Professional Office Market is Overbuilt in Spots

The hot topic in commercial real estate lately has been the overall professional office market in Northwest Arkansas being “overbuilt.” Although that’s true for some segments, it would be unfair to describe the entire market this way.

It’s important to make this distinction since several segments of the market are experiencing healthy vacancies and absorption.

It is also important to keep the Northwest Arkansas office market in perspective when comparing other metropolitan office markets. For instance, Springdale’s Real Estate Market Data Inc. currently tracks about 4.6 million SF of Class “A” and Class “B” space in the overall area office market.

Total inventory, square footage amounts, and property class are based on the information gathered for the REMDI database. Buildings are chosen based on quality, age, condition, market compatibility, and rental rates.

This 4.6 million SF is a relatively small number in comparison to Memphis’ 17.3 million SF, Kansas City’s 71.3 million SF, and Dallas’ 176.6 million SF (based on estimates from CB Richard Ellis).

Therefore, when comparing current construction trends, it is important to remember Northwest Arkansas has not grown into another Dallas — yet.

As of mid-year 2005, the Class “A” office market had approximately 2.9 million rentable SF in Northwest Arkansas. Overall vacancy dropped to 12.7 percent, which is an improvement over the 15.7 percent reported at year-end 2004. Absorption also improved during the first half of the year. All markets experienced lower Class “A” office vacancy compared to 2004’s end. Fayetteville, specifically the North Fayetteville submarket, improved most notably with significant absorption and a drop in vacancy to 1.5 percent from 6.9 percent. This submarket currently has about 395,618 SF, with 125,000 SF of additional space already under construction.

On the surface, and with new construction deliveries of only 111,399 SF of Class “A” office space at mid-year, this appears to be positive news. Unfortunately, Bentonville continues to struggle with an oversupply of Class “A” space and vacancy above 20 percent. Although construction has slowed for Class “A” space in Bentonville, newly delivered buildings have had little improvement in leasing. There are four Class “A” office buildings recently constructed in the Bentonville market that are at least 50 percent vacant.

Overall in Northwest Arkansas, Class “A” office properties currently under construction have had substantial pre-leasing and are not expected to impact the market radically. This pre-leasing is a positive sign for improvement in the office sector. Nevertheless, the 125,000 SF building under construction in North Fayetteville may impact other surrounding office submarkets, as existing buildings may lose tenants as a result.

Similar to the Class “A” market, the Class “B” office market also reported lower vacancies and higher absorption. The overall Class “B” market has a total inventory of about 1.7 million SF. Every submarket improved, with Rogers leading the way. The Rogers Class “B” office market had a mid-year 2005 vacancy of 2.6 percent. Unfortunately, rental rates remain flat for the overall Class “B” office market, as well.

At mid-year, Bentonville’s Class “B” office market had positive absorption, but vacancy was 32.8 percent. Bentonville has four projects under construction with more than 450,000 SF of rentable space to be added. Even though the majority of this space is in one project and its completion date is uncertain at this time, it will have a significant impact on the Bentonville Class “B” market. If, in fact, this particular project delivers the projected 400,000 SF of rentable space to the market within the next two years, and offers the expected below-market rental rates, this will most definitely affect existing buildings that are already struggling with leasing in Bentonville.

Fayetteville’s professional office market has approximately 1.04 million SF, with the bulk of that space being Class “B” office space. The overall office market in Fayetteville had an 8.5 percent vacancy at mid-year 2005. The only submarket experiencing high vacancy in Fayetteville lies in the central business district Class “B” properties, with a 20.1 percent vacancy at mid-year.

The overall professional office market in Northwest Arkansas continues to report strong absorption of available space. In other words, there are tenants actively leasing in this market either searching for new space or expanding their current offices. Unfortunately, that fact gets buried underneath the vast construction deliveries and future planning for a market of this size. Fayetteville and Rogers remain moderately healthy and continue to experience demand. Bentonville, however, is expected to continue to undergo high vacancy rates and flat rental rates with the steady stream of new construction deliveries.

(Brandi Willis is a market analyst at Real Estate Market Data Inc., which produces The Reed Report semi-annually on aspects of real estate in Northwest Arkansas. More detailed information can be provided by calling Real Estate Market Data at (479) 872-1000.)