Oklahoma City Retail Property Market Trends
2017 Year-End Retail Survey Summary
Retail is never boring. In the age of click-bait, the headlines would have you believe retail is dying, or at least mortally wounded. Over 8,000 stores closed this year, over 300 firms declared bankruptcy. Millennials aren’t spending money on ‘things’, everyone is shopping online, Amazon is unstoppable. Retail as we know it is over. A little perspective is in order. Retail is still growing, the final numbers will most likely put 2017 growth at close to 4 percent. And, while online sales continue to grow faster (12 percent), keep in mind that brick and mortar store sales continue to grow as well. When you look at the aggregate data, the retail industry is pretty healthy; the disruption appears greater when you break data down by type of goods and individual retailers.
Retail has always been characterized by change, but the change is coming more rapidly. We see the market being about halfway through a transition period that will usher in a more stabilized yet more dynamic retail market that will once again focus on the customer. Four broad factors are working together to re-make the market:
We are in a normal cycle. Everyone knows that real estate is cyclical. We’ve been in a long retail expansion and the market is seeing the signs of a mature cycle, where weaker retailers are either failing or closing stores. After a long period of growth, some retailers seem to forget how to retail, don’t change with consumer tastes and see a resultant decline in sales. Payless, True Religion, The Limited, Gordmans are good examples. While painful, this part of a cycle is ultimately healthy for the overall retail market.
Debt levels are at all-time highs. Over the past 10 years, retailer debt has skyrocketed, much the result of leveraged buyouts. This has limited retailers flexibility to make needed changes, to spend money on their stores, and has lessened their margin of error resulting in bankruptcies and store closures. Toys R Us, Gymboree, Rue 21 & Claires are but a few examples.
Competition for disposable income is squeezing traditional retail. We all know that about 70 percent of our economy is driven by consumer spending. But, that 70 percent isn’t just retail. Health care and student debt expenditures are taking up an increasing amount of Americans’ spending, particularly for younger generations who are just entering their prime spending years.
Online sales & Amazon are changing retail. This is obvious, what is not so obvious is where it leads. Online sales total about 9 percent of total retail sales, but the reach of online varies greatly by product category. This online/brick & mortar distinction is becoming less important. One of the biggest challenges retailers are facing right now is figuring out the right online/store mix for marketing, sales and distribution. The ones that get it right will lead their markets. This melding of online and traditional retail is driving innovation in the industry which will lead to not only new store concepts, but also to a more personalized shopping experience. Both good for the industry.
A few thoughts on the juggernaut that is Amazon. Per eMarketer, Amazon may very well own over 40 percent of e-commerce sales next year. Within 10 years, they may control nearly 12 percent of all retail sales. And their appetite for growth shows no signs of slowing as they are exploring drug sales and additional brick & mortar acquisitions. There have also been a few chinks in their armor: Amazon shut down AmazonFresh delivery service in a number of smaller cities; and, you are beginning to see complaints about declining quality/service at Wholefoods. It is hard to be all things to all people. At the end of the day, Amazon will have to decide what it wants to be.
OKC Retail Performance
The performance of our local market reflects the dynamics of the above influences. We’ve seen a number of national store closures in our market as well. Oklahoma City has had the additional drag on our market of being in our third year of lower energy prices. Lower energy prices means lower royalty payments; royalty payments have an outsized effect on local retail as these payments typically go straight to disposable income. So, despite some good economic indicators, unemployment below 5 percent, 9 months of sales tax growth, the energy industry figuring out how to make money at today’s pricing, retail activity has slowed, particularly among small shop and local tenants. This is not immediately reflected in our survey numbers as overall market vacancy remained unchanged from mid-year at 9.8 percent. But then you dig into the numbers.
The market is very much bifurcated, both in terms of which properties are doing well and which retailers are active. Newer properties are generally maintaining occupancy: when the market is anxious, retailers want ‘can’t miss’ locations. This anxiousness also tends to make local tenants less likely to expand or start a second location. There is increased small-shop vacancy scattered through the market. This increased vacancy has generally been offset by larger pre-leased developments or additions to existing projects coming online. The tenants that are expanding continue to be the same general restaurant tenants and value oriented retailers that have been expanding the past few years – TJX (including Marshalls & Homegoods), Academy, Aldi, Five Below, SportClips, etc. Looking forward, there’s a wave of deep discount tenants taking some of the vacant box space around the country that may be headed to Oklahoma, including dd’s, Dirt Cheap, Ollies, Burkes Outlet. More entertainment concepts will be entering the market with the change in our liquor laws, Show Biz Entertainment in Edmond and Flix on Broadway Extension have already been announced, expect some smaller dining/movie concepts to come as well.
Development. The uncertain retail environment has curtailed most larger retail construction projects other than GBT’s the Market at Czech Hall. Most of our new construction the last few years has been the expansion of existing centers like Chisholm Creek or University North Park. This may be changing as a number of projects are being marketed to retailers – the Poag Spring Creek development off 15th & Bryant in Edmond, Sooner Development’s Cotton Mill project downtown, Veritas Development’s mixed-use project at 50th and North Pennsylvania, the American Fidelity mixed use project on Broadway Extension. There are several others in various stages of planning. Even if they all don’t happen, this is a positive reflection on our market.
Our survey tracks 30.0 million square feet in 259 buildings of over 25,000 square feet and 15.4 million square feet of stand-alone buildings for a total market of 45.4 million square feet.
There continues to be a significant number of smaller strip centers in the market (under 25,000 s.f. in size). We would estimate there are close to 6.0 million square feet of these properties in the market.