The Supply Side: Suppliers’ presence in Northwest Arkansas created real estate boom

When executive recruiter Cameron Smith first “hung out his shingle” in Northwest Arkansas in 1994, he said 48 Walmart supplier companies had offices in the area. Many of those teams consisted of one person working out of their home, or two people with a small, basic office in the Beau Terre office park in Bentonville.

The floodgates opened in the mid-1990s, and the number of supplier companies almost doubled every two years, totaling 445 in 2001. By 2006, Smith said, the number soared to 1,218 before leveling off in the recession and then steadily rising to more than 1,600 today.

Not only did the number of teams multiply, but team sizes also increased. Smith said teams doubled in size in the past five years and now range from eight to more than 100 employees. That growth translated to growth in the housing market, the number of restaurants, retail shops and hotels. But it also created a huge boom in commercial office real estate in Northwest Arkansas.

Between 2005 and 2017, leasable office square footage increased from 4.5 million square feet to 11.7 million square feet, according to The Skyline Report, produced by the Center for Business and Economic Research (CBER) at the University of Arkansas.

Even with the addition of leasable space, the vacancy rate for the latter half of 2017 was 9.7%, down from 10% in the first half of that year. Available office space has fallen 30.3% since 2013. The $56.6 million sale of the 243,000-square-foot Bentonville Plaza in late 2016 is further evidence of a hot market and the value investors find in office properties marketed to Walmart suppliers. At the time of sale, the property was 98% leased, with tenants including L’Oreal, Toshiba, Samsung, 20th Century Fox and Mattel.

SIZE OF TEAMS
When supplier companies first opened shop in Northwest Arkansas, they only needed accommodations for a sales team and an administrative person.

“Then came the analysts functions, then logistics people moved here, then marketing people,” Smith said. “Now you have teams that are so large, they have HR people here.”

How large teams will ultimately become is unknown, since Walmart is requiring more product info and other digital support from suppliers to build its e-commerce business. In the past few years, mergers and acquisitions of large consumer product companies also affected commercial real estate. The Newell Brands/Rubbermaid merger is an example of teams with separate buildings leaving those to find or build space large enough to house both teams, Smith said.

“That causes a lot of shifting in the market place,” said Tom Allen, executive vice president and principal at commercial real estate firm Sage Partners in Rogers.

Allen and Smith said even though a company’s name may be on the outside of a building, it is very unlikely it owns it.

“Fortune 500 companies who are publicly traded don’t want to be in the real estate business,” Smith explained. “So, although their name may be on the building, they work with a developer who owns the building, and they pay rent.”

Class A office space in the region goes for $28 to $29 per square foot, Allen said. A recent CoStar report found the average gross asking rent for Northwest Arkansas is $19 per square foot. Twenty years ago, office rent averaged around $12 to $14 per square foot, with “some rents even in the single digits.”

CHANGE IN AMENITIES
The type of office space suppliers require also has changed over the years. In the early days, supplier offices were basic because Walmart was a frugal, no-frills company, said Mervin Jebaraj, director of the CBER.

Allen agreed, saying the vendor community initially was very careful about spending any money on rent and amenities for its space because it wanted to make sure it was focusing on Walmart and not anything else.

“But as Walmart has grown and they recruit talent from across the world, everybody, Walmart included, is recognizing that they need to have more amenities,” Allen explained.

Office space in the market is going from Class B properties to a truer definition of Class A, he said. Walmart supplier companies want large, multi-tenant buildings and a wide range of office space amenities. Allen said companies ask questions like, “Is it steel construction or wood frame? Is there a lot of glass? Is it easily accessible to the interstate? To shopping and restaurants? To hotels? To neighborhoods? To the Walmart home office? Is it easy to get in and out of?”

Inside the building, Allen’s clients may look for a fitness center with showers, a coffee shop, bicycle racks and high ceilings. Allen recently traveled to Denver to survey what amenities are being offered in large cities across the country.

“It’s quite common now to see foosball tables, ping-pong tables and pool tables in common spaces,” he said. “You’re seeing coffee bars for latte-type drinks, and some are even offering a microbrewing-type of beer — which is something new. You see all kinds of new features that I’ve never come across but are sweeping the nation in the larger markets.”

DEMAND STILL STRONG
The Northwest Arkansas commercial real estate market is strong, well-balanced and full of opportunities, Jebaraj said. In addition to a strong Class A market, he sees the low vacancy rates in Class B office space as a good sign for the overall economy because it means startups are renting space formerly occupied by suppliers.

“That’s particularly important to all the new business and entrepreneurs who want nice locations and fairly nice amenities but can’t afford Class A office space,” Jebaraj said. “Class C is the only piece of the market that has a little bit of softness in it. The older commercial space is the only piece that isn’t doing as well, but it could if it were renovated and modernized like the newer ones.”

Another segment that’s filling in office space in NWA is what Smith calls “vendors to the vendors.” He said these are merchandising, marketing, packaging and data analytic companies such as WhyteSpyder, Mars Advertising, Acosta and Crossmark, that help suppliers do a better job of managing their Walmart business.

“There are over 400 of those companies in town right now, and it’s probably the biggest growth part of Bentonville,” Smith said.

Demand continues to be strong for new construction in the Pinnacle Hills area. Allen’s company has filed development plans for two office buildings, totaling 140,000 square feet on West J.B. Hunt Drive in Rogers.

“The primary target is the supplier community,” Allen said. “We haven’t started marketing it yet. We’re still tweaking the final building plan, then it will be full speed ahead.”
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Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.