Preleasing Guiding Return Of Commercial Real Estate

Selling something that doesn’t exist isn’t the easiest thing to do.

But that hasn’t stopped Grady Mathews from trying. For the last four months, the optimistic leasing agent with Newmark Grubb Arkansas has shopped Class A office space at a second Bentonville Plaza.

The trick is, Bentonville Plaza II is a plot of undeveloped land on Southwest E Street, and thus far, Mathews hasn’t had any takers. But he expects that to change sometime this year. And when he has 50,000 SF worth of leases in hand, work can begin on a four-story, 100,000-SF companion building to the nine-story tower at 609 S.W. Eighth St., across the street from the world headquarters of Wal-Mart Stores Inc.

Owned by FBE Limited, an investment firm based in New York, Bentonville Plaza is currently occupied at a rate of 98.7 percent, which in practical terms means it’s full, Mathews said. With all that square footage under long-term lease, it should only be a matter of time before new tenants start asking for new offices within walking distance of Wal-Mart.

“We still have a demand for space, and we want to build this thing sooner rather than later,” Mathews said. “It would only take one great tenant to come over and break the ice.”

 

Clearing Hurdles

Without mentioning names, Mathews said he is in talks with several potential clients that are big enough to lease an entire floor — 25,000 SF. If Mathews can land just two of them, construction can begin.

But Mathews must clear several hurdles, the highest of which is to convince a tenant that it’s wise to invest in a 10-year lease in a building that has yet to be built.

“But if it wasn’t challenging, it wouldn’t be fun,” he said.

While Wal-Mart vendors are the prime target, Mathews said FBE would gladly negotiate a lease contract with a company not associated with the retailer, like a law firm, an investment firm or an IT company.

The search has gone international, with presentations made to companies based in China, India and South Korea, among others. The search has included cold calls, emails and the tried and true art of the handshake. Perhaps most helpful to Mathews’ efforts is the state of the economy, which continues to recover from the crash of 2007.

“The phone is starting to ring a bit more,” Mathews said. “Businesses are starting to recommit to long-term leases.”

His enthusiasm is backed by data.

The Market Trends report issued quarterly by Xceligent Inc., a national real estate market analyst with an office in Northwest Arkansas, shows this region’s commercial health returning.

 

Stiff Competition

While Mathews is confident a second tower will rise, he also concedes that at $24 per square foot — the most expensive in the region — Bentonville Plaza II faces stiff competition from not just other Class A buildings, but from economical Class B locations.

Still, for the right client, nothing could be more prestigious than a ZIP code and address across the street from the world’s largest retailer.

“There’s more than one nice property in Northwest Arkansas,” Mathews said. “But what sets us apart is location.”

If there’s more than one nice property, then it follows that there’s more than one nice address. And the ones that keep Mathews on his toes are those just south of Bentonville along a stretch of Interstate 540 in Rogers known as the “Golden Mile.”

And with piles of fresh red dirt and construction workers toiling in the shadow of the J.B. Hunt Tower, it’s evident that the “Golden Mile” has plenty of appeal. 

Hunt Ventures is the group building what will be known as Pinnacle Heights I, a 60,000-SF office building at 5708 Northgate Road. It’s about 50 percent preleased and should be at about 90 percent capacity by the time it opens in the fall, said John George, executive vice president at Hunt Ventures.

The Rogers Planning Department confirmed that Kimberly-Clark Corp., one of Wal-Mart’s most important vendors, will lease the first floor at Pinnacle Heights in favor of its current location at 5504 Pinnacle Point Drive.

Unilever, a multinational consumer goods company, is also expected to lease space at Pinnacle Heights I.

 

Where the People Are

While the new building might be the latest big real estate project for Hunt Ventures, it surely won’t be the last.

“We’re looking at our next buildings,” George said. “The demand seems to be there.”

He didn’t rule out the possibility of building a new complex of office suites on the east side of I-540 near the Pinnacle Hills Promenade.

“People want to be where the people are,” George said, referencing the convenience of walking distance to restaurants and retail.

If it’s true that the climate for commercial leasing has improved, it is also true that the paradigm has changed, George said. These days, calculated planning trumps dollar-driven speculation — the calling card of the early 2000s.

“I don’t think you can just put up a Class A [office building] anywhere and expect the market to flow to it,” he said. “Developers don’t need to build things that won’t rent.”

A few years back, that’s what plenty of people were saying about the Promenade. The 80,000-SF of office space above the ground-level retail outlets languished for years, and many thought the experiment had failed.

But that began to change in 2010, when two 15,000-SF tenants made long-term commitments, George said. Now, the Promenade’s second floor is about 65 percent occupied, and features clients such as Best Buy Co., Georgia-Pacific, Starkist Co. and Revlon Inc.

As in Bentonville, the numbers in west Rogers are encouraging.

According to Xceligent, the overall vacancy rate in west Rogers has fallen from the first quarter of 2012, when it was at 15.3 percent, to 13.3 percent in the first quarter of 2013.

Rogers has been particularly strong in the absorption of Class B space, where the vacancy rate has dropped from 14.8 percent in the first quarter of 2010 to just 5.3 percent in the first quarter of 2013.

Measured Growth

As George looks at what Mathews is trying to do at Bentonville Plaza II, he sees potential for success.

“It’s not a far-fetched opportunity,” George said. “Bentonville Plaza is as unique in its own right as Pinnacle Hills is.”

But he also sounded a note of caution — not just for Mathews, but for anyone in the game of commercial leasing.

“There’s a limited number of potential tenants in our area,” he said. “You have to find the right people and if there are not enough of them to be found, you sit empty.”

Jordan Ligon, regional director at Xceligent’s office in Fayetteville, spends plenty of time crunching real estate numbers. He’s shared that information with his colleagues, and the news is good.

“There’s definitely things going on for hard deals now,” Ligon said. “Before, it was just talk. Now, there are deals.”

A growing trend in commercial real estate, he said, is to do what Mathews and George are doing — prelease to a certain threshold before construction begins.

Companies, Ligon said, are also switching to larger “floor plates” so that their employees can be on one floor and even in one room. The days of employees marching down dark halls and walking up steep stairs to meet with other departments within their own company are coming to an end, Ligon said.

Looking at the entire picture, Ligon sees measured growth under the steady hand of preleasing. While that will be good for the market, Ligon said it could also test the patience of people like Mathews.

When asked if he will accomplish his goal of preleasing 50,000 SF at Bentonville Plaza II, Ligon said, “He’ll get it, but as for when, that’s the question.”