The Retail Market
Overall market occupancy equaled 92 percent at year-end 2018, unchanged from a year ago. This confirms that there has been little overall movement in the aggregate market but belies all the activity behind the numbers. The underlying fact is that retail continues to grow, both nationally and locally. We added 650,000 square feet of space in centers over 25,000 square feet this past year, maintained occupancy, and, for the most part, rents. Much of the pain of the last few years is over – store closings have declined, downsizing is still taking place but at a reasonable rate, and retail layoffs have leveled off. Retailers have been focusing on the strategies that have always made retailers successful – the customer (both what they want and how they want it), getting their marketing and distribution right, and figuring out the optimal mix of stores and digital. As a result, for the first time in a while, retailers are seeing growth in sales and profits; the market is seeing a wave of new tenants, many of which were birthed over the internet; and, this past Holiday season saw a 5.1% increase in sales, the most in six years.
Concerns remain however. The most worrisome concern is the chance of a national recession within the next few years. A downturn is inevitable regardless of the time frame and could stall the retail recovery and the ongoing transformation of the industry. Trade wars could also hurt retailers given how many use overseas suppliers. The retail industry has always been characterized by creative volatility and today is no different. These changes include a focus on smaller spaces, more flexible spaces, internet sales and marketing, alternative non-retail uses, like entertainment, and health and fitness tenants as well as the continued growth of discounters. There is a certain natural pace to these changes which the current market appears to be comfortable with; but, a national disruption such as a recession or escalating trade war would end up putting significant stress on retailers.
Locally, we see the effects of the national retail trends play out here. We continue to see a few closures (Toys R Us for example) and downsizing (Office Depot among others). We have also seen much of the square footage vacated over the past few years back-filled with either discounters or non-traditional tenants. These include Urban Air, Lifetime Fitness and a future wave of deep-discounters like Ollie’s and Dirt Cheap. These types of tenants are why the market has been able to maintain occupancy, but, in larger spaces, it puts pressure on rents as these tenants generally pay less than traditional big box users. In addition, the traditional big box users that are active typically want a turn-key build-out, putting stress on landlord returns, particularly as construction costs escalate.
The energy business has an outsized influence on the local market, partially due to employment and incomes but also given the number of Oklahomans that get royalties. The industry has been undergoing its own transformation with an emphasis on technology over people. We believe that transformation has negatively impacted local retail, particularly mom and pop retailers, in a way that is difficult to measure. These local retailers have had a harder time over the past few years than standard economic tools have indicated. This has been acerbated by a slow-down in population growth. Of course, the health of the local retail market is somewhat dependent on who you talk to – discounters, many restaurants, service and entertainment tenants would say the market is good; boutiques, most fashion tenants and many local tenants would say it’s uneven at best. Expect more of the same in 2019.
The most significant retail projects in 2018 were the continued expansion of Sooner Rose in Midwest City, the Lifetime Fitness at Quail Springs and ShowBiz Cinemas in Edmond. The market also saw the construction of a number of stand-alone buildings and smaller strip centers. Oklahoma City’s first Costco at Western & Memorial and the Flix Brewhouse mixed-use project on the Broadway extension both broke ground in 2018. A number of other projects are in some phase of planning or pre-leasing, including the Cotton Mill site south of Bricktown. But, the uneven nature of the market described above and the present national uncertainties will most likely hinder any significant new construction this year.
Survey Footnote: Our survey tracks 30.7 million square feet in 265 buildings of over 25,000 square feet and 15.7 million square feet of stand-alone buildings for a total market of 46.4 million square feet. There continues to be a significant number of smaller strip centers in the market (under 25,000 s.f. in size).