More Vacancies Expected for Commercial Properties

According to the latest edition of the Reed Report, the biggest news of 2006 in the Northwest Arkansas commercial real estate market was in the retail sector.
With the opening of the Pinnacle Hills Promenade in Rogers, along with other projects, the region had nearly 1 million SF of retail space added to the market in 2006.
Even more surprising, the retail market as a whole remained healthy as most of the new deliveries brought new tenants to the market and kept vacancy low.
However, the professional office and office-retail markets did not perform as well as vacancy and construction continued to increase.
Following is a closer look at each sector of the region’s commercial real estate market taken from the year-end 2006 Reed Report.
Higher vacancies prevailed yet again in the professional office market due to unrelenting construction.
However, leasing activity remained active, as net absorption was positive for the fourth consecutive quarter.
This is great news considering the amount of construction that has occurred in Northwest Arkansas in the past few years.
Unfortunately, improvement in vacancy or rental rates is not expected, as over 750,000 SF will be delivered in 2007.
The usual suspect, the overly analyzed and overbuilt Bentonville office market reported high vacancy yet again, especially in Class A properties where vacancy ended 2006 at about 26 percent.
However, the Rogers market looks to be vying for Bentonville’s title as vacancy in Rogers skyrocketed to nearly 20 percent for Class A and B properties at year-end.
This is primarily due to two new deliveries and over 200,000 SF of additional office space for the Rogers market.
Unlike the retail market, much of this space was not pre-leased.
Bentonville, on the other hand, had positive absorption but with over 2.3 million SF of space from construction activity from the past few years, there is still much to fill.
Another looming issue is the Fayetteville office market.
This market has been very healthy in recent years, but nearly 200,000 SF were under construction at year-end.
The north Fayetteville area of this office market will likely experience a surge in vacancy as these new buildings are delivered in 2007.
Together with Bentonville and Rogers, Fayetteville is also expected to contribute to overall higher vacancies and flat rental rates in the professional office market in 2007.
The office-retail market in Northwest Arkansas had a few new deliveries in 2006, which kept the vacancy rate just over 13 percent.
Since those new buildings had little pre-leasing, vacancy remained high.
Absorption was positive and if not for the new space added to this market, it would be much healthier.
As of year-end 2006, the report surveyed over 2.2 million SF of office-retail space.
As stated earlier, the retail market remains the bright spot in Northwest Arkansas commercial real estate.
The Reed Report surveyed about 4.8 million SF of retail space in 2006, including the Northwest Arkansas Regional Mall and the newly opened Pinnacle Hills Promenade.
Vacancy slightly increased in 2006, but is quite healthy at about 8 percent.
The retail market may experience slightly higher vacancy in 2007 because of more construction, but should remain relatively healthy.
The Fayetteville market has over 200,000 SF under construction, located mostly in the north Fayetteville area.
In another positive note, rental rates increased during the second half of 2006. This may be a positive new trend as this market continues to grow.
The report also released data on the area’s industrial market in 2006.
Although this is considered a partial survey as this database is built, at year-end 2006 the Reed Report surveyed over 7.6 million SF of industrial space.
The bulk of this space is in the Springdale and Fayetteville markets.
At year-end, the overall vacancy rate was reported to be about 18 percent.
Another new aspect to the Reed Report is the medical-office market.
This market is growing in response to area hospital growth and construction. About 98,000 SF were reported to be under construction at year-end.
This market is also considered a partial survey since it is a growing database, but at year-end 2006 the Reed Report surveyed about 350,000 SF of medical-office space.
The vacancy rate was very health at about 3 percent.
The Northwest Arkansas hotel market is yet another important and ever-changing sector of the area’s commercial real estate.
This market has experienced tremendous growth in recent years and at year-end 2006, there were about 4,600 hotel rooms (limited service & full service) in Northwest Arkansas.
There were also over 2,200 rooms either under construction or planned.
This will certainly be an interesting market to watch in the coming year.
The Reed Report is published twice a year and the commercial edition contains information on all aspects of the Northwest Arkansas real estate market.
This survey addresses existing space, current vacancy, asking rates and space under construction.