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Meagan McCollum talks about the commercial real estate environment downtown
Tulsa World Business Writer
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Despite a relatively high office space vacancy rate following the COVID-19 pandemic, downtown Tulsa is poised to grow, local officials said.
“I think that Tulsa is on a hockey stick up. There are only positive things happening,” said Jackie Price Johannsen, president of Price Family Properties, which is investing $80 million to transform three historic downtown buildings from empty office space into apartments.
“Our office space in the Deco District (downtown) is very strong. New York (City) has a lot of empty office space. We don’t,” she said.
The commercial vacancy rate for downtown is about 12%, according to both global commercial real estate services and investment firm CBRE and CoStar Group, Inc., a provider of information, analytics, and marketing services to the commercial property industry in the U.S., Canada, the UK, France, Germany, and Spain.
Tulsa’s downtown has about 13.6 million square feet of office space with at least 1.5 million square feet considered vacant.
CoStar lists the office vacancy rate at 11.9% and the retail vacancy rate — which includes shops, restaurants and other ground-floor businesses — at 4.6% for everything inside the Inner-Dispersal Loop as of the end of 2023, the most recent data available.
However, those numbers only include properties being advertised for sale or lease, said Meagan McCollum, associate professor of finance and director of the new Center for Real Estate at the University of Tulsa.
“There’s no way that the real number could be lower. It could only be higher,” she said of the office space vacancy figure.
She declined to guess what the real number is but said it was “substantially higher.”
McCollum compared CoStar’s vacancy figures as to that of the unemployment figure, which only counts those who are actively seeking work.
Experts have said a key factor in a glut of available office space are much higher interest rates than before the pandemic.
“If you are a building owner that has a loan then you at some point are going to have to renegotiate that loan,” McCollum said.
“We’re seeing inquires from national investors who want to come to Tulsa,” said Jackie Price Johannsen, president of Price Family Properties.
“If you have a bunch of vacancies in the building when it’s time to renegotiate, it’s going to be really hard for you to get a good deal from the bank.
“It’s going to be doubly hard when interest rates are high because you’re going to trying to support a higher payment off less money coming in. The bank’s not going to be so keen on that,” she said.
The building owner, she added, is going to be reluctant to lower the rent to get companies in “because you could fill up the building with really low-paying tenants and the bank’s going to say, ‘I can’t justify a loan that big based on your cashflow.’
Jackie Price Johannsen leads a tour of the Arco Building at 119 E. Sixth St. It is among three office buildings that Price Family Properties is converting from office space into apartments as part of an $80 million project.
“But you can’t say ‘I’m going to be double (the market rent price) because that’s what I need to support my loan.’ You’re just kind of stuck.”
A recent 60 Minutes story outlined how there is more than 95 million square feet of empty office space in New York City — about the equivalent of 30 Empire State buildings.
The price of some office buildings has tanked as much as 40% in New York since the pandemic, 60 Minutes reported.
CoStar said downtown Tulsa has 13.6 million square feet of office space.
That means there is at least 1.5 million square feet of available office space, said Emily Scott, director of planning and vitality for the Downtown Tulsa Partnership.
“It is worth recognizing that long-term vacancies (in some buildings) … are not included in those numbers so there is nuance to what is likely perceived as ‘vacant’ to someone standing on a downtown street versus space available to be leased and therefore considered ‘vacant’ via this data,” she said.
Federal Reserve Chair Jerome Powell reinforced his belief last week that the Fed will cut its key interest rate this year but said it first wants to see more evidence that inflation is falling sustainably back to the Fed’s 2% target.
Powell also suggested that the Fed faces two risks: Cutting rates too soon — which could “result in a reversal of progress” in reducing inflation — or cutting them “too late or too little,” which could weaken the economy and hiring.
The effort to balance those two risks marks a shift from early last year, when the Fed was still rapidly raising its benchmark rate to combat high inflation.
“I’m very optimistic, but it’s scary when you’re not attracting those big companies to downtown. We’ve got all the pieces in place, we have just got to figure out somehow how to get new blood,” said Rick Guild, owner of the Guild Co., who has spent his career in commercial real estate.
Rick Guild, owner of the Guild Co., has a career in commercial real estate spanning roughly four decades and has completed more than $1 billion of personal leasing and sales of office and industrial properties in Tulsa.
“I’m very optimistic, but it’s scary when you’re not attracting those big companies to downtown,” he said.
“We’ve got all the pieces in place, we have just got to figure out somehow how to get new blood.”
Guild said that in addition to functional space, companies are looking for amenities for their employees, including nearby restaurants, natural lighting and other features.
Regionally, a previously low level of commercial real estate activity declined even further below historical norms during the last quarter of 2023, according to the most recent regional survey released last month by the Federal Reserve Bank of Kansas City.
The level of commercial real estate activity has been declining over the past 12 months as the Federal Reserve tightened financial conditions, the KC Fed said.
The commercial real estate index is a quarterly indicator of activity in the Fed’s Tenth District, which includes Oklahoma, Kansas, Colorado, Nebraska, Wyoming, the western third of Missouri and the northern half of New Mexico.
The index incorporates a broad range of related economic activities and financial considerations across a variety of commercial property types — such as retail properties, hotels, office buildings, multifamily housing, and industrial space.
“Though interest rates and financial conditions stabilized near the end of last year, CRE conditions in the region deteriorated further due to large declines in the use and absorption of commercial space,” said Nicholas Sly, vice president at the Fed bank of Kansas City.
Nonetheless, local officials remain bullish about downtown Tulsa.
“We’re seeing inquires from national investors who want to come to Tulsa,” Price Johannsen said.
McCollum said of national investors, “I think they’re all kind of hanging back to see a little bit of local proof of content first. Like if Jackie’s ($80 million) project is going well, than I think that money is coming in.”
McCollum
McCollum said that before the pandemic, “Tulsa was in a somewhat worse position,” regarding office vacancy rates, but that the city recovered faster, in part because of economic conditions, organizations such as the Downtown Tulsa Partnership, the Tulsa Regional Chamber and Tulsa Remote.
“Not that these numbers are great, but now instead of being below average, we’re average,” she said.
Brian Kurtz is president and CEO of the Downtown Tulsa Partnership, which was established in 2021 by property and business representatives, as well as civic leaders, to advocate for and champion the continued improvement of the area.
He said a healthy mix of office space and retail is needed for downtown.
“We need a market that supports the growth of all these segments,” he said.
Kurtz said downtown will grow, especially on its west side, with a new $171.2 million Veterans Affairs hospital in the former Kerr-Edmondson state office complex.
Local officials remain bullish about downtown Tulsa despite an office vacancy rate of at least 12%.
The hospital will be affiliated with the neighboring Oklahoma State University Medical Center and part of a larger, $450 million project that will include a 100-bed inpatient mental health facility and OSU Pharmaceutical Research Lab and Clinical Center. Officials have said the medical complex will be the largest construction project in downtown Tulsa since the Williams Center in the 1970s.
A $70 million, 140,000-square-foot Oklahoma Psychiatric Care Center also is planned in the area. A partnership between Oklahoma State University and the Oklahoma Department of Mental Health and Substance Abuse Services will offer 106 beds and replace the current 56-bed Tulsa Center for Behavioral Health.
Kurtz said that during the middle of the week — on Tuesdays, Wednesdays and Thursdays — about 70% of downtown employees have returned to work since the pandemic.
The figure is lower on Mondays and Fridays because of hybrid work schedules between home and company offices, he said.
McCollum also said efforts by local tech leaders hoping to secure millions in federal money as part of the Tulsa’s effort to become a “tech hub” also may help downtown.
“Of course, some of them will require more office space than others,” she said.
“You have to have all those kind of smaller players in place before you’re going to get a Fortune 500 company to open a Tulsa office.
“The hope is you put all those ingredients together and then you have the big firms that say, ‘Well, we have to have a regional office in Tulsa, because that’s where the activity is.'”
Price Johannsen added, “There are just so many good things going on in Tulsa right now. I’m just glad I’m part of the ride.”
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According to RealtyMogul.com, for investors, property class is an important factor to consider because each class represents a different level of risk and return.
Investors can use these differences about property class types to consider how each property fits within their strategy of investing, such as return objectives and amount of risk they are willing to accept in order to achieve those returns.
Each property classification reflects a different risk and return because the properties are graded according to a combination of geographical and physical characteristics.
The letter grades are assigned to properties after considering a combination of factors such as age of the property, location, tenant income levels, growth prospects, appreciation, amenities, and rental income. There is no precise formula by which properties are placed into classes, but here is a breakdown of the most common classes, A, B and C:
Class A
These properties represent the highest quality buildings in their market and area. They are generally newer properties built within the last 15 years with top amenities, high-income earning tenants and low vacancy rates. Class A buildings are well-located in the market and are typically professionally managed. Additionally, they typically demand the highest rent with little or no deferred maintenance issues.
Class B
These properties are one step down from Class A and are generally older, tend to have lower income tenants, and may or may not be professionally managed. Rental income is typically lower than Class A, and there may be some deferred maintenance issues. Mostly, these buildings are well-maintained and many investors see these as “value-add” investment opportunities because the properties can be upgraded to Class B+ or Class A through renovations and improvements to common areas. Buyers are generally able to acquire these properties at a higher rate of return than a comparable Class A property because those properties are viewed as riskier than Class A.
Class C
Class C properties are typically more than 20 years old and located in less-than-desirable locations. These properties are generally in need of renovation, such as updating the building infrastructure to bring it up-to-date. As a result, Class C buildings tend to have the lowest rental rates in a market with other Class A or Class B properties. Some Class C properties need significant reposting to get to steady cash flows for investors.
Source: RealtyMogul.com
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Tulsa World Business Writer
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Email notifications are only sent once a day, and only if there are new matching items.
Meagan McCollum talks about the commercial real estate environment downtown
Tulsa’s downtown has about 13.6 million square feet of office space with at least 1.5 million square feet considered vacant.
“We’re seeing inquires from national investors who want to come to Tulsa,” said Jackie Price Johannsen, president of Price Family Properties.
“I’m very optimistic, but it’s scary when you’re not attracting those big companies to downtown. We’ve got all the pieces in place, we have just got to figure out somehow how to get new blood,” said Rick Guild, owner of the Guild Co., who has spent his career in commercial real estate.
Jackie Price Johannsen leads a tour of the Arco Building at 119 E. Sixth St. It is among three office buildings that Price Family Properties is converting from office space into apartments as part of an $80 million project.
Local officials remain bullish about downtown Tulsa despite an office vacancy rate of at least 12%.
McCollum
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