Oklahoma City Commercial Real Estate Market Trends
2017 Mid-Year Office Survey Summary
While 2016 was a historically bad year for the Oklahoma City office market, 2017 is offering some signs of hope, but you have to look hard for those silver linings. The overall vacancy rate during the first half of 2017 ticked upward by a full point to 16.5%. The total market experienced negative absorption of 27,000 square feet, but significant gains were made in the northwest submarket, which along with the Central Business District serves as the bell cows in the local market. Much of those gains were in Class A buildings where the vacancy rate fell from 25.7% to 20.3%, demonstrating strength at the top of the market. However, the improved health of the Northwest submarket was offset by new availabilities hitting the market downtown.
The Central Business District experienced a significant increase in both inventory and vacant space due to the addition of the Sandridge Center and the Parkside Building, both owned by Sandridge Energy. These buildings had previously been held off the market, but with Sandridge only needing approximately 60% of its own headquarters building, the decision was made to offer the surplus space to other quality tenants. The addition of these buildings to the CBD market caused the vacancy rate to rise from 13.8% to 17.1%. Without those buildings, the CBD was actually fairly steady with negative absorption of only 13,000 SF. The Class A vacancy rate in the CBD nearly doubled from 6.1% to 11.3%.
We anticipate the Class A market downtown may improve a bit in the second half of the year, but it needs to as 2018 looks to the biggest challenge the CBD has faced since Devon Energy completed its headquarters building in 2012 and left 840,000 SF to be absorbed by the local market. That was largely accomplished by Continental Oil acquiring Devon’s existing 300,000 SF building at 20 N. Broadway and steady absorption of the remainder by a strong market during the energy heyday of 2012 through 2014. With over 400,000 SF of space coming online at the beginning of 2018 and no energy rebound on the horizon, downtown landlords will be fighting tooth and nail for every potential tenant as Class A vacancies could exceed 20%. Of course, that is good news for tenants as they can expect larger rental concessions and lower face rates.
It should be noted that our report does not include sublease space because frankly, landlords don’t accurately report the sublease space available in their buildings. However, given what we can discern, we estimate the inclusion of available sublease space would set the market’s total vacancy rate at closer to 19.5% rather than the 16.5% actually reported. The largest of those sublease opportunities is approximately 200,000 SF left behind by Williams Companies at Central Park. That space alone would bump the North submarket’s vacancy rate from 9.9% to nearly 17%. Fortunately, the North submarket appears to have dodged another bullet as Patterson UTI has confirmed it will maintain a significant Oklahoma City presence and will not be leasing any of the space it acquired in the merger with OKC-based Seventy-Seven Energy.
The rest of 2017 should be more of the same as we expect the market to have its ups and downs, but for the most part it will likely be one step forward, and two steps back as any gains in absorption in the suburbs will be offset by the addition of newly available space in the Central Business District.