By most traditional measures – occupancy, rents, lease volume, new construction – the retail market held up pretty well in 2016, probably the best performance of any asset type. Market vacancy ended the year at 10.6 percent compared to 10.4 percent at mid-year. Some underlying factors, however, are creating uncertainty and could impact 2017 performance. Chief among these are continued low energy prices, low income growth (the lowest in the country in the third quarter) and the resultant decline in sales taxes (see the chart on page 4). For these reasons, we anticipate uneven performance in 2017 with a slight rise in vacancy and relatively flat rents. Discounters like TJ Maxx, Ross and the various dollar stores have done well the past few years and we expect that to continue. Restaurant expansion, which has been booming in Oklahoma City and nationally (40 percent of retail growth last year), will likely slow. The higher end boutique market may see the most headwind. One unknown that could help our economy and possibly change the market dynamics is President Trump. It is anticipated that the new administration’s policies will be good for business in general and the oil industry in particular by ushering in reduced regulations and lower taxes. Whether or not these policies come to pass or give Oklahoma a positive bump in 2017 is unknown.
Development
On the development front, the second half of the year was characterized by the completion or near completion of planned projects: The Market at Czech Hall is nearing completion of phase one including Academy, Ross & Marshalls (approximately 180,000 square feet); Sooner Rose at Southeast 15th & Sooner with Academy and Hobby Lobby; Shoppes at Quail Springs is nearly complete as well (96,000 square feet); University North Park has added two outbuildings and three stand-alone restaurants; Winco is under construction in Moore and will start construction soon in three other locations; Chisholm Creek added the 76,000 square foot Tract 30, and, a significant number of smaller 10,000 to 20,000 square foot strips have been completed. Most of these projects come into the market preleased. In addition to these projects, Lifetime Fitness will be taking the former Macy’s location at Quail Springs Mall and numerous other retailers – Aldi, Homegoods, Mattress Firm, Five Below, among others – remain active. As noted in our mid-year report, Walmart just opened two new Neighborhood Markets and a Supercenter (part of the 1.2 million square feet they’ve added in the last few years).
There are a number of planned projects that haven’t broken ground: Poag’s Bridges at Springcreek in Edmond; the Triangle Expansion by Washington Prime that remains tied up in a lawsuit; the recently announced retail as part of the downtown Strawberry Fields development; Westgate’s expansion south of Interstate 40 and the possible re-configuration of Shields Plaza. The performance of our economy in the first half of 2017 will go a long way to determining whether these and other smaller planned developments get done.
Grocery
Our grocery market has experience significant change and increased competition over the past five years, trends we see accelerating. The sizable expansion of Walmart noted above has added nearly 800,000 square feet of just grocery. Specialty grocers, virtually nonexistent in our market 10 years ago, are now prevalent with Sprouts and Natural Grocers continuing to expand and Trader Joes entering the market albeit with one location. Aldi has added stores as well. Winco is poised to add four large stores to this mix; Winco is a strong entry in the market that will compete with Walmart on price. The recent passage of State Question 792, allowing full-strength beer and wine sales in grocery and convenience stores, will influence the grocery market. Whether or not it will allow us to attract a national full-scale grocer like Kroger or HEB remains unknown. The answer may be a few years off as the law does not go into effect until 2018 and is being challenged in court. But, the net effect of all these influences could very well shake-up the market. Homeland and Buy For Less have already both closed stores; the response of existing operators bears watching as the competition heats up.
The Internet
In the world of retail, the internet is usually characterized as both the future of retail and the killer of brick and mortar stores. The reality is much more nuanced. Currently, internet sales make up about 9 percent of total retail sales; 30 percent of e-commerce sales go to Amazon. Internet sales continue to grow rapidly; most experts put internet sales at around 20 percent of total sales by 2030. Here is where it gets murky. The second largest e-commerce retailer is Walmart, much of which is picked up at their stores. Approximately half of internet sales are to retailers who have brick and mortar stores. Retailers are getting very creative at using their stores both to fulfill internet orders and be distribution centers. Interactive kiosks in stores are becoming more commonplace. Amazon, of all companies, is opening brick and mortar stores (see the Amazon Go article on page 22). Walmart is experimenting with small stores that are primarily pick up locations for internet orders, including groceries, that are filled at a nearby Supercenter. The fact is that brick and mortar and the internet are integrating in ways we wouldn’t have imagined. Expect this to continue. Brick and mortar isn’t dying; it is organically changing in response to changing consumer tastes and buying preferences just like it always has.
Survey Footnote:
Our survey tracks 29.4 million square feet in 253 buildings of over 25,000 square feet and 14.8 million square feet of stand-alone buildings for a total market of 44.2 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 5.5 million square feet of these properties in the market.
