Market trends, bright spots Commercial Real Estate Roundtable

The representatives from Oklahoma City's commercial real estate market who participated in a roundtable discussion earlier this month agreed that the Bass Pro Shops development would result in a positive addition for the area.

Other issues discussed included trends in the market, projections of real estate rates and values and the effect of the Kilpatrick Turnpike extension.

The group included Mark Inman, brokerage services associate in retail properties for CB Richard Ellis; Tim Strange, partner of Wiggin Properties; Bob Sullivan, partner in Coldwell Banker Commercial Hocker-Sullivan & Associates; and Jay Scott Brown, senior associate in multihousing for Grubb & Ellis/Beffort Brooks Hogan.

Randy Vaillancourt, broker for Trammell Crow, moderated the discussion.

Question:

What, if any, positive trends or bright spots have you seen in the Oklahoma City real estate market during this recession?

Answers:

Inman: "Growth of discounters on the retail side continues with Dollar Tree, Dollar General, Wal-Mart and Target. I look for two more stores for Lowe's this year, another store for Home Depot this year, and another Wal-Mart Supercenter. They're snooping around I-35 and Edmond. The discount side is booming. In Edmond, the retail trade area has completely changed. It's gone from Broadway to three corridors -- now Second and Bryant, Broadway and also Danforth and Santa Fe. For people in Edmond it's more positive because you get more choices."

Sullivan: "I've seen a real mixed trend in the industrial real estate market. We have seen in the past six months continued building, continued announcements of industrial properties that are being built but more on the bigger end -- the 50,000 to 150,000 square feet. It seems in the lower end, the smaller spaces, that construction has virtually stopped. We still have a great deal of demand. We have much more demand for purchasing the smaller user- type properties than there are for tenants. There is certainly a surplus now of bigger space. You have a lot of 50,000 square feet and above. For the smaller space, there is not much available and virtually nonexistent in Edmond. I think because of that we'll see a great resurgence of the smaller buildings and land development in the next six months."

Brown: "Our returns and our cap rates in multihousing are still stronger than they are in other competing markets. We are attracting still a lot of out-of-state investors who look at our market and feel like they can get a better return here than they can in other places. We're getting a lot of pressure from that. I think our unemployment rate is still very acceptable and I think it's helping to keep our apartments' occupancy pretty stable. There's plenty of capital available. Interest rates are still attractive. I think our market does stand out for people that are willing to look at a secondary and not a primary market. They're still willing to invest here in Oklahoma City. I feel like we still have some good strengths. I don't see anything on the horizon to make me think it's going to change in the foreseeable future."

Strange: "On the office side, the positive trend or bright spot, is that we've held our own in the last six to 12 months despite the recession, despite 9-11. We're basically flat and that's good news. Because if you look at some major markets on the coasts, they've experienced some double-digit increases in vacancy due to the telecom, tech sectors and clothing. So I think it's good news. Basically we've been flat on absorption and flat on rates instead of a big negative absorption and a big drop in rates like some of these other markets are experiencing. And that corresponds to values. Values have basically held their own as well. They haven't gone up, they haven't gone down."

Question:

Where do you expect real estate rates and values to be in the latter half of 2002?

Answers:

Inman: "On the retail side as far as rates are concerned, it's going to be flat with a little pressure to the lower side. The Homeland exits in some of the anchored shopping centers are putting pressure" on landlords to lower rents because of decreased traffic in the areas. Remaining tenants are "saying we want a break in rents. Those are real concerns. I think as landlords feel pressure the gap between offering prices and sale prices will close and we'll have more shopping centers changing hands. That's probably six months to a year away. I see shopping center sales going from 10 sales a year over 25,000 square feet to 15 to 20 per year."

Sullivan: In the industrial sector, "we're seeing asking prices for industrial buildings up in the $40 range which is very high, above replacement costs really. I think we're seeing some sales up in the $35 range for the upper end of the market. I think that as long as there are very few properties on the market as there are today, that we're going to continue to see those values hold. And we're going to continue to see lease space hold at its current levels with the exception of the larger spaces that are currently on the market. We'll certainly see a softening in the larger, bulk warehouse spaces."

Brown: "I think for multifamily, I would say that in the better- quality properties -- the As and Bs -- rates are probably going to be stable. It's tough to say if there are going to be more concessions or not. But there's a fair amount of concessions that are being offered to get people into those. I think in the C properties, rents are going to continue to improve. I see managers asking more and more. People are willing to pay it. I can't explain why. I guess it comes from there's enough employment that people can do it. They're not doubling up or moving back with their parents like we've seen in other down times. I think that the prices will remain stable and the only places we'll see increases are where people have taken properties and done some value-added improvement. "

Strange: "We've seen some expansion of locally based and owned companies here. These tend to be smaller companies that are expanding a few people here and there. We've seen quite a bit of that. That's good news assuming that we continue to see those kinds of expansions and that we see no major mergers and acquisitions that affect companies using a large block of office space, or we don't see any companies that relocate back into company-owned buildings. That has happened some in the past. I think rates will basically be unchanged. In A&B buildings, they'll be about what they are now and that will translate into building values being about where they are right now. An interesting phenomenon in building sales is that we are seeing asking cap rates going up slightly. The cap rates that they're being offered for sale at are slightly higher today than they were 12 to 18 months ago. I think deal rates, though -- actual rates at which the property trades, are going to be about where they are today."

Question:

What do you expect the completion of the Kilpatrick Turnpike to do for the real estate market in the far northwest corridor?

Answers:

Inman: "Retail follows rooftops and rooftops follow access. West of MacArthur, it's going to be some time before the rooftops infill. At the intersection of MacArthur, it's on the verge of explosion. We've got three or four banks looking around there." McDonald's, Legacy Bank and Walgreen's are moving into the area. "Gaillardia has got a lifestyle center planned -- 150,000 feet that would front Memorial. Who knows if that will actually happen. And they're trying to attract typical mall tenants. As far as retail, you won't see a whole lot past Rockwell until you see more houses being built."

Sullivan: For the industrial market, "we're not seeing any activity in that area. It's not zoned for it. It's too far away from all of the infrastructure. We do have several parcels of land around May Avenue and Portland. Those values have already gone up. And there's enough land out there that it's probably going to hold its value. Everything is going to have to develop to get it moving further west. The real winners are the people out on I-40 where that's looping in."

Brown: "I think it helps the multifamily in the Yukon and Mustang market because people can get that school system out there and there are some projects that are there or that are planning going there. It is amazing how spread out people are willing to live from where they work just because it is so easy to get around."

Strange: "For the short run, I don't see it doing much. Long-term I think we'll continue to push west. I think office buildings will move that way. Gaillardia has pretty much filled up their first building and they're talking about their second building. We're going to see a few small build-to-suits at MacArthur or Rockwell. I don't think we'll see any major development, though, other than maybe the second Gaillardia building in the next 12 to 18 months. The small build-to-suits may not be traditional office, they may be more service. Because of the loop being extended, the people that need to get to that building will have better access."

Question:

Now that we have right to work, do you see other legislative initiatives that could benefit Oklahoma City or speaking more broadly, have you seen in other U.S. cities programs and projects we should be emulating?

Answers:

Strange: "In St. Louis, the county has developed two or three buildings specifically as incubators for small buildings. They'll lease one or two offices at very low rates for starter businesses, hoping that those businesses will outgrow the incubator and move into private space. I'm sure other cities have done it as well. I'm not aware of anything we've done here in that regard. Of course, there is plenty office space here. So a firm could lease one or two offices and it's inexpensive here. So we probably don't need that today, but it's something to think about for the future."

Sullivan: "Kind of the reverse of this, some of the things that we are already doing that maybe some of the other cities are not, such as the MAPS program that Tulsa voted down, just the ease at which Oklahoma City works through their building permits as opposed to reports I hear of people trying to go to other cities and having enormous problems, enormous wait times. I think we are really doing a lot of things right for our city, certainly, and making it easy for people to relocate here."

Strange: "I think that's an excellent point. Think of all the things that we have been done -- MAPS, MAPS for Kids, the Mayor's Initiative, the city being named HUD Round 3 Empowerment Zone -- all of those things are huge. I think that's right."

Brown: "I had a client in from Colorado Springs and one of the things he was interested in" was whether Oklahoma City was a pro- business community. "When we talked about MAPS and building permits and all that kind of stuff, the message kept coming back over and over again that we will do anything we can to encourage business and jobs and growth. So he was really impressed with that."

Inman: "It's an easy sign city. Retailers like big signs and they've got it here if they want it."

Question:

What impact do you expect the proposed Bass Pro Shops development to have on the real estate market in the Bricktown area?

Answers:

Inman: "It's huge for retail. It's the key to infill for the rest of it. I think it could attract some of the stronger smaller shop retailers because of the traffic of Bass Pro. I think ultimately that will lead to -- and this may be a few years away -- a bigger box retailer. I think we're a ways from that, but I think eventually will come down here. If the population doubles, I could see a Wal-Mart Neighborhood Market going in."

Sullivan: "I can't see any reason not to do it or not to be aggressive in getting them in. That aggressive behavior is what has put us on the map in the last 10 years."

Brown: "I would have to believe that if Bass Pro comes in and all the other things that will follow I think you will see development from here to 23rd Street. The whole area will infill with various kinds of rental housing. I think that will be a pivotal thing. I think more lofts will go in and more building conversions into residential living downtown."

Strange: The added people would be a "plus for office. The Central Business District would be a more attractive place to do business. But I would not like to see any office development in Bricktown. I think that's a retail area and needs to stay that way -- restaurants and retail development. We've got enough office space downtown and other parts of the city that we don't need to be building more in Bricktown. Redeveloping a building is one thing. Building a new building is another. I guess what I'm saying is we can redevelop, that's fine. But I don't think we should be building new buildings. We need to fill up what we have."

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