CBRE vice president and executive broker David Erstine said the market for premier office space in Northwest Arkansas is tight. And with strong demand and limited supply, developers must proceed with caution due to the trend of increasing construction costs.
In an interview recently with the Northwest Arkansas Business Journal, Erstine discussed the findings of a recent CBRE report examining the Class A office market at the midway point of 2018. Over the past few quarters, according to the report, new office building deliveries have experienced positive absorption to the point that vacancy in Class A office space has dropped to the single digits.
In a survey of 44 Class A office buildings in the submarkets of north Fayetteville, Bentonville and west Rogers, the CBRE research indicated an 8% vacancy among 2.48 million square feet of space. About 204,845 square feet of space is available.
“That 8 percent vacancy would indicate a very tight market,” Erstine said. “A healthy market is between 10 and 12 percent vacancy. It’s an interesting time in the market. If you are a tenant looking for space, it can be quite challenging when you’re looking at Class A buildings.”
Broken down by submarket, west Rogers has a 7.74% vacancy rate among 25 Class A office buildings, north Fayetteville has a 6.38% vacancy rate among 11 Class A office buildings and Bentonville has an 11% vacancy rate among 8 Class A office buildings.
Erstine said there are challenges to new construction where tenants are concerned. Rising construction costs are being passed on to potential tenants in the form of rising rental rates.
“Five to seven years ago we could see Class A office rates in the range of $22 to $24 per square foot, full-service, all utilities included,” he said. “Today we are seeing those $25 to $29 per square foot. So quite a bit more on the rental rate side. A challenge, too, for most occupies is tenant improvement costs. Historically we would see office infill projects cost between $50 and $70 a square foot. We are seeing several come in in excess of $100 a square foot. And that’s a challenger for occupiers to be able to come in and finish out the space, because tenant improvement dollars form the landlords are typically in the range of $45 to $60 a square foot.”
Erstine said tenants are offsetting the rising price, at least somewhat, by signing longer-term leases to extend the term.
“Landlords usually see the benefit in that and so they are willing to increase their tenant improvement packages,” he said.
CBRE recently announced a Class A office park development in north Fayetteville. The 13-acre project, called Vantage Drive Office Park, is east of North Vantage Drive, north of the U.S. Postal Service at 1590 E. Joyce Blvd. Erstine said the developer is planning to build a two-story, Class A office building with 40,000 square feet of space. The remaining acreage will be split into smaller lots, between four and seven lots ranging in size from 1 to 5 acres, and marketed for sale.
“We’ve not seen any construction of any Class A, multitenant office space for lease in north Fayetteville in over a decade,” Erstine said. “We feel like there is some pent-up demand.”
In west Rogers, Hunt Ventures, the longtime Rogers developer headed up by philanthropist Johnelle Hunt, has received city approval to build two office buildings and a parking deck on West J.B. Hunt Drive. The two buildings of Class A space would total 140,000 square feet.
Nearby, in The District at Pinnacle Hills, a 54-acre commercial development along Pauline Whitaker Parkway, Whisinvest Realty is under construction with a second Class A office building. It will be approximately 45,000 square feet.
You can watch the full interview with Erstine in the video below, which includes comments on how the relocation of Walmart’s home office in Bentonville is impacting the region’s office market and development patterns.