The Retail Market
Change within the retail sector has been well-documented: pressure from Amazon and internet retailers; the changing spending habits of consumers; the influence of private equity and resultant high debt levels; discretionary spending being squeezed by health care expenditures and student debt; and the world of digital marketing. All during an increasingly uncertain national political and economic environment.
Retailers have reacted to these changes both positively and negatively: store closures and bankruptcies; downsizing/rightsizing; reducing costs; creating better shopping experiences; re-training staff and improving product mixes; optimizing digital presence; opening new concepts; focusing on value & convenience. Favored tenants in this environment include best of class, service-oriented, health/fitness, and discounters.
Retail spending isn’t an issue, retail sales increased 4.4 percent in 2017 and 5.7 percent in the first quarter of 2018. In fact, sales have increased every year since the 2009 downturn. The issue is the ability of retailers and the retail market to recognize and adapt to change.
OKC Retail Performance
Why is the Oklahoma City retail market not as vibrant as it seems like it should be? Unemployment is under 4 percent, energy prices have rebounded nicely in the last year; City and State sales tax collections are up significantly; new business relocations and expansions are up. Add to this the positive effect of the national tax cuts and reduced regulation and you would expect a stronger retail market. But, our survey numbers show increased vacancy in the first half of the year, 10.7 percent from 9.8 at year-end. Retail development of any significance has slowed. Local retailers in particular are being hesitant about expansion and adding stores. The pressures of change within retail in general are part of the answer, but we see a couple of local influences dampening the market. Despite rising energy prices, there is a continued energy market hangover from the last few years. Energy firms have become very efficient; consequently, most of the highly paid workers laid off over the past few years haven’t been hired back. This has hurt wage growth. Oklahoma population growth has slowed considerably as well, .7 percent in 2017, 1.3 percent in 2016, 1.6 percent in 2015 (per World Population Review). Retail feeds off population growth and wage growth. And the effect on smaller retailers is typically more pronounced as they have less flexibility to adjust to changing market conditions than larger national firms.
Let’s take a look at how these changes are playing out in Oklahoma City. Several retailers have closed in the last six months which has negatively effected occupancy: three Toys R Us stores and the Baby’s R Us store, the three Gordman’s closures, and the Sears store closures (including the recently announced closure of their 44th and Western location). Several retailers have also downsized stores or are in the process of downsizing, including Kohl’s, Burlington, and Office Depot. Conversely, a number of retailers have expanded locally, HomeGoods, Five Below, Dollar Tree, Aldi, and Sprouts among others. And, we have added several new to the market retailers: Lifetime Fitness, Duluth Trading, the Container Store, Uncle Julio’s and, the announced additions of Costco and Urban Air. This doesn’t include the retailers who are actively looking in the market: highlighted by REI, Restoration Hardware, and Capitol Grille. Not to mention the Amazon fulfillment center that is under construction near the airport which should reinforce Amazon’s presence and allow for same day delivery in the future. The net result of all this activity is a bit of a mixed bag consistent with the national and local influences we are seeing.
The general thinking is that class A malls are performing well and will continue to perform well. We see this at Penn Square Mall, sales are over $700 per square foot and the tenant mix remains strong; Simon has been able to replace tenants that have vacated and the Container Store is a good addition. Class B malls nationally are seeing signs of stress and are having to embrace new tenants and new strategies, in some cases adding housing and alternative uses. Quail Springs Mall falls in this category as they’ve seen some increased vacancy, particularly in the east wing and they have torn down the former Macy’s building and added Lifetime Fitness in the parking lot (not connected to the mall). Quail Springs won’t fail, but General Growth has its work cut out to reinvent the Mall to keep it relevant. Sooner Mall in Norman is a bit of an anomaly as smaller malls have typically not faired well nationally. Some smaller tenants have closed, including Forever 21, however the real question with Sooner Mall is Sears and JC Penney. If they close in the next couple of years, it will put a lot of stress on the Mall. The 200 or so class C malls around the country are expected to fail; Oklahoma City has already experienced this with Crossroads and Heritage Park.
Survey Footnote: Our survey tracks 30.1 million square feet in 260 buildings of over 25,000 square feet and 15.4 million square feet of stand-alone buildings for a total market of 45.5 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 would estimate there are close to 6.0 million square feet of these properties in the market.