Vendor Space Expands, But New Arrivals Scarce

Commercial real estate in Northwest Arkansas has one common characteristic in 2005: a forecast of increased construction activity.

As the professional office, office-retail, and retail sectors attempt to absorb construction deliveries from the past year, even more construction activity remains in the pipeline. Unfortunately, most of these sectors are dealing with flat rental rates and decreased absorption. In the short term, higher vacancies in these real estate sectors should be expected.

Below is an overview of each sector. Total inventory, square footage amounts and property class are based on the information gathered by Real Estate Market Data Inc. in Springdale. Buildings in the database are chosen based on quality, age, condition, market compatibility, and rental rates:

Bentonville’s oversupply and unrelenting construction activity continues to be an aggravation to the overall professional office market. As of mid-year 2005, with the exception of Bentonville, all other Northwest Arkansas professional office markets are experiencing relatively healthy vacancy and absorption. REMDI tracks approximately 4.6 million SF of Class “A” and “B” space in the overall office market. Rental rates have moved slightly upward in certain submarkets but remain flat overall. Area landlords and leasing agents reveal a slight pick-up in tenant interest but the expected surge in retail supplier relocations remains elusive.

On a more positive note, expansion of vendors already established in the community have become more prevalent, and if building owners can assist tenants with these expansions property success increases significantly.

As of mid-year 2005, the overall Class “A” professional office market appeared to be improving. Overall vacancy dropped to 12.7 percent, which is a positive indication from the 15.7 percent reported at end-of-year 2004. Similarly, the Class “B” office market also reported lower vacancies at mid-year. Rental rates remain flat, however, and area landlords should not expect improvement in the near future. Most notably, at mid-year, Bentonville’s Class “B” office vacancy was 32.8 percent with four projects currently under construction.

As expected, Northwest Arkansas’ office-retail vacancy and overall rental rates have been affected by the more than 150,000 SF that was delivered in 2004. Currently, this market contains approximately 2.2 million SF. Although there were no construction deliveries during the first half of 2005, this market will need time to absorb all of the new space brought online last year. The Class “A” office-retail market has had positive absorption during the first half of 2005 and vacancy remains a healthy 6.2 percent. Class “B” space has several new projects currently under construction; improvement in this sector and the 11.1 percent vacancy are not expected to improve by the end of 2005.

Northwest Arkansas’ overall retail vacancy rates at mid-year were relatively unchanged over year-end 2004. New deliveries from 2004 are slowly being absorbed into the market. Currently, this market has approximately 2.9 million SF. No new construction has been delivered in 2005, but ongoing construction activity in the Bentonville market of Class “A” and “B” retail space will obviously affect vacancy in the coming months. As of mid-year 2005, the vacancy rate for the overall retail market was 7.9 percent. There are also the highly publicized retail projects in the planning stage for Rogers along the Interstate 540 corridor, with more than 1 million SF in the planning stage. Although the timing of completion and exact tenant make-up of these projects are unknown, the overall retail landscape in Rogers will change dramatically in the next two years.

The medical-office market tracked by REMDI consists of approximately 144,392 SF (this is a partial survey of major buildings and may not include all medical-office properties in Northwest Arkansas), and at mid-year the overall vacancy was reported at 8.2 percent with no projects under construction. The medical-office market in Northwest Arkansas is predominantly in the North Fayetteville submarket.

REMDI has recently added the area hotel market to The Reed Report, and at mid-year 2005 this market had a total of 4,362 rooms in 42 existing properties. Properties targeted for participation in the survey are primarily located along the I-540 corridor and are limited or full-service oriented. Although Fayetteville currently has the most number of rooms available, Bentonville is expected to surpass that lead in the coming two years with a considerable amount of hotel properties under construction.

The overall Hotel market experienced an average annual occupancy of about 65 percent in the past year.

Although areas of the Northwest Arkansas commercial real estate market appear to suffer from being overbuilt, there are parts of the market with positive outlooks. For instance, the Fayetteville commercial market has experienced significant improvement and should absorb new deliveries with ease in all real estate sectors. With increased scrutiny of future real estate developments and continued strong population and job growth, the overall Northwest Arkansas commercial real estate market should improve in the coming years.