixed-use project we haven’t seen in our market. Rose Creek Plaza was kicked off with a Homeland and working on filling out the rest of the project at 164th and May and there are other new projects in the pipeline – a north Oklahoma City power center and a couple of interesting mixed-use projects downtown – that will further add to the metro’s retail mix.

Retail is the sexiest real estate sector. Office is where you work, Industrial is, well, industrial, and in multi-family you have to put up with your neighbors. In retail, we get to dream, shop, and choose. This is why retail is vibrant and ever-changing, which will no doubt characterize our market in 2024.

The one area of retail that was bloodied a bit in 2023 was retail investment sales. This was due almost entirely to the rapid rise in interest rates and the corresponding increase in capitalization rates. Across the country, investment sales in all product types were down 40 to 60 percent and the Oklahoma City metro decline was similar. There are far more buyers in the market than sellers, given the generally good performance of retail operationally, many owners are not willing to sell at current capitalization rates, giving up their current returns and having limited reinvestment opportunities. Lenders have tightened lending standards making deals even more difficult.

Normally in this environment, buyers’ and sellers’ expectations adjust and increased transaction volumes follow. However, there still seems to be a belief among a lot of investors that interest rates will trend down in 2024 (and they have gone down moderately over the past month); but, interest rates need to stabilize for this buyer/seller gap to close.

The other factor influencing some buying decisions is the belief that there will be significant buying opportunities for distressed assets. CRE Daily recently noted that private equity firms have over $300 billion in funds set aside for buying opportunities. And that figure doesn’t include the many single private investors doing the same thing. If you’ll recall, investors followed the same strategy in the 2009-10 recession and there just weren’t that many distressed assets to buy. You now read the horror stories of all the assets coming up for re-financing that won’t be able to afford the higher interest rates. The truth is that most of these investors will figure something out. Now, it’s going to be different on the coasts as they’ve been living in a different world, but don’t expect to see much carnage here, especially in retail.

In the meantime, Oklahoma City retail investments sales volume will remain low. That’s not to say that there won’t be a few; a handful of centers are currently either under contract for sale or nearing contract. For 2023, there were only four sales of significance, Expressway Center, Southwestern Plaza, Midland Plaza and Memorial Square. Both Midland Plaza and Memorial Plaza were institutional owners that wanted to leave the market. 

In the slide deck I included a few slides on Tulsa retail. I just want to comment on the sales volume, which not surprisingly is down with few properties trading hands and price per square foot remains high but appears to be softening. We also see that most of the retail property is in the hands of private owners at 47%.

Next, let me comment on Multifamily. Again, I comb through the charts and graphs and then I have conversations with the best in the business from Capstone Companies. They focus their brokerage efforts purely on multifamily and I talk with Ryan Chapman, CCIM & Sr. Analysis and David Dirkschneider – Managing Director.

Interestingly, this darling of the commercial real estate industry has seen fairly significant changes and is experiencing a bit of headwind. Oklahoma City (OKC) and Tulsa, with a focus on units sold, total volume, and the anticipated impacts of rising interest rates on the 2024 sales forecast, alongside a discussion on rent growth in both cities.

A little history and background is in order. In 2021, OKC experienced a robust market with 12,527 units sold, generating a total volume of $1,034,938. However, the following year, despite a slight decrease in units sold to 10,778, the total volume remained significant at $926,679,506. By 2023, the market faced a sharper decline, with just 4,912 units sold, and a total volume reaching $421,402,627. This trend mirrors the broader economic challenges impacting the real estate sector.

Similarly, Tulsa's multifamily market in 2021 saw 7,432 units sold, amassing a total volume of $560,379,905. Interestingly, 2022 marked a period of growth for Tulsa, with 9,312 units sold and a record total volume of $1,139,739,411. However, like OKC, Tulsa experienced a downturn in 2023, with only 2,165 units sold and a total volume of $174,800,527.

As we forecast into 2024, we must acknowledge the significant impact of higher interest rates on sales volume. The tightening of monetary policy is expected to temper investment appetites, making it crucial for us to strategize accordingly. Amid these challenges, it's noteworthy that both OKC and Tulsa have experienced rent growth, suggesting a resilient demand for housing despite economic headwinds. This dynamic presents both challenges and opportunities as we navigate the multifamily market in the upcoming year.

As we prepare for a potentially turbulent market in 2024, understanding these trends will be paramount in making informed decisions and adapting strategies to continue driving growth and value in our multifamily investments.

Onto office.

Let me talk in general. It is not going to surprise anyone that this is the weakest sector we will talk about today. The national office vacancy rate reached 19.2% in Q3 2023, according to Moody’s Analytics. That’s up from Q2 and approaching the historic peak of 19.3%. Despite these headwinds for office, it’s important to remember that while there is, and will continue to be, obsolete office, the office sector is not obsolete. With a flight to quality in reach for more office occupants, some older, less-desirable Class B and C offices may face obsolescence. As a result, there could be opportunities to convert central business districts’ office space into apartments or data centers. In Oklahoma City we continue to see friction compounded by leases ending and tenants evaluating their space needs. Guess what, the major of clients are fining out they can relocate to nicer, newer, high-tech, smaller spaces and not only increase employee productivity, but also fulfill an ongoing desire of some employees for a more flexible work schedule which allows for at least some work from home situations.

Is everyone ever going to work from home – NO. Are more people going to work remotely in the future – CLEARLY. This is impacting occupancy when larger companies lease come up for renewal. If landlords are not able to downsize the footprint and make the space more compatible to the new flexible work schedule of employees, tenants are able to find building that will.

Oklahoma City and Tulsa are not exempt from this pandemic-induced phenomenon. The good news is we do see a flatting out of vacancy, although high, in the future. Oddly, the rental rates have been consistent and even higher because tenants are satisfied paying a bit more for less space and newer and more appropriate amenities.

In OKC we will have several new projects come to market soon and have seen several buildings completed renovated recently. BancFirst has a new home and completely renovated the old Liberty Bank Building. Tanenbaum is renovating the old BankFirst building downtown and Beffort and Tanenbaum will complete a huge mixed-use project in the Innovation District soon. This is a 2.7-acre site and will have more than 400,000 square feet for bioscience, laboratories, aviation, aerospace, and energy. While challenged, I would definitely characterize the office market as resilient.   

For industrial sector, I turned to UCO Real Estate graduate, Allan Meadors at Cushman & Wakefiled. In Oklahoma's industrial real estate sector, we're seeing a story that's all too familiar across the country: a stubborn shortage of supply. Despite a noticeable uptick in new construction, especially in top-tier warehouse spaces and smaller projects under 12,000 square feet, there's a noticeable gap in the availability of stand-alone medium-sized properties that many business owners prefer. The origins of many of these larger developments were laid down before the recent series of interest rate increases, under more development-friendly financial conditions. Yet, as these properties get lease up, the continued demand underscores a critical gap in construction, hampered by rising interest rates and soaring costs for construction and land.

This imbalance has led to steady increases in rental rates over the past few years. However, these adjustments have not been rapid or substantial enough to spur a new wave of construction starts. Looking forward, we anticipate these rates to accelerate, driven by the market's dynamics and the pressing need for additional space.

Most of the development focus is on build-to-lease projects, leaving a thin market for properties available for purchase. Yet, when these rare opportunities do emerge, and they're priced right, they quickly attract a flock of institutional investors eager to seize the moment.

Vacancy rates, however, can be deceptive. They might hint at a surplus of space, but the real picture is a market teeming with demand, with businesses actively hunting for millions of square feet. This discrepancy between vacancy statistics and actual market dynamics highlights the distinctive challenges and opportunities within Oklahoma's industrial real estate landscape, painting a complex but promising picture for investment and development amidst growing population and demand trends.

The overall national industrial market has had a record quarter across various key metrics such as rent, vacancy, and net absorption. National industrial vacancy fell to an all-time low of 4.1%, and average rents hit an all-time high of $7.18 per square foot.

Oklahoma City has seen much of this national success locally. Vacancy rates continue to be extremely low, and construction is finally starting to respond with the largest purely speculative Class A industrial development ever to be constructed in the city. Many hope, and expect, this will bring even more jobs and growth to the city’s national distribution footprint.

I want to thank you for allowing me to visit with you today. If you want or need more information, please try to attend the Commercial Real Estate Summit at UCO in October or visit my website at jdavidchapman.com.

Blog Post Title Two

It all begins with an idea. Maybe you want to launch a business. Maybe you want to turn a hobby into something more. Or maybe you have a creative project to share with the world. Whatever it is, the way you tell your story online can make all the difference.

Don’t worry about sounding professional. Sound like you. There are over 1.5 billion websites out there, but your story is what’s going to separate this one from the rest. If you read the words back and don’t hear your own voice in your head, that’s a good sign you still have more work to do.

Be clear, be confident and don’t overthink it. The beauty of your story is that it’s going to continue to evolve and your site can evolve with it. Your goal should be to make it feel right for right now. Later will take care of itself. It always does.

Blog Post Title Three

It all begins with an idea. Maybe you want to launch a business. Maybe you want to turn a hobby into something more. Or maybe you have a creative project to share with the world. Whatever it is, the way you tell your story online can make all the difference.

Don’t worry about sounding professional. Sound like you. There are over 1.5 billion websites out there, but your story is what’s going to separate this one from the rest. If you read the words back and don’t hear your own voice in your head, that’s a good sign you still have more work to do.

Be clear, be confident and don’t overthink it. The beauty of your story is that it’s going to continue to evolve and your site can evolve with it. Your goal should be to make it feel right for right now. Later will take care of itself. It always does.

Blog Post Title Four

It all begins with an idea. Maybe you want to launch a business. Maybe you want to turn a hobby into something more. Or maybe you have a creative project to share with the world. Whatever it is, the way you tell your story online can make all the difference.

Don’t worry about sounding professional. Sound like you. There are over 1.5 billion websites out there, but your story is what’s going to separate this one from the rest. If you read the words back and don’t hear your own voice in your head, that’s a good sign you still have more work to do.

Be clear, be confident and don’t overthink it. The beauty of your story is that it’s going to continue to evolve and your site can evolve with it. Your goal should be to make it feel right for right now. Later will take care of itself. It always does.