Converting commercial property to allow for residential or mixed-use developments with shops and homes may help to quell rising home prices in Northwest Arkansas, economist Mervin Jebaraj said.
In a recent report on the residential real estate market, Jebaraj, who is director for the Center for Business and Economic Research (CBER) at the University of Arkansas, expressed concern over the lack of lots on which to build new homes, specifically near amenities.
“Put simply, we need more available lots added to the pipeline, or we will begin to experience issues with higher home prices affecting housing affordability in the region,” said Jebaraj, the lead researcher for the Skyline Report. The report is released bi-annually by Fayetteville-chartered Arvest Bank and included details on the residential real estate market for the second half of 2017.
Between 2015 and 2017, average home prices rose 23% to $219,876 in Washington County. Over the same period, the prices increased 12.2% to $228,310 in Benton County. At the same time, the number of available lots in active subdivisions in the two counties declined 53.5% to a 27.3-month supply, based on the existing rate of lot absorption.
The prices rose, according to the report, as a result of increasing construction costs and the decline in the supply of available lots on which to build houses. Within the 371 active subdivision the report tracks, there are 5,571 empty lots, 1,030 homes under construction, 238 unoccupied homes and 211 housing starts. Including the 6,906 lots that have received preliminary or final approval, there’s a 54-month supply of remaining lots — the lowest level since the Skyline Report started in 2004.
Rezoning commercial property to allow for developments with homes and shops hasn’t been common practice in Northwest Arkansas, but some developers have rezoned existing commercial property to allow for mixed-use developments.
Fayetteville-based Specialized Real Estate Group has converted existing commercial property to allow for mixed-use development, including multiple projects in downtown Fayetteville. A large mixed-use development the company recently completed was Uptown Fayetteville Apartments + Shops, at East Joyce and North Steele boulevards. The 14-acre development was rezoned to allow for its 308 luxury apartments and 17,000-square-feet of commercial space for shops and restaurants.
Jeremy Hudson, partner and CEO, said the development’s residential units are 83% occupied, and the commercial is 30% open and occupied. Nearly 40% to 50% of the commercial is “under heavy negotiation,” he said.
The developer also is working on mixed-used developments in Bentonville, including the J3 project, which includes 252 apartments in the first phase and a second phase that is expected to include more than 100,000 square feet of commercial space for retail, office and hospitality, Hudson said. The project at J and Third streets is being built across from the future Walmart Home Office. Another mixed-use project is near the downtown square on Central Avenue and will include 25 attached townhomes, 6,000 to 8,000 square feet of commercial space and 20,000 to 24,000 square feet of residential space.
The close proximity of homes and shops in mixed-use developments should help the retail sector as it has been struggling, Jebaraj said. Along with rezoning undeveloped lots for commercial use, a commercial lot with an existing business that’s struggling also could be converted to allow for mixed use.
“For example, if a big box store is shuttered, it’s hard to find other commercial tenants of that size, so it could be converted to a mixed-use zoning that would support residential development as well as office and smaller retail spaces,” he said.
Developers such as Specialized Real Estate Group and those in charge of the Crystal Flats project near Memorial Park in Bentonville have mixed-use developments in the works, but Jebaraj said he’s yet to see anyone convert a struggling commercial development recently.
Downtown Fayetteville has been an area that’s allowed for both commercial and residential developments, said Jonathan Curth, senior planner for Fayetteville. But as far as developers building a “true mixed-use development,” there’s not been a lot of that. “I don’t know if the mindset of developers is there yet.”
Land was rezoned from commercial C-2 (big-box stores) to commercial C-3 to allow for different uses, like multifamily projects Uptown and Watermark at Steele Crossing. Unlike Uptown, the Watermark project is solely residential but was built in a traditionally commercial district.
The timeline to rezone an existing property in Fayetteville is about three months. Fayetteville City Council must approve an ordinance to rezone property. After an owner requests to rezone property, city staff complete research, create a report on it and make a recommendation to the planning commission. The planning commission will make its own recommendation on the request before the city council has the opportunity to vote on it. Depending on how controversial the request is, the council could take as many as three readings before voting whether to approve or deny it.
Most of the residential growth in Fayetteville is happening on the west side of the city, Curth said. That could shift, though. In 2017, the planning commission approved a 293-lot subdivision in south Fayetteville, and recently approved a preliminary plat for a 135-lot subdivision in southeast Fayetteville.
But before houses can be built, the subdivision must receive approval as a final plat. The timeline to complete the process can vary widely depending on the development process, which starts with a preliminary plat.
The initial process can take between six and eight weeks and includes public hearings and staff review. Afterward, a period of more than 30 days is needed to review a grading permit. After receiving the permit, the developer can start to build the infrastructure for the subdivision, including water and sewer, streets and drainage.
“I have seen this take anywhere from six months to several years,” Curth said.
After the infrastructure is completed, the developer can apply for final plat review, which takes more than four weeks and would require the city to accept the project if something is intended to be publicly maintained, he said.
Between 2015 and 2017, Fayetteville subdivisions added 857 lots on which homes can be built, based on the number of final and concurrent plats approved over the period. A concurrent plat is a preliminary and final plat combined. A developer would seek a concurrent plat if the infrastructure on the site is already in place and the number of lots exceeds three.
Property owners who don’t split a lot more than three times won’t need to complete the formal platting process, Curth said. And the number of lots created as a result of a lot split are not included in the previous number on subdivision lots.
Curth estimated the city has added dozens of new lots, possibly more than 100, annually as a result of lot splits. Lot splits can take as little as two weeks to complete, but they typically take four to six weeks, depending on the owner’s surveyor or engineer.