Lifestyle Center to Oklahoma City…Why Not?

Why doesn’t Oklahoma City have a lifestyle center?  In  our mid-year market survey, we included the following:

Who probably isn’t coming anytime soon?  Let’s put Ikea at the top of this list.  Crate & Barrel, Lifetime Fitness, Nordstrom, and pretty much any tenant from Italy or France.  Oklahoma City’s problem attracting these higher end tenants comes down to demographics; we do not have the incomes or density they require.  So it will be a while before we see most of them.  Having said that, we firmly believe that Oklahoma City could support a more upscale shopping center; we have the incomes equal to or greater than many of our competitive cities, our challenge being that our higher income households tend to be scattered throughout the city.  It will take a developer and retailers who understand that we’ll drive further and spend more than their typical formulas suggest.  If Wichita and Little Rock have lifestyle centers, why not us?

The definition of lifestyle center varies depending on who you are talking with; the ICSC doesn’t even include a definition among its general retail classifications.  For our purposes, let’s call a lifestyle center a project with higher end retail, restaurants, and perhaps mixed use characterized by open-air design, heavily landscaped common areas and pedestrian friendly.  None exist in Oklahoma City, but, as we pointed out, both Wichita and Little Rock have such centers.  Follow this link to Bradley Fair in north Wichita, www.bradleyfair.com.  Look at the pictures, notice the mix of tenants….I thought you’d like it.  Now go to www.chenalshopping.com.  Red Development completed this project in Little Rock a few years ago, nice!

The population of the greater metro areas of Oklahoma City, Wichita and Little Rock are 1.3 million, 660,000, and 710,000 respectively.  Retailers crave income…each metro area has a median household income of between $40-42,000.  What about high incomes that are important to this kind of development?  Incomes over $100,000:  OKC, 8.7%; Wichita, 8.7%; Little Rock, 11.4%.    Little Rock has a bit of an edge in high incomes, but if you look at the actual numbers, Oklahoma City has twice as many high wage earners at Wichita and a third more than Little Rock.   These numbers clearly suggest that we can support a similar development.

As referenced in the market study, our high wage earners are more widely dispersed (or, conversely, Wichita and Little Rock have a higher concentration) which is a driving factor as to why Oklahoma City does not have one.  It also hurts us that there is no large commercial developer located here; these types of developments are expensive and require a developer to have close ties to retailers and access to capital.  Perhaps the most significant issue is the economics of lifestyle centers in general since the downturn.  The anchors of these types of centers generally demand and get sweet deals; the developer makes up the difference on higher small shop rent and pad sales.  As the anchor deals have gotten sweeter, the centers have had to get bigger.  Add to that dynamic the pull-back by many national retailers over the last four years and the economics of getting a deal done is very hard.

But, with retail in general getting healthy and Oklahoma City looking better than the rest of the country, now is the time for developers and retailers to be engaged here.  They’ll need some help looking beyond their traditional models – our shoppers have proven that they’ll drive further for the right development; and, our low cost of living gives Oklahoma City consumers more disposable income than our demographics suggest.  Come on Red, Cordish, Poag….welcome to Oklahoma City!

Our real estate market bottom was 2009. Although, our bottom was much higher on a relative basis than the rest of the country in that 1) we didn’t have the excesses of the rest of the country, particularly in the single family housing market, and, 2) the energy industry helped us. But, we can’t escape the effects of a deep national recession no matter how much we’d like to think we are insulated.

Our firm manages and leases about 17 million square feet of space in Oklahoma. In looking at our commission and transaction volume as a guide, we’ve seen a relatively steady increase in lease transaction business in the last two years, approximately 25 percent in 2010 and about 25 percent again this year. So little activity occurred in 2009, the 2010 improvement was what I’d characterize as ‘returning to life’ economic activity. In the retail market, this year we’re seeing a return of national retailers to the marketplace, not a flood, but a return. Local retailers are probably hurting more now due to the extended recession…they’ve already cut back on overhead and expenses and now they are having to live through lower sales/growth. The office/industrial market has not fallen as far, thanks in large part to the energy industry growth.

But, despite the growth in transactions, we’ve seen rent decline moderately, less than 10 percent, and values decline close to 25 percent. And, that brings us to the part of the market that remains anemic – property sales. Very few properties have changed hands the last three years. We attribute that to 1) a continued lack of lending (at terms that make sense to borrowers), 2) the huge amount of uncertainty in the general economy, 3) the lack of attractive re-investment alternatives for sellers; and 4) seller’s being unwilling to accept a 25 percent reduction in value despite a relatively constant income stream. Activity has picked up marginally in the last year to 18 months, but for distressed properties and class A properties only. Our market continues to see a limited amount of distressed properties; the ones we have are typically retail and multi-family. I don’t see the sales market picking up significantly in the near term as we see little change in the above factors.

I started out the year very positive about our market, but despite some improvement, it feels like we are crab-walking sideways. I’ve said this before, but I think improvement will continue over the next couple of years, but it will be in fits and starts….very uneven. So, when we look back two years from now, we’ll see that the real estate market has made significant improvement. But, it probably won’t seem like it while we are in the midst of the give and take of it.

Oklahoma City, OK — Fitness 19 recently secured four new locations in the Oklahoma City area taking about 40,000 square feet of vacant retail space off of the market. Two of the new locations are in Casady Square and Edmond Plaza, both listed in the Price Edwards portfolio. Each location is scheduled to open before the end of the year and is already pre-selling memberships. Laci Jackson with Price Edwards was the broker on both deals.

Founded in 2003, Fitness 19 has locations nationwide (including the four new gyms in the Oklahoma City Metro) and is currently operating in 27 states. They provide top quality cardio, free weight and strength equipment at an affordable price. The gyms are stocked with world-class equipment from leading manufacturers such as Life Fitness and Hammer Strength. They focus on giving their members the most value for their money.

For more information on Fitness 19, log onto fitness19.com.

Price Edwards & Company has managed and leased properties in Tulsa throughout its history and its Tulsa area business is growing. As a result, the firm is opening an office at 7633 East Memorial Place to better serve its Tulsa clients. The firm currently manages and leases nearly one million square feet of retail space and over 1,500 units of apartments in the market. Price Edwards has been Oklahoma’s leading full-service property management, leasing & brokerage firm since its formation in 1988 and currently handles over 10 million square feet of property throughout Oklahoma and north Texas. Tulsa has a vibrant real estate market and Price Edwards looks forward to being an expanded part of that community.

Clearly the location of our new convention center is a hot topic. It seems to me that it needs to be integrated into the fabric of downtown and take into account the various groups lining up to argue for the various sites. So, here’s an idea that I haven’t seen that, while not easy, might be a pretty good compromise location and accomplish a number of positive goals in the process:

• Tear down the Sante Fe parking garage (yes, we’ll have to build a new garage)
• Close EK Gaylord south of 4th street (this will make everyone who wants to straighten out Broadway happy – Gaylord is an ugly street anyway)
• Build the convention center on the Sante Fe/Gaylord site (it’s close to all the hotels, easy access to Bricktown and buffers the railroad track)
• Remodel Cotter tower into the convention hotel (it’s going to be nearly empty after Devon vacates and needs a lot of money spent on it…this will have the added benefit of improving the downtown office market)

Tax Internet Purchases – most states do not charge sales taxes on purchases made over the internet. A lot more are looking at it as a possible revenue source, particularly given the current economic downturn that has most states in a fiscal bind. It may not be the most popular position, but I believe that states should charge the same sales tax on internet purchases as they do on in-store purchases. This may be the only time you hear me advocate a new tax. And, I know that there are difficulties in tracking and enforcement, but they can be overcome. From a public policy perspective, I don’t think it makes sense to favor internet purchasing over bricks and mortar purchasing. Let’s level the playing field for all retailers.

Change Oklahoma Liquor Laws – I don’t know too much about liquor laws or liquor for that matter. But, I do know that Oklahoma’s liquor laws are antiquated and from strictly a retail perspective, hurt our ability to attract a number of retailers to the state including Costco and any number of grocers. We need these retailers to provide competition to Walmart and add quality to our retail mix which would benefit the Oklahoma Consumer. Even if you are not a drinker, the goods and services these additional retailers would bring to our market would broaden our shopping choices. Our current laws favor a handful of distributors at the expense of the broader retail market and consumers. I’ll leave it up to others to figure out what an equitable system would look like, but let’s start looking at it and move in that direction.

Sandridge Energy Building – Larry Nichols, Aubrey McClendon, Tom Ward, and their respective companies have played a major role in transforming this City in the last 10 to 15 years. Unlike some of their predecessors, their time and money have more often than not been spent here, making Oklahoma City a better place. Aubrey and Chesapeake have revitalized the area around 63rd and Western, creating a beautiful campus and re-making the entire area, including retail and housing components. The office tower that Devon is now constructing is unlike anything we’ve ever seen in terms of size and grandeur. The tax increment financing district related to the project is allowing us to redo virtually all the downtown streets and streetscapes, not to mention the Myriad Gardens. Let us not forget Sandridge, the quietest of the three, who bought and is remodeling the old Kerr McGee Tower at a time when many thought it would sit vacant for years. Sandridge now wants to spend upwards of $100 million revitalizing their block on which the tower sits. The opposition to their plan is well-documented and I have no doubt that opponents to the plan are sincere and well-intended. Nonetheless, Sandridge’s plan needs to be approved without further delay and there are persuasive reasons to do so: it’s private property and unless the City has some compelling interest otherwise, private property owners should be able to have wide latitude in what they do on their property. Their use is consistent with applicable zoning and Sandridge has followed the appropriate steps to get their plan approved. In this case, the buildings Sandridge will tear down are all obsolete and have no historical significance. As to the aesthetics of their plan, we can’t have the City become the taste police. The overall outdoor design, while clearly unique to Sandridge, is not that different from what Devon is doing around their building. We have always thrived as a business friendly city; it will do us no good to start antagonizing our leading corporate citizens. Let’s get their plan approved and give Tom Ward and Sandridge the thank you they deserve for taking a stagnant block and breathing life into it.

Price Edwards & Company has been selected to manage and lease the three property portfolio of Mayfair Village, Edmond Market Place, and Midland Center. The properties comprise over 329,000 square feet and are all well located within their submarkets. Tenants include Conn’s, Panera Bread, Delta Café, Steinmart, Michaels and numerous other local and regional favorites. Kathi Risk will be the property manager for the portfolio. Susan Brinkley, Ev Ernst, Laci Jackson and Brandy Rundel  will handle leasing.

I was recently asked about the prospects for Bricktown retail.  Probably the best place to start is to discuss what Bricktown has become: an entertainment district containing primarily restaurants and clubs with a focus on tourism.  It tends to draw most of its traffic in the evenings and particularly on the weekends.  And, much of the traffic is out of town visitors and people from the suburbs.

Of the roughly 150,000 square feet of retail added to all of downtown over the past three years, just under a third was in Bricktown, 90 percent of which was restaurants, clubs, and the Red Pin bowling/restaurant.  Of the less than 5,000 square feet of non-restaurant retail, it was all focused on tourism traffic.  For all the traffic Bass Pro drives to the area, it has not helped attract more traditional retail.  I tend to agree that the location of the new convention center near the Core to Shore Park will hurt Bricktown in the long-run as some restaurants and business will gravitate toward the park.  Putting it on the lumberyard site or near Bricktown will build on the restaurant/club business already there, but will most likely cement Bricktown’s fate as strictly a tourism and entertainment district.

A discussion of what Bricktown is not is also helpful.  It is not a significant office market.  A handful of buildings have tried to attract office users on upper floors but most have struggled.  The recent conversion of the Candy Factory is helped by access to parking.  But, most of the upper floors of Bricktown buildings remain vacant or underutilized.  I don’t see this changing due to lack of parking, access issues for office visitors, and the functionality of existing buildings.  Housing is not a big part of the Bricktown mix either.  The Centennial sold out its condo units as it is located in the heart of Bricktown and was the first high-end project out of the gate.  However, many were purchased by corporations and few of them are occupied as primary residences.  Several of the Bricktown buildings would make nice conversions but not at the prices owners are asking for their buildings.  High land prices also make new construction problematic, particularly given the fate of high-end residential to date in downtown.  None of the above is changing anytime soon, which brings us back to retail.

Can retail be attracted and survive in a primarily entertainment environment?  The short-answer is not in this retail market.  Retail is not doing well anywhere at the moment and national retailers in particular continue to stand by the sidelines.  So, nothing is going to happen until a general retail turnaround.  But, what then?  Retail needs one of two things to survive, either lots of people living near it (rooftops as it were) or a project of scale and uniqueness that would draw people to the area.  Counting rooftops and their underlying demographics is the traditional retail model.  This won’t work in Bricktown.  Even with the most optimistic projections of downtown housing growth, we won’t get enough people with enough money living downtown to attract the attention of traditional retailers.  We will get some one-off projects and the occasional local retailer, but not the kind of retailers or projects that are going to get people excited.

Which leaves us needing a project of a scale or uniqueness that brings people to Bricktown to shop.  Bass Pro was supposed to do this, but it tends to draw from outside Oklahoma City and a very narrow profile of shopper…a bit too much of a shotgun blast.  But, it could be a nice complement in a larger piece of the puzzle.  Luck, a good site, incentives from the City, a large national developer, an improvement in the capital markets, the previously mentioned improvement in the national retail economy and, did I mention, luck will be required to make it work.  All the above were in play when Kansas City did the Power & Light District  in their downtown but the retail market fell apart while the project was under construction and they have a cool project with little retail, a new Bricktown without the bricks.  And, Kansas City has a lot more folks living downtown than we do.  It will be a while before we can get the perfect storm of site, incentives, developer and market conditions together to make a significant retail development happen.  And, even then there will and should be debate as to whether that development should be in Bricktown, around the Core to Shore Park, or some other downtown location.  It’s too far down the road to move it, but the planned and, hopefully soon to break ground, Horizon outlet development on I-40 and McArthur would have had a chance of succeeding in Bricktown.  It’s a unique project with retailers not in Oklahoma City now.  Yes, it is an outlet Mall, but our market needs a Grapevine Mall long before it needs a Michigan Avenue.

The prognosis?  Nothing soon, so embrace and build on the entertainment characteristics of Bricktown.  Help local retailers who want to be in Bricktown, be happy with incremental progress.  While we wait, plan for the big project and cross your fingers that all the pieces can come together at the right time.

Price Edwards and company was selected to lease the 4,279 square foot space located in front of the Super Wal-mart at 13410 North Pennsylvania Avenue. The former Blockbuster space is ideally located for visibility and access at Oklahoma City’s prime retail corner. Available to lease for $20 per square, Susan Brinkley, Laci Jackson, Ev Ernst, and Brandy Rundel can assist potential retailers with regard to the space.

The City of Oklahoma City’s revenue lifeblood is sales taxes, around 55 percent of its total revenues are derived from them. Retailers drive sales taxes. It follows that the City would do all that it could to attract and nurture retailers, particularly since neighboring municipalities have conducted a successful campaign over the last 10 years to move Oklahoma City’s retailers to their markets. Moore and Edmond have been uniquely successful using a combination of monetary incentives and doggedness. During the economic expansion, it didn’t matter as much as sales were good and budgets were increasing. But, in a downturn like we have now, it’s an issue.

In response, Oklahoma City is putting an increased emphasis on attracting and retaining retailers. It put together a package of sales tax rebates to help close the deal to get Terrell Zerby’s outlet mall done with Horizon (the development is planned but construction has not yet started). And, the City is being more aggressive in offering infrastructure improvements and other inducements for retail. The City has, in my opinion, always been good in working with developers on a one-on-one basis. All of this will benefit retail developers as the market turns around which in turn will benefit retailers and ultimately lead to increased sales tax revenues.

But, the City is sending mixed signals to both retail developers and retailers. City staff is pursuing two ideas that are particularly punitive to retailers and retail development. The first, impact fees, was floated a couple of years ago and has been put on the back burner due to the outcry from the commercial real estate community. The idea of impact fees is that new development has an impact on the City infrastructure and that developers should pay for that impact. Retailers draw a lot of traffic (hopefully) and are therefore charged a much higher fee. In reality, impact fees are a tax on development and would retard retail development. The main reason City’s gravitate toward them is that these types of fees can be done administratively without a vote of the city council or public. If the funds are truly needed, and they probably are, the fair way would be to increase the ad valorem tax rate marginally which would spread the cost across all the users of the new development. Why is this more fair? Development is market driven, projects are only built when there is sufficient market demand; therefore, the market, ie, the public, should pay for infrastructure improvements. If there isn’t the political will to do it and you can’t justify it to the broader public, then it’s probably not a good idea anyway. You will hear the argument that other cities have impact fees, wouldn’t it be nice to do what makes sense for Oklahoma City instead.

The more recent proposal that has the effect of hurting retail is an ongoing review and revision to the neighborhood appearance standards. The goal is to revise zoning requirements to improve the appearance of buildings and developments, something I think we can all get behind. The proposed language from the City planning staff would significantly change the landscaping, parking and appearance standards for any building over 50,000 s.f. And, while it would apply to all buildings, it appears geared toward retail. A couple of the requirements are particularly bothersome too retailers. Only 60 percent of parking could be in front of a store; this makes no sense for retailers or for their customers. People want the shortest walk possible and no one wants to park on the side or behind a building, particularly at night. Virtually no current retail developments in Oklahoma City meet this requirement. Other requirements add designated walking paths in parking lots and a buffer strip of landscaping in the parking lot with the goal of making it greener and more hospitable. Some of these ideas make sense, but the proposals give developers little latitude in design and all add to the cost of the project. Adding to development costs and making the development process more cumbersome will be a detriment to development. Again, other cities have similar codes, but our community is unique and our zoning regulations need to reflect it. It’s worth noting that household income in Oklahoma City is significantly less than Edmond, which has a more rigid code, and significantly less than Austin, which has a more rigid code. Our market rates act as a limit to how much developers can spend and retailers can pay for a new development. Anything that drives up costs needs to be thought through. Retail and retailers are very much consumer driven. Retailers demand what customers want. Developers build what retailers demand. Let’s have the goal of improving appearance but give developers the flexibility to meet retailer and consumer demand.

I love Oklahoma City and want the best for us. It is important that the mixed messages be reconciled in favor of Oklahoma City consumers and the City will be the ultimate beneficiary.