2011 Year-End Office Survey Summary
Despite a still sluggish national economy, Oklahoma City's office market continued the positive growth that began in the second half of 2010. During the year, the Oklahoma City office market absorbed nearly 200,000 square feet of previously vacant space. The market's overall vacancy rate decreased from 17% to 16.4%. The Northwest submarket continues to lead the recovery in the suburban markets. That sector absorbed nearly 80,000 square feet and saw its vacancy rate decline from 11.6% to 9.9%. Class A buildings in the Northwest submarket have dramatically improved over the past two years, dropping from 24% to only 8.9% vacant. We fully expect that success to continue in 2012 and to trickle down into the other classifications and suburban submarkets.
It should be noted that in addition to general growth within the Northwest submarket, both the North and Northwest submarkets have been and will continue to be very positively impacted by Chesapeake Energy's acquisition of approximately 800,000 square feet of multi-tenant buildings during 2011. While some of these buildings will remain multi-tenant offerings with Chesapeake occupying space alongside others, some will eventually be totally occupied by the energy giant as other tenants' leases are allowed to expire. These acquisitions thus have the twofold impact of taking vacant space off the market at the buildings it has acquired and eventually putting displaced tenants out into the market to fill other vacancies.
For the local market to perform as well as it did is very positive considering approximately 600,000 square feet of available space will hit the downtown market over the next year as Devon Energy begins occupying their headquarters building which is nearing completion. The Central Business District experienced a drop in its vacancy rate from 24.9% to 22.8% during 2011 as the submarket experienced positive absorption of over 110,000 square feet. The CBD will be tested during the next few years as it lives through the growing pains related to the construction of the Devon Tower and the reconstruction of many streets and sidewalks in the central core, but when the work is complete it will result in a very vibrant business environment with greatly improved accessibility, public spaces and on-street parking options.
Backfilling vacated Devon space will certainly be achallenge for downtown landlords, but it should also prove to be a golden opportunity to attract suburban users that are quite frankly running out of good options in the outlying markets. To be successful in those efforts, downtown landlords will need to overcome the lack of well located and economically priced parking solutions. Oklahoma City is very much a personal vehicle town with minimal usage of mass transit options, which further exacerbates the issue. Most downtown tenants pay between $2.50 to $4.50 per square foot for their employees to be able to park in a well located facility. Right now, the average Class A rental rate in the suburbs is approximately $2.80 more than similar offerings downtown. It will bear watching to see if the rental rate spread widens enough to attract suburban users to the city's core or if the downtown improvements are enough to attract suburban tenants on their own merits. We think some combination of the two should lead to improved CBD occupancy.
Our firm remains optimistic about the prospects for the local office market, believing we are still in the early stages of a recovery. Barring any dramatic changes to the national and worldwide economies, Oklahoma City is well positioned for significant absorption of its existing inventory of office space.
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2012 Year-End Retail Survey
The Retail Market
2012 was a good year for Oklahoma City retail, particularly for national tenants. Oklahoma City probably saw the most national tenant leasing in the last ten years. Much of our report this year end will focus on tenants new to our market, new concepts and expanding tenants. Newer well located space is generally well occupied. If you take only centers opened from 2000 till now, vacancy is 5.2%. There isn't much space available for tenants in the best locations which is a hindrance for attracting more national and big-name tenants. Consequently, a number of new projects are in some stage of development; expect announcements of new construction in 2013.
The overall market is healthy but not without concerns. We've talked before about the importance of consumer confidence in an economy that is 70 percent driven by consumption. 'Consumer Confidence Rises to 4-year High', Chain Store Age; 'The Mighty Consumer is on the Ropes', Wall Street Journal; 'Consumer Confidence Points to Growing Optimism', National Retail Federation; 'Consumer Confidence is on the Wane', Wall Street Journal. These four headlines were all from the last few months and highlight the retail market's continued issues with slow national growth and related uncertainties in our economic and political environment. Locally, we have some issues that contribute to this uncertainty as well: low natural gas prices, shareholder/management issues at Chesapeake and Sandridge, health care changes - to name a few.
Our year-end survey results reflect this back and forth between the positive and this uncertainty. The market as a whole was relatively flat for the year, vacancy ended the year at 10.2 percent, up moderately from year-end 2011 at 9.8 percent. The South submarket reflected improved occupancy as some long-vacant spaces were filled. The remaining markets saw vacancy tick up slightly, but overall absorpsion was positive at just over 178,000 square feet. With the exception of the West-Central submarket, the increase was generally spread throughout the centers in each submarket. In the West-Central
submarket, older centers experienced a few sizable tenant move-outs that contributed to the rise in vacancy. This divergence between vacancy in old and new product is taking place throughout the country. A number of older centers will need to be re-positioned in the upcoming years to compete; a few may need to be torn down. The vibrancy in the top half of our market is winning the day though which bodes well for the upcoming year.
ISSUES OF INTEREST
Much of the improvement in our market has come from big boxes being filled. Both former Ultimate Electronics, on I-240 and Quail Springs Marketplace, have been leased, by US Foods Chef's Store and Golfsmith, respectively. The former Belle Isle Linen's space is expected to be leased in the first quarter. Gold's Gym took the NW Highway and Portland former Circuit City off the market as well as the former Sportmen's building at Quail Springs. Several boxes have been converted to non-retail use, including both former Borders, the Norman location will be a library and the NW Highway location a medical clinic. The former Crossroad's Best Buy will be expansion space for Heritage College. As a result, we've seen a nearly 1 percent drop in vacancy for the free-standing retail buildings we track, to 4.7 percent.
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2011 Mid-Year Industrial Survey
In the midst of a sluggish nation recovery, the Oklahoma City industrial multi-tenant market continues a slow steady rebound. The last twelve months have seen increasing leasing activity, some stabilization of lease rates, and some significant portfolio sales. Overall the multi-tenant market reports a vacancy rate of 16.4%, down from 19.8% mid-year 2010. This is still significantly higher than the total Oklahoma City industrial market vacancy rate of 9.6%. Once again the multi-tenant market, which contains a high number of national industrial tenants, is more reflective of the national economy than local trends.
There was an important sale of a multi-tenant service warehouse facility to a user, 1101 S.E. 59th St., which removed 440,000 square feet of total space and 300,000 square feet of vacancy from the calculations. Factoring this space into the current vacancy still results in net positive absorption form midyear 2010, most of which occurred in the bulk warehouse market.
The Flex space market increased in vacancy from 10.2% in 2010 to 12.9% in 2011. The majority of this increase occurred in the Southeast submarket which went from 7.9% last year to 19% in 2011. A significant amount of flex space vacancy over last year can be attributed to the departure of out-of-town roofing companies which converged on Oklahoma City following the May 2010 hail storm.
The bulk warehouse market, with the highest concentration of national tenants, absorbed a net positive 113,000 square feet of space to post a current vacancy of 20.4%, down from 23.3% last year. These gains were more or less distributed evenly across the market. This positive absorption is perhaps the best news for the multi-tenant market as it reflects recovery, albeit slow, among national and regional industrial companies.
Service Warehouse space enjoyed market-wide absorption, even factoring out the before mentioned sale. Service Warehouse is the smallest and most volatile of the multi-tenant property types. The very few modern service warehouse facilities maintain high and consistent occupancy, while the older, more functionally obsolete buildings are more subject to market swings and short-term leases.
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2011 Year-End Apartment Survey
In 2011, Price Edwards & Company surveyed 317 market rate, student and senior housing units totaling 62,703 units in the Oklahoma City metropolitan area; of which 266 properties totaling 57,978 units were standard apartment housing. While much of the United States struggles to emerge from the most severe recession in the post World War II era, Oklahoma City delivered another year of declining vacancy and increased rents. Although not as robust as the mid 2000's, the economy seems to be a little more solid than in the past two years. Jobs are being modestly added and consumer confidence is slowly increasing; still many issues remain uncertain which causes consumers to opt for renting rather than home ownership. The apartment sector has proven to the most resilient during economic downturns, delivering superior returns during recessionary periods.
For 2011, properties experienced an increase of 1.1% in occupancy to an average rate of 89% across all classes as compared to 2010. Market rental rates increased across the board for all floor plans, with the efficiency units having the largest increase of 2.5% to the current rate of $0.88 per square foot. One bedroom units had the lowest percentage increase to $0.75 per square foot which is an increase of 2.7% as compared to 2010, two bedrooms up 1.5% to $0.68 per square foot and three bedrooms increased by 3.1% to their current rent of $0.66 per square foot. All property classes, with the exception of Class D, experienced increases in rent occupancy, with the largest increase in Class A properties of almost ten percent in rents alone. This large increase is from a combination of limited construction over the past year and the increased demand for quality rental housing, both of which are expected to continue as fundamentals strengthen on both the supply and demand side over the next few years.
Although the occupancy rate overall was up year-over-year 1.1%, there were some submarkets which fared better than others. Submarkets which posted gains were North Central with a 5.7% increase to 93%, Northwest went from 81% to 83%, an increase of 2.5%, Edmond and Mustang-Yukon both up about 3.3% with Edmond at 96% and Mustang-Yukon just below at 95%. Although three of the submarkets had an increase in vacancy, they were very minimal and all only one percentage point below last year. South Oklahoma City has a rate of 89%, Midwest City-Del City at 88% and Moore- Norman at 91%. It is important to note that although these markets had a slight decrease in overall occupancy, they all had increases in rental rates as indicated above.
We surveyed 25 senior housing properties with a total of 3,380 units. Senior housing occupancy increased 1.1% to 95% as compared to 2010. All unit types were up from 2010 with efficiency units renting at $2.65, one bedroom units at $1.87, two bedrooms at $1.99 and three bedrooms renting for $0.63. Senior properties continue to be priced above market rate properties for rent and sales values primarily due to the higher cost of construction as well as a higher average operating expense. As more baby boomers retire, senior properties will see a surge as more retires opt for some type of assisted or amenity rich senior housing.
Eight student properties were surveyed this year for a total of 1,389 units, or as most student properties are rented, 4,544 beds. Occupancies increased 2.1% from 94% in 2010 to 96% in 2011. Student rental rates also increased by 2.1% from $522 in 2010 to $533 this year, this totals $1,582 per unit on average. Although some experts say the student market is slightly overbuilt, the statistics show that this niche property type is not in decline, rather is stabilized and in demand. Resort style amenities and planned community events are desired features for student housing; with new developments pushing the envelope on what is available. Older properties are going to face challenges to compete, ultimately needing expensive capital investments. To be successful, a property must provide a distinctive and competitive edge that positions the property better than its peer properties. Timing for new construction is crucial and can potentially be a significant blow to the bottom line if not completed before the ever important leasing season just prior to new semesters. Going forward, successful investors will have to have a strong understanding of student
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