Retail Sector Improves In 2010’s Second Quarter

Streetsmart NWA researches both Class “A” and Class “B” non-owner occupied retail space in Benton and Washington counties. In the second quarter of 2010, the total 6.25 million SF was researched for both classes of space.

Class “A” space in Rogers and Fayetteville represented slightly more than 50 percent of the retail space researched in the quarter. The overall vacancy rate was indicated to be slightly more than 14 percent with Class “A” space just under 12 percent and Class “B” space near 17 percent.

The retail sector of the commercial real estate market in Northwest Arkansas has shown improvement over the past year. It appears the overall vacancy rate peaked in the second quarter of 2009, near 16 percent. The second and third quarters of 2009 reflected slight improvement, with the fourth quarter of 2009 and first quarter of 2010 each indicating a drop in vacancy of one-half percent or better.

Commercial brokers are reporting increased leasing activity in the better retail locations in Benton and Washington counties. Lease rates have declined, which obviously has been a major reason for the increased activity.

A significant downward adjustment in the average lease rate for Class “A” space occurred between the fourth quarter of 2009 and the first quarter 2010. Our research shows an average annual per square foot lease rates between $19.75 and $20 for Class “A” space and between $13 and $13.25 for Class “B” space.

Class “A” retail space is typically leased under full-service lease arrangements while Class “B” space is typically leased under modified gross lease arrangements.

Positive net absorption occurred in both the Class “A” and Class “B” retail sectors in the second quarter of 2010. A total of slightly more than 40,000 SF was absorbed in the second quarter. Morre than 55,000 SF of retail space was indicated to be under construction in the second quarter. All of this new development is located in Fayetteville.

The strip center sector of the market is researched separately by Streetsmart. This is Class “B” space that can be allocated to office or retail. A typical strip center will include a mixture of both. The retail area is typically small user space.

The strip center sector has struggled for several consecutive quarters. In the second quarter of 2010, the vacancy rate was indicated to be above 19 percent.

Restaurants are part of the overall retail sector; however, in reality, represent retail/service space. There is significant competition in the restaurant sector in Benton and Washington counties.

Streetsmart researches near 32,000 full-service restaurant seats in the two-county area.

Fayetteville, Rogers and Bentonville contain the highest number of seats. Based on 2009 population estimates, these three cities indicate 6, 7, and 7 people, respectively per full-service restaurant seat. Fayetteville and Bentonville are the only cities in the two-county area that collect restaurant tax receipts. Year-on-year numbers between the second quarter 2009 and the second quarter 2010 reflect an increase of 1.7 percent in Fayetteville and an increase of 2.5 percent in Bentonville.

Overall capitalization rates have increased over the last several quarters in the retail sector, as they have in other sectors of the commercial market. The third quarter 2010 Realtyrates.com Investor Survey, reflecting second quarter data, indicates an average capitalization rate range of 8.88 percent to 10.02 percent for anchored retail centers and 9.6 percent to 10.75 percent for unanchored retail centers.

Free-standing retail was indicated to range from 8.66 percent to 10.38 percent. Full-service restaurants reflected an average capitalization rate range of 12.53 percent to 13.29 percent. This is a national survey. 

Tom Reed is a partner in Streetsmart NWA, which produces reports pertaining to the residential, multi-family, and commercial sectors of the market. Company offices are located at 2804 Main Street, Suite C, Fayetteville, Arkansas. The phone number is 479-575-9100.