Commercial Agents Say Rates for Retail Footage in NWA Down, Listings Up

Northwest Arkansas was once considered “under retailed” in terms of space. Now there’s just more than 1 million SF sitting empty.

While the national average in 2005 was 18 to 19 SF of retail space per person, Northwest Arkansas had about 10.

Considering population estimates at the time were 369,000 in Benton and Washington counties, that left a void of about 3 million SF of retail space.

Developers raced to fill the void with large retail centers, including the 1 million SF Pinnacle Promenade and the 1.2 million SF Pleasant Crossing in Rogers. But that was too much, too fast, said many commercial real estate agents.

David Erstine, vice president of Sage Partners in Fayetteville, said the population of Northwest Arkansas couldn’t support the amount of retail that was built during the past few years.

“This is not a big enough area to have a huge mall at every exit,” he said.

Pleasant Crossing is a prime example. While the development was once the planned location for a 14-screen movie theater and a Saks Parisian department store, its only major tenant now is a Wal-Mart Supercenter.

Its other major tenant, a 55,000-SF Sportsman’s Warehouse, closed its doors in March when the company liquidated 23 locations.  

The surrounding land, about 215 acres, is being sold in a closed bid auction. Bids were due June 10.

Retail Shift
Erstine said the retail market is currently frozen as national retailers curb their expansion plans or shut down stores in response to the troubled economy.

Some agents, however, are starting to see activity improve from the last quarter of 2008.

Alan Cole, a retail specialist for Colliers International, said most of the activity is with local, mom-and-pop type businesses that are looking to take advantage of reduced rental rates.

“Landlords are aggressively seeking tenants,” he said. “So if the retailer is in a strong position or has cash to work with, they’re taking advantage of some of those deals.”

Matthew Dearnley, managing partner with Flake & Kelley Commercial, agreed that the local retailers are generating activity in the market.

“We’re seeing a lot more local and regional tenants,” he said.

Dearnley recently leased space at Nelson’s Crossing in Fayetteville to Eyemart Express, a Texas-based discount eyewear retailer with 87 stores, and Sugarbear’s, a local pet boutique and bakery.

If nothing else, the trouble that national big box retailers are experiencing has opened a door for the smaller operations, Dearnley said.

Erstine said it’s also a good opportunity for businesses that have not previously thought of themselves as retail. Businesses such as medical offices, real estate offices and insurance agencies, can get high visibility space for a lower cost because they’re not competing with as many of the traditional retail tenants, he said.

Some spaces are harder to fill, however, such as the larger spaces left vacant by national retailers that ceased operations during the past year, such as Circuit City and Goody’s Family Clothing in Fayetteville and Linens ‘N Things in Rogers.

Landlords are getting creative in how they fill those vacancies, Cole said. They have to decide whether or not to spend money to break up the space or hold out for a comparable tenant and reduce the rental rates.

“They might go after a use that they haven’t considered in the past, such as a gym, a church, or someone who might be able to take over the space in the short term and ride out this market,” he said.

Cole said he’s starting to see some of the vacant spaces in the market fill up as new construction slows.

According to the most recent Arvest Bank-commissioned Skyline Report, compliled by the Center for Business and Economic Research at the University of Arkansas, commercial building permits fell to $7.6 million in the first quarter. That’s a 45.3 percent drop from the fourth quarter of 2008 when $13.9 million in permits were reported and a 79.2 percent drop from a year ago when $36.7 million were reported.

In 2006, at the height of the commercial building frenzy, $106.8 million in building permits were issued.

Vacancy rates in the retail market were at 14 percent in the first quarter as 57,521 SF of space became occupied.

Center Director Kathy Deck said the vacancy rates in Northwest Arkansas are higher than the national average, proving that the area was overbuilt in retail space.

“I think we built with the theory that we would continue to grow at those spectacular rates for longer than we did,” she said. “We are no longer under retailed.”

Mall Advantage
Despite the negative news, the area’s two biggest shopping destinations, the Promenade in Rogers and the Northwest Arkansas Mall in Fayetteville, are fairing better than some other locations.

Jeff Bishop, senior property manager at the Fayetteville mall, said occupancy rates for retail space have kept steady at about 93 to 94 percent, while the food court is 100 percent occupied.

Bishop said the mall has the population base to support itself.

“Being the only enclosed regional shopping center is certainly an advantage,” he said.

To those that predict the decline of the indoor mall, Bishop said he doesn’t see it.

“I would agree with what many of the industry experts are saying, which is that well located, well positioned shopping centers, regardless of format, whether it be a lifestyle center, or enclosed mall, will continue to thrive,” he said. “I think we’re a perfect example of that.”

The Promenade, a joint venture between the Pinnacle Group and General Growth Properties, also continues to dissuade uncertainties that emerged when General Growth filed for Chapter 11 bankruptcy in April.

The Promenade was not included on the list of more than 165 holdings in the filing and Pinnacle Group executives said the move would not impact operations at the mall.

In fact, the majority of retail space at the Promenade is occupied.

Cole recently inked a deal with Famous Footwear to take a 7,042 SF space in the outdoor mall.

“If you have quality national anchors, that’s still going to drive people into shopping centers,” he said.

Office Space
The office market is suffering many of the same ills as retail as the economic downturn affects the demand for space.

Dearnley said the office market is seeing most of its activity from existing tenants.

“We’re seeing less companies coming in from out of town,” he said. “Mainly what we’re seeing is tenants shuffling around.”

Tenants are opting to move from one space to another, as they get better deals on rent.

“However, that doesn’t help the overall market,” Dearnley said. “The biggest help by far is that no one is building more space.”

In the first quarter of 2009, there was a negative net absorption of 36,379 SF in the office market.

Vacancy rates held steady at 17.7 percent, compared with 17.1 percent for the fourth quarter of 2008.

Marshall Saviers, vice president at Sage Partners, said Wal-Mart vendors continue to keep the office market moving in Benton County.

“Washington County is a little sleepier,” he said.

Erstine was more direct about the state of the office market.

“It’s as soft as I’ve ever seen in the last 10 years,” he said.

Saviers said much of that can be attributed to bad timing.

Several office buildings in Fayetteville became vacant at the same time as tenants moved to other locations.

“It’s a bad time in the cycle,” he said. “But it will come back.”

Deck said the region will have to experience employment growth in order for the office market to see some absorption in vacant space.

“We depend on population growth and employment growth to be the drivers of demand,” she said. “As we come out of this downturn toward the end of the year and the beginning of next year, the hope is that we see more businesses hiring again, which means they’ll need more office space.”