Some Big Box Properties Find New Leases on Life

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Pastor Ben Anderson of Woodlands United Methodist Church in Fort Smith said opportunity knocked last spring when a Books-A-Million store closed.

Fifty-six days of hard work and $165,000 turned the 22,000-SF space into a worthy house of worship. By June 2009, congregants had a new place to pray. The refurbished structure even came equipped with a built-in coffee shop that was left behind.

Did Anderson ever consider building a new church?

“This was so much cheaper,” he said. “The amount of money we would have had to come up with for a down payment, with a parking lot like that, would have been far more expensive than just the lease that we’re paying now and renovation costs.

“We thought it was a win-win for everybody,” Anderson said.

Relocating Sunday services to second- and third-generation property is just one example of successful commercial leasing – a former Kmart in Rogers has been handily turned into a car dealership, for instance. But even with win-win spaces available, the trick in commercial real estate right now is more about “Location, location, location,” and getting past the recession, brokers said.

According to the Northwest Arkansas Commercial Data Exchange, a service supported by Xceligent Inc., the vacancy rate of retail space in Benton and Washington counties was 7.3 percent, or just more than 1 million SF available for lease at the end of the first quarter.

Colliers International principal Steven Lane said good properties are getting absorbed fairly quickly. “In a year we won’t have many vacancies in good locations,” he said. “We’ll need new construction to fill the gap. While well located spaces continue filling up, B and C locations on the market’s edge will face troubled times for the foreseeable future.”

But there are exceptions. The 49,670-SF Rogers property that was formerly a Sportsman’s Warehouse is listed with Lane for a rental rate of $11.40 per SF. Instead of adapting to the structure, Academy Sports + Outdoors, a newcomer to the market, decided to build a 75,000-SF building nearby at a cost of at least $4 million.


Big Box

As a Sage Partners vice president, T.J. Lefler connects companies with information – such as average household income and population size – that helps them decide which city, and site, represents the best possible match.

Lefler admits that investors are afraid of tomorrow’s market, and that interest rates may eventually rise. Lefler said commercial lending is so tight in the current environment that it’s tough to get a good loan. Still he sees normalcy slowly, but surely returning.

“We’ve had more business this year than in the past few years,” Lefler said. “People are trying to see the opportunity. People feel like the recession is either over or coming to an end, and they feel safer when they open a new business. I think the attitude has gotten a little more positive on leases and new businesses. There’s definitely been an up-tick.”

Lefler said there is a world of interest in the Northwest Arkansas commercial market; unfortunately, availability in the 20,000-SF to 100,000-SF market is lacking.

Still, Northwest Arkansas is probably lucky not to have many empty big boxes. “Those big ones stick out like a sore thumb. It frustrates people in a lot of towns when they have a lot of those. We’re fortunate we don’t.

“In good markets, spaces like that can be filled in six months or less,” he said. “In bad markets, it could take years.”

Arthur Thurman of Springdale’s Mathias Properties believes the challenge of bigger spaces “is you have tremendous parking. And usually the buildings are extremely conducive to second- and third generation uses. The challenge is that sometimes they are very deep. You need a user with a deeper footprint.”

Mathias Properties has a history with such developments – like the Fiesta Square on Fayetteville’s College Avenue, a section of which has at various stages served as a Wal-Mart, Stein Mart, Trees N Trends, and, most recently, Hastings Books and Big Lots. Mathias also owns property across the street (in a space referred to as Market Center) that houses a Hobby Lobby, and before that, a Kmart.

“It comes back to location,” Thurman said. “Location typically dictates usage. If you take that former Wal-Mart location and try to put too many tenants in there, they won’t be successful, maybe because they’re competing for the same dollars.” In any case, Thurman said, “you have to have something that generates draw.”

Thurman said Northwest Arkansas is witnessing an oversupply due to spaces built for the area’s anticipated population growth – expansion that has stalled out in the face of economic recession.

“There is always more or less than there needs to be,” he said. “Rarely do you ever hit a period when it’s in balance. Typically builders and developers are redeveloping property when they feel like there is a demand. It’s a cycle. It will correct itself.”

“We’ve seen the lease market slow down,” said Greg Taylor, a Realtor at the Griffin Company Commercial Division. “It’s strictly driven by need. Retail, office, industrial, warehouse – I think everybody’s concentrating on making money right now and they’re not making big changes. Unless it’s religion, health care or education, there’s not much expansion going on.”

Taylor adds that businesses are waiting for an increase in profits and demand before they’ll do more than is presently the case.

“People have to make money. Businesses have got to see an increase in profits and they have to see more of a demand for their product before they’ll do any more than they’re doing.

“If you go out and talk to people that’s the struggle. Businesses are doing half in most cases what they were doing two years ago,” Taylor said.

“It’s enough to keep the people who own the businesses from spending any money. They’re not in expansion mode that’s for sure.”



David Russell, First Security Bank’s Fayetteville market president, believes the business of loans depends on any number of variables.

All sorts of questions – from location to competition to neighborhood to enquiring why the last business vacated the space – determine whether a commercial loan makes good sense.

“If they have an excellent track record and the perception is the business plan makes sense, they’re going to have a lower rate than someone walking in doing this for the first time,” Russell said. “We base our decision on the company or the person owning or operating the company. That’s the best indication for future success.”

Although the decision process often takes anywhere from two weeks to two months, Russell said much depends on how well prepared the borrower is from the very beginning.

In any case, the in-depth nature of the process hides the hopes of many bankers: that a successful commercial loan will sow seeds of a long-term relationship between user and lender.

Russell notes that interest rates (which can range from five to eight percent) on commercial loans are often renegotiated every two to three years since banks like to reevaluate loan terms depending on how well a given business is doing.

“If they are buying it as an investor where they are going to lease out, we typically try to see the income potential for the property based on the lease income it’s going to generate,” Russell said. “If it’s owner occupied, it depends on the business incoming and the cash flow. Will it cover the day-to-day operating costs as well as the payments on the loan?”

Russell believes reusing older spaces makes sense if conversion costs do not exceed what would have been spent building anew from the ground up.

“If it’s the right location, exposure and price, that’s sometimes the best way to do it. I think there are more opportunities today to buy at the right price to make it more feasible than to go the new construction route,” he said.

For his part, Anderson doesn’t see any awkwardness saving souls in used space.

“What we hope is it enhances the businesses around us,” he said. “We hope those businesses flourish. We think our presence gives a message of love and comfort to the community.”