ECONOMY: Expansion Mode
Tulsa’s economy has been steadily rebounding over the past year and is considered to have entered an expansion mode. The unemployment rate remained flat from Q4 to Q1 at 3.2% and the current workforce has dropped 6,800 from Q1 to 471.7K (up 4.8K YOY). Low rents, energy costs, and taxes help to make the cost of doing business in Tulsa 11% lower than the national average. Tulsa’s low cost of doing business continues to drive companies to the metro. With aviation, aerospace, and to some extent, oil and gas industries providing demand, the industrial market has remained stable.
DEMAND: : Consistent Pace Into 2023
The Tulsa industrial market remains on stable footing with vacancy rates still trending at near lows. Overall, the industrial market is proving to be better insulated and is a point of strength in the commercial real estate market compared to other assets. Demand has continued to be focused on logistics properties, and development has reflected this growth. The passing of medical marijuana in Oklahoma has contributed to the budding demand for industrial space also. Consistent leasing has kept vacancy rates tight at 3.7%. In turn, annual rent growth measured 6.5%, the best performance on record. There has been a lack of speculative construction in the metro, resulting in increased competition among tenants, and rent growth has averaged approximately 3% annually over the past five years. Through the first quarter of 2023, the market has registered $26.6 million in annual sales , o n track for another strong year.
PRICING: Industrial Rents Soft Start to 2023
Overall Industrial Rents increased $.05/per square foot (psf ) since the fourth quarter. While Flex properties continue to boast the highest overall rents in Q1 2023 ($7.54 psf ) this category took a $0.07psf loss from Q4. Among the large area submarkets, the highest rents are found in South Central ($9.02 psf ), Southeast ($7.72 psf ), and East ($7.00 psf ) Tulsa. In contrast, rents are typically lower in the West ($4.90 psf ) and the CBD ($4.00 psf ). Asking rents come at a premium in warehouse space compared to distribution centers. Among large area submarkets, the highest rents are found in Southeast Tulsa ($5.79 psf Tulsa’s asking rents remain affordable relative to the national average and are on par with regional metros like Oklahoma City and Northwest Arkan sas .
ECONOMY: Consistent Outlook For 2023
Tulsa’s economy has been steadily rebounding over the past year and is considered to have entered an expansion mode. The unemployment rate remained flat from Q4 to Q1 at 3.1% and the current workforce has dropped 6.8k from Q1 to 471.7k (up 4.8k year over year). Low rents, energy costs, and taxes help to make the cost of doing business in Tulsa 11% lower than the national average. Tulsa’s low cost of doing business continues to drive companies to the metro.
DEMAND: Investment Activity Trending
Investment activity is trending higher in the Tulsa office market. The market is reporting $208 million in sales over the past year.
Steep move outs are in the rearview mirror as the market is reporting net absorption in the black through late 2022. Net Absorption has made a sizeable shift YOY from 60.3k to 18.5k in Q1 2023. The vacancy rate has decreased from 12.0% to 11.4% in the same timeframe. Through the fourth quarter, CoStar is reporting a total of 283,000 square feet (sf) of move ins by the end of 2022. While the market’s vacancy rate remains elevated, demand’s inflection point keeps vacancies from rising further. With improving demand , rent growth has also returned. Annual rent growth is positive at 1.0%. Despite moveouts over the past year, investors logged $3 28 million in sales in 2022, the highest volume reported on record.
Despite ongoing uncertainty surrounding the office market, the area is reporting annual rent growth of 1.4%.
PRICING: Small Market Rent Increase For Q1
The Tulsa total market saw a $.17 per square feet (psf) increase finishing the quarter at $16.82 psf, with the total Central Business District (CBD) showing a $.15 ($17.25/psf) increase and Non CBD a $.17 ($16.59/psf) increase. Class A space continues to struggle with fluctuations in demand. Total Class A vacancies were up .08% (up 2% YOY) within the CBD and Non CBD. Class A vacancies were down 1.8% (down 4.2% YOY). The highest rents are found in the metro area outside of the CBD. The South submarket has the highest asking rent at $22.21/psf followed closely by the Southwest submarket at $20.00/psf, and all rank ahead of the CBD with a near $3/psf premium at $17.25/psf. Due to continued consolidations and closing in the downtown area, the CBD has struggled to see any significant rent gains.
“Sometimes change comes at you hard and fast, and other times it’s a gradual shift.” Oklahoma City’s local economy continues to effectively resist the fallout of the unofficial recession the nation has been enduring as of late. Relatively speaking, there have been consistent parallels between growth in the job market and unemployment rates; Oklahoma City sales tax revenues experienced a strong increase above from 2022 at 10% year-over-year; and 85% of the proposed school bond elections have passed, indicating the taxpayer’s willingness to allocate dollars towards an elective mission. The previously mentioned metrics, and a few additional others, lead us to believe that the local Oklahoma City economy will continue to remain strong in the short and near term.
The Q1 2023 Oklahoma City office market paints a fairly optimistic picture, going into the summer months, which historically, typically experience an uptick in overall activity. Although net absorption remains negative, Q1 2023 has seen 30,000 square feet positive net absorption as compared to Q4 2022. Vacancy rates continue to trend below the national average at 9.7%, months-on-market continues to remain steadily on the decline, and lease rates continue to see positive growth. We see a rise in product competition with several Class A office projects recently announced and expect to bring more than 200,000 sf online over the next 3-5 years. While this might appear excessive, existing product is still trading cap rates above the national average at 9.37%, leaving significant levels of opportunity for both institutional and local groups seeking to uncover solid investment opportunities.
Yes, the challenges that come with the continued rise in interest rates, tenants continuing to navigate through their transition back to the office, and landlords not having the same capacity to provide concession packages akin to the 2020 office market exist. However, current leasing activity, a meaningful pool of active buyers, and public dollars continuing to be invested into the city fortifies our belief that the Oklahoma City office market will have another strong year, comparable, if not better than 2022.