Vacancy Rates Still High for 2Q Professional Office Market (market forecast by Tom Reed)

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Streetsmart Data Services researches various sectors of the commercial real estate market in Northwest Arkansas, including professional office, office/retail, retail, medical office, office/warehouse, hotel and full-service restaurant.

In the second quarter, Streetsmart Data Services researched 2,546,969 SF of Class A and 3,025,212 SF of Class B professional office space in Benton and Washington Counties.

In the second quarter, the overall vacancy rate in Class A office space in the two county area was indicated to be about 19.91 percent, based on research conducted by Streetsmart Data Services.

This represents an increase from 14.4 percent in the second quarter of 2006. Out of the total 2,546,969 SF of space researched, about 507,213 SF were reported to be vacant.

Fayetteville reflected the highest vacancy rate at 23.84 percent, with Rogers second at 20.41 percent. These high rates are primarily reflective of the recent introduction of new product. Bentonville, in the recent past, had experienced the highest vacancy rate in the two-county area, however, due to positive net absorption, reflected a second quarter rate (18.18 percent) below that of both Fayetteville and Rogers.

The lowest vacancy rate among the cities researched in Benton and Washington Counties was in Lowell, with a second quarter rate of 2.38 percent.  However, Lowell has only some 105,864 SF of Class A space.

It should be noted that our research does not reflect any Class A office space in Springdale.

A positive indicator in the second quarter was that Class A office space in Benton and Washington counties experienced positive net absorption of about 50,555 SF.

The average, annual lease rate for Class A office space in the area in the second quarter was $19.28 per SF.

This was up from $18.53 per SF in the second quarter of 2006. The overall market had experienced relatively flat lease rates over the last few years, however, there are now indications of some increases in certain sub-markets.

Fayetteville reflected the highest average lease rate at $20.34 per SF, with Bentonville reflecting the lowest at $18.47 per SF.

With respect to Class B office space in the two-county area, the overall vacancy rate in the second quarter was 15.37 percent, based on our research.

About 465,085 SF were reported to be vacant out of the 3,025,212 SF researched.

Rogers reflected the highest vacancy rate at 20.17 percent, with Springdale experiencing the lowest rate at 4.46 percent.

Bentonville has the most Class B space at about 1,819,572 SF. This is due to the heavy concentration of Wal-Mart vendors in Bentonville. The vacancy rate in Class B space in Bentonville was 15.98 percent. Fayetteville was just slightly higher at 16.69 percent. Lowell experienced a second quarter vacancy rate of 9.61 percent.

Positive net absorption of about 7,857 SF did occur in the overall Class B market in the second quarter

Our research supports an average, annual lease rate for Class B office space in the Benton/Washington county area in the second quarter of $12.95 per SF. Lowell experienced the highest average rate at $16.15 per SF, with Rogers the lowest at $10.98 per SF.

Again, lease rates have been relatively flat, however, certain sub-markets are now seeing some increases.

In conclusion, the professional office market is obviously of concern in Benton and Washington counties due to the current overall vacancy rate. Considering both Class A and B space together, the vacancy rate is near 17.5 percent.

Encouraging signs are that positive net absorption is occurring, and lease rate increases are being experienced in some sub-markets. However, there is more than 600,000 SF of professional office space under construction in the two-county area, with slightly over 90 percent of this being Class A space.

One Class A building in Bentonville accounts for near 400,000 SF of the total office square footage under construction.  This building is projected to be completed in 2007. Without considerable pre-leasing, the introduction of this amount of new product will not be positive in the near term for the overall office market in Northwest Arkansas.

(Tom Reed is a partner in Streetsmart Data Services. Streetsmart Data services provides quarterly reports pertaining to the single-family residential, multifamily residential and commercial sectors of the real estate market in Benton and Washington counties.)