The Oklahoma City industrial market experienced a notable decline in the third quarter of 2023, with rental rates dropping to $8.22 per square foot per year on a triple net basis (NNN) from the previous quarter's $8.44. This correction marked a departure from the high growth witnessed between 2018 and 2022.
Despite the rental rate decline, the market displayed resilience, recording a positive total net absorption of 450,857 square feet, indicating ongoing activity and demand within the sector. However, the vacancy rate rose to 4.6% from 3.8% in the second quarter, attributed to the closure of medical cannabis companies and the introduction of large-scale speculative Class A developments.
Leasing activity remained steady throughout the year, with 110 lease transactions reported in Q3. Two significant leases, each surpassing 100,000 square feet, attracted attention. Stafford-Smith Inc secured a lease for 119,715 square feet, while Industrial Paper IP (NYSE) acquired 115,488 square feet, showcasing sustained interest from national corporations in the Oklahoma City market.
Conversely, the purchasing activity saw a notable slowdown, reporting only 36 transactions with a total sales volume of $34 million, the lowest in recent years. The slowdown was attributed to prevailing economic uncertainties, as investors grappled with rising borrowing rates and sellers struggled to adapt to evolving market conditions.
Despite the challenges, the Oklahoma City industrial market remained resilient compared to other commercial real estate segments. The city's strong labor market, with an unemployment rate of 2.7%, continued to attract businesses seeking stability and a skilled workforce. Additionally, its position as the 20th largest city in the United States and reputation for affordable living costs and a thriving business environment solidified its appeal for businesses considering expansion or relocation.
Looking ahead, market projections indicated a continued shift towards leasing over purchasing, driven by persistently high interest and borrowing rates, which had reached a 22-year peak. This trend reflected the preference for leasing arrangements, given the relatively favorable terms compared to the challenges associated with property acquisitions. The anticipated impact of rising 10-year bond yields was expected to contribute to an increase in capitalization rates, aligning with the evolving financial landscape.
As industry observers monitored the market's response to these dynamics, the trajectory of the Oklahoma City industrial market in the upcoming quarters remained a focal point. The interplay between economic conditions and the balance of supply and demand would significantly influence the landscape of the region's industrial real estate sector.
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