Risk Management Association

By: J. David Chapman/March 9, 2017

I was honored to speak at the Risk Management Association monthly luncheon this week. This organization is focused on advancing the use of sound risk principles in the financial services industry. As someone who researches the local real estate market, I hope I was able to provide some clarity in evaluating the risk parameters in our metropolitan market.

I started by admitting there are many unknowns, particularly considering the new administration. Those unknowns and assumptions focus around the continuation of what has been the backbone of real estate investment. I spoke about the 1031 tax-deferred exchange, capital gain rates, interest rates, and mortgage interest deduction practices. I am simply guessing there will be little change by an administration led by a real estate guy. Time will tell.

I listed the industrial sector as having the biggest upside in our marketplace. As I have written about in the past, the last-mile, as we call it, is huge. The last mile is essentially the final step in delivery between the online retailer and its client. Warehouses are now fulfillment centers with distributors wanting to get closer to those clients. Next-day is so yesterday; everyone wants it today. This dynamic is advantageous for markets like Oklahoma City.

I spoke of office as a category to be entered into with caution. As the price of oil and gas goes, so goes the office market in OKC. I presented a story consisting of backfilling approximately 500,000 square feet of vacant office space, much as a result of the struggling oil and gas industry.

Retail is another sector to look upon with caution. A marketplace with changing customer preferences toward online purchasing results in smaller square footage for retailers and a blurring between online and brick-and-mortar. Retailers will need to cut costs, but at the same time create a unique experience for their customer.

Maybe the most surprising prediction was caution considering residential, both single-family and multifamily. Oil and gas recovery will stabilize the markets, but we must consider generational moves in regard to this category. We are expecting older millennials to begin leaving the urban core for the suburbs, looking for better education opportunities and a safer environment for their children. Younger millennials will continue to rent in the urban core, but affordability will continue to be an issue.

J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).