Skyline Report: Commercial vacancy rates at lowest level in 13 years

The vacancy rate for all commercial space in Northwest Arkansas fell from 11.7% in the second half of 2016 to 10.5% in the first half of 2017, according to the latest Skyline Report, released Tuesday (Sept. 19) by Arvest Bank.

The bi-annual analysis of commercial, single-family residential and multifamily residential markets in Benton and Washington counties is conducted by the Center for Business and Economic Research (CBER) in the Sam. M. Walton College of Business at the University of Arkansas.

The vacancy rate of 10.5% is the lowest level since the Skyline Report was first published in 2004. According to the data, there were 815,546 square feet of commercial space absorbed in Northwest Arkansas during the first six months of the year, while 327,845 square feet of new space were added, resulting in a net positive absorption of 487,701 square feet.

Each of the six submarkets saw a decrease in vacancy rates from the second half of the 2016 to the first half of 2017. The most significant drops in vacancy rate were in the medical/office submarket which fell from 10.8% to 7.1% and the office/warehouse submarket which went from 8.7% to 6.2%.

Mervin Jebaraj, lead researcher for the Skyline Report and interim director of the CBER, said the significant decrease in vacancy rate in the medical/office market is primarily the result of the fast growing health care sector in the region.

“The health care sector has been one of the top performers for the state of Arkansas and the Northwest Arkansas region,” he said in the report. “With the growth in this sector, along with hospital expansions and the opening of the Arkansas Children’s Hospital Northwest campus, we have seen significant absorption in medical/office space in the region.

“During the first half of 2017 we also experienced a drop in vacancy rates in the retail sector, which has been driven primarily by restaurant and service-sector retail outlets, as opposed to retail space for companies selling goods.”

In the first half of 2017, there were $116.8 million in commercial building permits issued in Northwest Arkansas, down from $137.2 million in the second half of 2016 and even further down from $206.5 million issued in the first half of 2016.

“The strong positive absorption in the first half of the year combined with a decline in permits for future development indicates that we can, for the time being, expect to have a well-balanced market,” Jebaraj continued.

MULTIFAMILY
Vacancy rates in multifamily real estate rose from the second half of 2016, but remain at low levels throughout Northwest Arkansas.

The overall vacancy rate for the Northwest Arkansas multifamily market during the first half of 2017 was 4.2%, up from 2.4% in the first half of the previous year. Jebaraj said the increase was the result of several new multifamily developments coming online, primarily in Fayetteville and Rogers, but without being available for long enough to have achieved their expected level of leasing.

“While the vacancy rate rose from 2.4% in the second half of 2016 to 4.2% in the first half of this year, it is important to note that the current vacancy rate is still low in relative terms, as multifamily developments are usually financially viable with a 10 to 15% vacancy rate,” he said.

Mark Ryan, loan manager with Arvest Bank of Benton County, said the Skyline Report indicates good news for Northwest Arkansas.

“To see the commercial vacancy rate at its lowest level since Arvest began producing the Skyline Report in 2004 shows strength in the overall economy in the region,” he said. “Our commercial lenders are working with our real estate development customers to continue to intelligently finance future projects that will meet the needs of the community.”

In the next year or two, there could be as many as 6,500 new rental units in the multifamily sector coming online with nearly half of those (3,200) slated for Bentonville.

Increased demand continued to apply upward pressure on lease rates with the average monthly lease price for a multifamily property unit in Northwest Arkansas increasing to $642.47, up from $627.04 in the second half of 2016.

“When looking at the residential real estate market, we are entering a time period where there is a shrinking inventory of new homes being built within the city centers and close to the amenities that consumers want,” Jebaraj said. “At the same time, multifamily properties are being developed in these geographic areas and are experiencing significant growth as a result. With more than 6,500 new multifamily units under development or announced, we anticipate significant changes in this area of real estate over the next few years.”

Other findings from the multifamily real estate market through the first six months of 2017 were:

• Siloam Springs had the largest year-over-year decrease in vacancy rates from 1.7% in the first half of 2016 to 1.0% in the first half of 2017.
• In Bentonville, vacancy rates increased from 1.0% in the first half of 2016 to 1.4% in the first half of 2017.
• Springdale experienced a decline from a 0.7% vacancy rate in the first half of 2016 to a 0.6% rate in the first half of 2017, giving the city the lowest vacancy rate in Northwest Arkansas.