NWA Office Vacancies Remain High (Market Forecast)

As 2005 came to a close, the office market in Northwest Arkansas continued to experience strain brought on by constant construction activity over the past few years.

Thankfully, certain areas of the market continue to outperform, such as the north Fayetteville Class A market, but the fact still remains that other areas are overbuilt.

Real Estate Market Data currently tracks over 4.7 million SF of professional office space in Northwest Arkansas. Of that number, approximately 2.75 million SF are classified as Class A space and about 2.05 million SF are classified as Class B space.

Nationally, overall vacancy rates in major metropolitan areas generally improved over year-end 2004.

In a recent report by CB Richard Ellis, the overall national vacancy for the fourth quarter of 2005 fell to 13.9 percent, which is down from the fourth quarter 2004 vacancy rate of 16.0 percent. That report also points out the worst office markets were Detroit, Dallas/Fort Worth, Atlanta and Columbus, Ohio, which all had overall vacancy rates above 20 percent at year-end 2005.

Comparatively, the Northwest Arkansas office market had minor improvement in 2005. Ending the year with a combined Class A and B vacancy rate of 14.5 percent, the office market vacancy was down from year-end 2004’s vacancy rate of 17.2 percent.

The Fayetteville, Lowell, Rogers and Springdale markets all ended the year with overall vacancies at 10 percent or below. However, the Bentonville market remained above 20 percent, which continues to put upward pressure on the entire Northwest Arkansas office vacancy. Rent growth for the Northwest Arkansas area office market has been flat for several years and is not expected to improve in the short-term.

Real Estate Market Data estimated at year-end 2005 just over 800,000 SF of office space was under construction in Northwest Arkansas.

Nearly half of that number is in one Class B building in the Bentonville market. This building will have quite an impact on the already overbuilt Class B Bentonville office market.

The Rogers and Fayetteville markets together have just over 400,000 SF of Class A space under construction, but much of this space has been pre-leased.

Although the amount of Class A space delivered in 2005 to the Bentonville market was less than half of the space delivered in 2004, absorption of newly delivered space could not match the oversupply.

The vacancy rate for Class A space in Bentonville remains over 24 percent. Class B space in the Bentonville market is also overbuilt and the vacancy rate at year-end 2005 was over 17 percent.

Even though there are many projects in Bentonville that remain successful despite the past two years, other projects continue to struggle to find tenants. Longevity in the Bentonville market will take strong property management and possibly upgrades to older space to remain competitive. Real Estate Market Data tracks over 2.3 million SF of office space in the Bentonville market.

For the past two years, the Fayetteville office market has absorbed excess office space added to the market in 2002, and at year-end 2005 the overall vacancy rate for Fayetteville was approximately 8.2 percent. With minimal construction over the past two years, absorption has been positive and rental rates have increased, though marginally.

At year-end 2005, there was one Class A office building under construction; however there are five known projects currently planned for the Fayetteville market. Although there is an obvious need for additional Class A space in Fayetteville, looking forward to the later part of 2007, vacancy rates are likely to rise as additional space is added to the market. Real Estate Market Data estimated there were over 1.07 million SF in this market at year-end 2005.

With just under 1 million SF of office space, the Rogers market ended 2005 with an approximate 10 percent vacancy. Most of that space lies near Interstate 540 and is classified as Class A space.

There are approximately 135,000 SF of Class B space tracked in this market, with vacancy over 20 percent. At year-end 2005, Real Estate Market Data estimated over 280,000 SF of office space under construction.

The Springdale, Johnson and Lowell office markets account for about 10 percent of the total market. Although vacancy in the Johnson market is high at this time due to a newly constructed Class A building, the Springdale and Lowell markets have healthy vacancies.

At year-end 2005, there were no known office projects under construction in these smaller office markets.

Fortunately, certain areas of the market have kept the overall Northwest Arkansas office market from bottoming out.

The Fayetteville and smaller Lowell and Springdale markets all had minimal vacancy for Class A and B space at year-end 2005, and are expected to experience little change in the coming year.

The Bentonville market, with excess space and high vacancies, is not expected to improve drastically during 2006. Although leasing has been strong, it cannot match on-going construction activity.

Looking forward, vacancies are expected to remain high in Bentonville and may creep higher in Fayetteville as more buildings are completed near the end of 2007.

As for asking rental rates, they have remained relatively flat for the past couple of years and are not expected to change significantly.