Commercial Real Estate Vacancies in NWA Below ‘Healthy’ (Commentary)

Streetsmart NWA produces quarterly reports pertaining to the real estate market in Benton and Washington counties.

The reports focus on the single-family residential, multi-family residential and commercial sectors of the market. The company also produces quarterly reports on the single-family residential sector in selected cities in Sebastian and Crawford counties.

In this article the professional office and commercial retail sectors of the market are considered. Strip centers are excluded from the data presented.

In the first quarter of 2009, Streetsmart NWA researched 2.9 million SF of Class “A,” and more than 3 million SF of Class “B,” professional office space in Benton and Washington counties. The indicated vacancy rates were between 20 percent and 21 percent for Class “A” space and between 17 percent  and 18 percent  for Class “B” space.

The overall vacancy rate for Class “A” and “B” professional office space was indicated to be near 19 percent. This was down significantly from the 24.5 percent overall vacancy rate indicated in the first quarter of 2008, and up only slightly from the overall rate indicated in the fourth quarter of 2008.

Negative net absorption was indicated for both Class “A” and “B” professional office space in the first quarter of 2009.

With respect to professional office lease rates, Class “A” and “B” space reflected average lease rates in the first quarter of 2009 of $21.33 per SF and $13.98 per SF, respectively. Class “A” space reflected an increase of slightly more than 7 percent from the first quarter of 2008, while Class “B” space reflected nearly a 2 percent decrease.

The change from the fourth quarter of 2008 was up slightly for Class “A” space and down slightly for Class “B” space. Class “A” lease rates are considered under full-service lease arrangements (less janitorial), while Class “B” rates are considered under modified gross lease arrangements.

Next, the commercial retail sector was considered. In the first quarter of 2009, Streetsmart NWA researched 3.32 million SF of Class “A” and 2.76 million SF of Class “B” retail space in Benton and Washington counties. The indicated vacancy rates were near 13 percent for the Class “A” space and between 18 percent  and 19 percent  for the Class “B” space.

All of the Class “A” space is located in Fayetteville and Rogers. The overall vacancy rate for Class “A” and “B” retail space was indicated to be near 15.5 percent.

This is up significantly from the 9.8 percent overall vacancy rate indicated the first quarter of 2008, and very near the overall rate indicated in the fourth quarter of 2008. The year-on-year figures show an increase in vacancy in both categories of space.

Negative net absorption was indicated in Class “A” retail space in the first quarter of 2009, while Class “B” space reflected positive net absorption. Overall, absorption was positive in the first quarter.

The average lease rates in the retail sector in the first quarter of 2009 were indicated to be $21.53 per SF for Class “A” space and $12.56 per SF for Class “B” space. The average Class “A” lease rate was up more than 13 percent from the first quarter of 2008, while the average rate for Class “B” space was down slightly more than 4 percent.

The change from the fourth quarter of 2008 was down slightly in the Class “A” category and up slightly in the Class “B” category.

In conclusion, the professional office market in Northwest Arkansas has been a concern for some time, and still is. However, some submarkets are showing slow improvement. Obviously, more improvement is needed as overall vacancy rates are considerably above what constitutes a healthy market.

The retail sector had been the strength of the commercial market through the first half of 2008, but the last half of the year saw a significant spike in vacancy. Problems in the national economy helped to weaken this sector locally. Vacancy is expected to remain above norm at least into the latter part of 2009. Job creation is critical to the absorption of commercial space, particularly professional office space. A return to positive job growth is necessary for significant improvement in the professional office and commercial retail sectors.

(Tom Reed is a partner in Streetsmart NWA of Fayetteville. He may be reached at 479-575-9100.)