Area Retail and Office Vacancy, Lease Rates Trending Downward (Opinion)

The focus of this article is the commercial sector of the real estate market in Benton and Washington counties, specifically retail and professional office space.

In Q1 2011, Streetsmart researched 6,303,052 SF of improved retail space and 6,334,051 SF of improved professional office space in Benton and Washington counties. This reflects Class “A” and Class “B” investment grade properties. Owner-occupied properties are excluded.

In addition, this does not include strip centers which could not be finished-out for either retail or office use. An additional 3,278,905 SF were researched in Q1 in the strip center category. 

The Dictionary of Real Estate Appraisal, Fifth Edition, defines Class “A” and “B” office buildings as follows: Class A – “The most prestigious office buildings competing for the premier office users, with rents above average for the area.” Class B – “Compete for a wide range of users, with rents in the average range for the area; do not compete with Class A buildings at the same price.”

With respect to retail, class ranking typically reflects the strength of tenants, construction quality of the improvements, and the purchasing power of consumers in the market trade area. 

In Q1 2011, our research reflects the overall vacancy rate in Class “A” retail space in the two-county area at just less than 11 percent. The reported average annual lease rate, based on full-service (except janitorial) or gross lease arrangements was between $20.50 and $21.00 per SF of building leasable area.

With respect to Class “B” retail space, the overall vacancy rate was just less than 15 percent and the average annual lease rate between $12.50 and $13.00 per square foot of building leasable area. The reported average lease rate for Class “B” retail space is based on modified gross lease arrangements where the tenants typically pay a portion of the operating expenses, such as utilities, interior maintenance, janitorial, etc.

It appears, based on our research, that the peaks in vacancy rates over the past four years for retail space were in Q2 2009 for Class “A” properties and in Q4 2008 for Class “B” properties. Overall vacancy rates have decreased almost 20 and 25 percent, respectively, from the peak highs to Q1 2011.

With respect to average annual lease rates, the peaks appear to have been in Q4 2008 for Class “A” space and in Q1 2008 for Class “B” space. Average annual lease rates declined almost 8 percent in each category between the peak highs and Q1 2011.

In the professional office category, the overall vacancy rates in Q1 2011 in the two-county area were slightly more than 22 percent for Class “A” space and slightly more than 24 percent for Class “B” space. The reported average annual lease rates were between $19.50 and $20.00 and between $13.50 and $14.00, respectively, for the two categories.

Class “A” and “B” office lease rates are also considered under full-service (except janitorial) and modified gross lease arrangements, respectively.  The peaks in vacancy rates for professional office space over the past four years appear to have been in Q4 2007 for Class “A” properties and in Q1 2011 for Class “B” properties. The Class “A” vacancy rate decreased almost 31 percent between the peak high and Q1 2011.

With respect to average annual lease rates, both Class “A” and “B” space peaked in Q1 2009. The declines between the peak high and Q1 2011 were almost 7 percent for Class “A” properties and between 2 and 3 percent for Class “B” properties.

The declines in average annual lease rates in both the retail and professional office sectors are likely greater than reported. This is due to the difficulty in obtaining effective lease rates, which take into consideration lease concessions.

A positive note is that both the retail and professional office sectors reflected positive net absorption in Q1 2011.

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