New Commercial Projects Impacted By Slow Market (Commentary)

This article focuses on commercial construction activity in Benton and Washington counties. Bella Vista, Bentonville, Lowell, Rogers and Siloam Springs are considered in Benton County, while Fayetteville and Springdale are in Washington County.

Based on our research, the accompanying commercial building permit numbers and total permit valuations were reflected over the past five quarters.

Building permits are an indication of future construction activity. Minimal commercial construction is occurring in the major cities in the two-county area. However, this is to be expected given the present concern in the commercial real estate market. The total number of commercial building permits issued in the cities researched in Benton County decreased from 125 in 2007 to 55 in 2008 to 32 in 2009. A bright spot is that the first quarter of 2010 reflects an 83.33 percent increase in number of permits issued over the same quarter in 2009. The indicated increase in permit valuations was $10.07 million between the first quarter of 2009 and the first quarter of 2010. With respect to the two major cities researched in Washington County, total commercial building permits issued decreased from 75 in 2007 to 36 in 2008 to 33 in 2009. There were four building permits issued in the first quarter of 2010, down from six permits issued in during the same period in 2009; however, the first quarter 2010 valuations were up $644,251.

The 2008 commercial building permit valuations in Benton County totaled $51.37 million. In 2009 the total was $78.15 million. This 52.1 percent increase was significantly aided by the Crystal Bridges project in Bentonville. Washington County better reflects current market conditions in the commercial sector. Permit valuations decreased in Washington County from $56.88 million in 2008 to $25.22 million in 2009, a 55.7 percent decline.

The 2004-2007 period reflected significant commercial “in play” square footage constructed in Benton and Washington counties.

The phrase “in play” refers to investment grade non-owner occupied space researched by StreetSmart. Commercial “in play” space constructed during this time period totaled 6.66 million SF, with 2006 indicating the highest year’s total at 2.16 million SF. Since 2006, commercial space constructed in the two-county area has steadily decreased. In 2009 about 253,358 square feet of “in play” commercial space was constructed.

Oversupply of space and deterioration in economic conditions have adversely impacted commercial vacancy rates. This, along with tighter lending requirements, has negatively influenced new construction. The majority of new commercial construction appears to be owner-occupied or special-purpose projects. A return to positive year-on-year job creation is critical to absorption of the excess space, and increased demand for new commercial construction. Slow improvement is expected in the second half of 2010. 

Tom Reed is a partner in StreetSmart NWA of Fayetteville, which produces reports pertaining to the residential, multi-family and commercial sectors of the real estate market. He may be reached at 479-575-9100.