Uptick in Office Construction Coming (OPINION)

Regional developers are gearing up for significant office space deliveries through the remainder of 2015 and into 2016.

Proposed and under-construction developments represent about 1.1 million SF of marketed space. If all projects come to fruition, Northwest Arkansas’ class-A office space would increase by one-third.

The uptick will primarily consist of multistory buildings, with multiple tenants. Some include plans for LEED certification, while others are taking into consideration the construction of off-site amenities.

To capture the attention of prospective tenants, most planned or recently started projects are concentrated in the Bentonville and West Rogers submarkets.

Bentonville developments like Bentonville Plaza II and the 8th & Walton building address some tenants’ desire to be across the street from Wal-Mart Stores Inc.

Two of the most sizable current projects are located in the West Rogers submarket, primarily known as the Pinnacle area, and consist of Hunt Ventures’ 10-story building and the Colliers International-led Country Club Plaza. The buildings will add 226,500 SF and 86,000 SF, respectfully, and leasing contracts for both projects show strong pre-leasing activity.

The activity in class-A office construction is welcomed, as overall square footage has remained relatively flat over the last few years, with little growth in overall square footage since pre-2012. In fact, the class-A market has grown by less than 10 percent since the last building boom of 2004–2008, when over 1.3 million SF of space was delivered in Northwest Arkansas during the five-year period.

The lack of new construction allowed current building owners to enjoy favorable occupancy rates over the last two to three years. During this time period, office vacancy rates have mostly been in the 9 to 12 percent range depending on property class and submarket, which is considered healthy by industry standards.

Today’s class-A market in Northwest Arkansas has exceeded 3.2 million SF, and will continue to grow in phases, as job and population growth in the region continue to grow at some of the fastest rates nationally.

The Pinnacle submarket offers office users numerous amenities, such as significant retail offerings, hotels, access to Interstate 49 and proximity to growing single-family residential communities in southwest Rogers. Therefore, developers may choose to offer fewer internal building amenities.

However, to address a lack of nearby amenities at more remote locations, there is a trend for developers to build them into the property, similar to the on-site amenities at Bentonville Plaza I, which include a restaurant and fitness center.

Build-to-suit projects will also be on the rise for the rest of the year and in 2016, as tenants looking for larger blocks of contiguous space have limited options. The Campbell Soup Co. and Jarden Corp. recently completed construction on 16,500-SF and 45,000-SF, respectively, build-to-suit projects within the Rainbow Curve area of Bentonville. With the combination of strong pre-leasing activity on speculative projects and build-to-suit projects increasing, area developers are continuing to look into new construction opportunities in strategic locations.

Other notable commercial real estate trends include:

Increased user footprint. Early in my career, which started in 2001, a sizable office tenant occupied 5,000 to 10,000 SF, but today that number has increased to 25,000 to 50,000 SF. With few buildings originally designed for larger-sized tenants, coupled with low vacancy rates, it is difficult to locate available contiguous space over 20,000 SF.

Where does this leave the office market? It appears we’re on the front-end of an office construction boom not seen since the 2004 to 2008 era. 

David Erstine, CCIM, is a vice president with CBRE Inc. in Fayetteville. Erstine and business partner Clinton Bennett handle regional office tenant representation assignments. He may be reached at 479-301-2520 or [email protected].