Warehouse shortage in Northwest Arkansas presents opportunities for developers

Editor’s note: This is the second of two stories about the warehousing sector in Northwest Arkansas. Link here for the first story.
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Businesses looking for warehouse space in Benton and Washington counties many times hit a wall because either the space available is outdated, or no space is available.

The region’s total warehouse space is roughly 28 million square feet, according to a report from Kansas City-based Xceligent. But at least half of that space is not conducive to modern standards putting true warehouse space vacancy rates near 4% last year.

The simple solution to the problem would be to build more warehouses, but experts say rising land prices in the region typically put the return on investment for warehouse space too low for the risk. Warehouses rent for considerably less per square foot than office or retail space, with developers more likely to build those types of buildings, and rising land cost exacerbate that problem.

“If you think about warehouse space, you think about 100,000, 200,000 square feet in an area where land goes at such a premium. It’s hard to make the case to a developer that they should be doing that versus something much more high density or something that will pay a lot more rent,” said Mike Harvey, chief operating officer/economic development with the Northwest Arkansas Council.

“I think it probably emanates from the ’08 crash when lending for building development probably dried up for awhile. And, if the guys on the real estate development side were mainly doing development over the last few years, they probably leaned toward office and residential because the ROI is probably better than big box warehouse space,” Harvey said. “They gobbled up a lot of land and land costs have gone up because of the snap back in the real estate market. Might not be a good ROI for them.”

RISING RENTS BOOST INCENTIVE TO BUILD
The lack of supply, coupled with an increase in construction costs, have created an upward pressure on rent per square foot over the last two years. Lease rates, which had been stable at about $3 to $4 per square foot over the last 15 to 20 years, have increased to $4.50 to $5 per square foot.

“The stability of rates was for an extended period of time and we’ve seen that uptick in a short span. Again, it’s lack of supply, coupled with rising construction costs and design changes,” said David Erstine, vice president of CBRE Group in Fayetteville.

As rents rise there is a little more incentive for developers to invest in additional warehouse space. Northwest Arkansas developers are reacting to the shortage and rising rents and starting to build on a build-to-suit and a speculative basis.

“Developers are actively building and planning space at this moment and they are all experienced developers in this segment. And, they are well capitalized,” Erstine said.

He cited several area warehouse sites under construction, or in the planning stages, as examples:  developer Rescue Heroes, LLC out of Columbus, Kan., building on Dixieland Road in Rogers; a four-building complex on Agnes Drive in Tontitown, offered by Matthias Properties; and a proposed warehouse project at “J” and 28th Streets in Bentonville.

“There is motivation right now to get more product in the planning stages, under construction and delivered to the market,” Erstine said.

Local businessmen Chris Crossland and Phil Martz saw the void in the warehouse market in the region and so began building, on speculation, the CrossMar Industrial Park on Southwest Regional Airport Boulevard in Bentonville. At completion in five to six years, the six buildings will offer more than 1.3 million square feet of warehouse space. The building permit for the project put the construction cost at $14.1 million.

The first building, consisting of 150,000 square feet, was leased at a triple net rental rate (without any operating costs) of $5 per square foot before it was completed. A speculative 200,000 square foot building, also renting for $5 per square foot, is on track to be finished by the end of March. According to Saviers, there has already been considerable interest in it.

The master plan for the development offers tenants the updated design that companies are wanting and that is seen in larger markets: higher ceilings, more sophisticated fire suppression systems, better ingress and egress to help the flow of trucks and deliveries around the buildings, and the opportunity to grow warehouse space within the park.

FUTURE NEEDS MAY INCLUDE SMALLER SPACES
If trends continue, the region will see the need for warehouse space continue to grow. Erstine believes there will be additional growth in warehouse space targeted to occupiers needing 5,000 to 25,000 square feet of space. He said that segment is especially underbuilt.

“There’s lots of new (start-up) companies. I feel like they are always looking for smaller spaces like 2,500 to 10,000 square foot facilities that can be used in a number of ways,” Stokes said. “I think that’s what’s really missing (in the market here) because we have a thriving entrepreneurial community being underserved. I think having space available for aspiring entrepreneurs and new businesses would really spur the community.”

Growth will have to occur over all sizes of warehouse space to accommodate the growing economy, said Marshall Saviers, president of Sage Partners.

“As the market grows, there will be more and more service companies that need to be here for an MSA (metropolitan statistical area) that’s growing pretty rapidly. So, if you’re an electrical supplier or a tile supplier or somebody of that nature, you might have a service center in Tulsa and you now need that here,” he said. “And then as this area grows and the companies grow, they will need warehouses to support that need that are based here in NWA. So as some of these startup companies grow, they need more space… and then you have your bases like Walmart and Tyson and J.B. Hunt that will continue to have a need or have their vendors will have a need.”