Stable and Growing (OPINION)

The Walmart supplier office market, comprised primarily of Bentonville and Pinnacle Hills, has stabilized during the past few years.

Many Walmart suppliers have hired employees and expanded since the reversal of Walmart’s Project Impact and the Walmart apparel division’s move back to Bentonville. Last year, we saw several new companies enter the market, adding to the long list of suppliers serving the Walmart account in Northwest Arkansas.

The days of the one-year lease renewal appear to be gone. In 2009, most Walmart suppliers wanted to extend one year at a time. Today, most new leases are five years or more. Landlords now have leverage to raise rates and demand longer terms as availability of space dwindles. When a supplier searches for space to fit their “wish list,” they typically find few options.

Significant net absorption within the market occurred in 2012 (196,000 SF) and was much flatter in 2013 (39,000 SF). However, consensus among commercial brokers is that more space was leased than the numbers indicate. This is due to the fact that much of the existing available office space does not meet the needs of Walmart suppliers.

One example is the open-office concept versus hard-wall offices. Some tenants want Class A space, while others want Class B. In either case, location seems to be the driving factor more than the rate.

Leasing absorption for Class A space in Bentonville was essentially flat (3,114 SF) due to lack of availability. Class B showed net absorption of 66,000 SF and Class C showed negative net absorption of 20,824 SF.

New numbers may indicate that Class C office space is becoming obsolete for suppliers and skew vacancy numbers going forward. Pinnacle Hills Class A, B and C posted a total negative net absorption 3,510 SF, most likely due to the lack of availability.

Space may be available, but the size of the spaces may not fit the supplier’s requirement. Therefore, several developers are currently planning new office space totaling approximately 900,000 SF. Most of the planned space will be Class A office space located in and around the Pinnacle Hills area of Rogers. Approximately half of the proposed space appears to be moving forward. 

Suppliers are also looking for office space in downtown Bentonville, which has become a hot area since the opening of Crystal Bridges Museum of American Art in 2011. However, the availability of office space in the vicinity is low. Given the difficulty of assembling land in the downtown area, we believe that office development in this submarket will be geared toward smaller tenants.

Large office building developments within Bentonville will most likely develop in south Bentonville, or on East Central Avenue where there are “green fields” for development.

Currently, several large suppliers are interested in expanding via build-to-suit or in one of the larger aforementioned planned buildings. These suppliers are typically 20,000 SF or larger and struggle to find spaces large enough to accommodate them.

When suppliers get a certain size, surrounding amenities appear to be the most important factor when considering locations. Smaller and “new to the market” suppliers tend to gravitate closest to their Walmart buyer, which means they will try to locate within close proximity to the Walmart home office or Walmart layout center.

As suppliers grow and move to larger spaces, smaller suppliers will have the opportunity to backfill the available space at rates below new construction rates. Second generation (previously leased) space is estimated to be 20 percent less than lease rates for new buildings. Theoretically, this should help keep supply and demand in check.

In summary, the Walmart supplier office market appears stable and growing. If developers adhere to the fundamentals of supply and demand, have quality product and a good location, they will able to procure quality long term tenants for the foreseeable future.

Butch Gurganus, CCIM, is a principle with Colliers International in Bentonville, which provides commercial real estate sales, leasing, property management and development services. He may be reached at 479-636-9000 or by email at [email protected].