Skyline Report shows excess supply in Class A office space in Northwest Arkansas

The second half of 2015 saw robust new construction in the commercial real estate market in Benton and Washington counties, but the absorption rate was even stronger, according to the Skyline Report released Wednesday (March 9) by Arvest Bank and researchers at the University of Arkansas.

This biannual report indicated that 836,033 square feet of commercial space became occupied, while just 550,331 square feet of new space was added to the market in the last six months of 2015.

Kathy Deck, lead researcher and director of the UA Center for Business and Economic Research, said commercial construction, which does not include multifamily housing, will continue well into 2016 as $112.8 million of commercial building permits were issued between July 1 and Dec. 31. In comparison, there were $153.4 million worth of permits issued in the second half of 2014 and $75.2 million issued in the first half of 2015.

The overall vacancy rate for commercial real estate in Northwest Arkansas was 12.4%, up from the 12% reported in the first half of 2015. While vacancy rates on average are lower that was not the case in all categories.

Deck said the largest gain in absorption was in the warehouse submarket with 131,082 square feet. The retail/warehouse submarket had positive net absorption of 41,411 square feet and the office/warehouse submarket had positive net absorption of 24,856 square feet in the Northwest Arkansas market.

The retail submarket had positive net absorption of 23,257 square feet with 82,715 new square foot added and 105,972 square feet absorbed. Positive absorption does not necessarily equate to lower vacancy rates. The retail submarket saw its vacancy rate rise to 9.8% from 9% between the first and second halves of 2015. The warehouse segment did see vacancy rates drop to 11.5% from 13% during 2015.

The office and office retail segments showed negative net absorption of 44,692 square feet and 38,992 square feet, respectively, in the second half of 2015, according to the report. Vacancy rates in these categories moved slightly higher from the beginning of year to the end.

“The commercial real estate market is beginning to reflect the overall optimism we have been seeing in the economy in Northwest Arkansas,” said Tammy Engle, senior vice president and loan manager with Arvest Bank in Siloam Springs. “At the same time, we are pleased to see that optimism tempered by careful consideration of the needs of the market. Everyone is letting the experience of the last 10 years wisely govern their decision-making processes.”

Deck said Class A office and retail markets continue to see strong demand in established “hot” locations. The Pleasant Grove Road area and Pinnacle area in western Rogers along with west Fayetteville as well as the North College Avenue and the Northwest Arkansas Mall vicinity in that city are deemed “hot” locations for developers based on the demand for permits issued in these areas.

Deck also said the overbuilding of Class A office space remains a negative factor for the local economy in 2016 and beyond. Rogers has the biggest surplus and is also where a majority of new office space is being constructed. Rogers also had negative absorption of 83,636 square feet year-over-year, according to the report. The same was true in the retail category with Rogers showing a negative absorption of 102,808 square feet from the back halves of 2014 and 2015. Other areas of concern are in Bentonville where the office retail submarket, also known as strip centers, saw a negative year-over-year absorption of 57,026 feet by the end 2015.

COMMERCIAL VACANCY RATES  (First and Second halves of 2015)
Office: 12.7%, 12.6%
Office/Retail: 12.7%, 13%
Retail: 9%, 9.8%
Warehouse: 13.1%, 11.5%
Office/Warehouse:  8.2%, 8.4%
Medical Office: 10.3%, 10.5%