Vacancy rate increases for commercial real estate in Northwest Arkansas

The vacancy rate rose to 10.8% for the commercial real estate market in Northwest Arkansas as the availability increased for warehouse and office/retail space in the first half of 2018, according to a report on the market. The vacancy rate was 9.7% at the end of 2017 and 10% in the first half of 2017.

On Tuesday (Aug. 28), Fayetteville-based Arvest Bank released the Skyline Report on the commercial market market for the first half of 2018. In September, the bank plans to release similar reports on residential and multifamily real estate. The biannual reports, focused on real estate in Benton and Washington counties, are completed by researchers at the Center for Business and Economic Research (CBER) in the Sam M. Walton College of Business at the University of Arkansas.

Click here for a PDF of the report’s key commercial real estate numbers.

Nearly 370,000 square feet of commercial real estate was added in Northwest Arkansas, and the market had 421,692 square feet of negative net absorption across all types of commercial real estate. By comparison, in the second half of 2017, the region added 718,282 square feet of commercial space and absorbed 990,860 square feet, leading to a positive net absorption of 272,578 square feet. The overall vacancy rate fell to its lowest level since the Skyline Report was first released in 2004.

In the first half of 2018, the warehouse submarket was the largest contributor to the overall negative absorption, accounting for 210,335 square feet of negative net absorption. The office/retail submarket had negative net absorption of 98,488 square feet, and the retail submarket had negative net absorption of 90,026 square feet.

The warehouse vacancy rate rose to 8.1% in the first half of 2018, from 5.8% in the second half of 2017. No new warehouse space was added in the first half of the year, and the rise was a result of previously leased space becoming vacant. The office/retail vacancy rate rose to 11.7%, from 8.9%, and the retail vacancy rate rose to 9.7%, from 8.9%. In the office/retail submarket, 11,043 square feet was added, and in the retail submarket, 77,000 square feet was added.

Though vacancy rose in the previous submarkets, the office submarket continued to absorb new commercial space. The strength of Class A and B office space in Bentonville was a significant contributor to the overall positive performance in the subsector as it absorbed 165,224 square feet, while 134,688 square feet of new office space was added. The office vacancy rate was flat at 9.1%, from the end of 2017.

“The office market in Northwest Arkansas continues to show strength and the ability to absorb the new space being introduced in the market,” CBER director Mervin Jebaraj said. “During this cycle, we were also impressed with the retail market, as it continues to outperform national trends, even as large national retailers close and vacate local retail space. While the vacancy rate increased, it remains at healthy levels, and the market seems to be adjusting to the new retail landscape.”

“And while the warehouse sector experienced a very weak period in the first half of the year, this has always been a volatile market due to its small size in this area. To have a bad six-month period and still have a vacancy rate of just 8.1% tells us that there is no significant reason to worry about the warehouse market as the move to more e-commerce is expected to create sustained, long-term need for warehouse space.”

When asked what surprised him the most in the report, Chris Thornton, executive vice president/loan manager with Arvest Bank of Springdale, said the retail vacancy rate, especially after the closing of large retailers Sears and Toys “R” Us. He thought the rate would’ve been higher and shows the market is still active. Also, many of the former retail shops are being use for selling services, instead of goods, according to CBER researchers.

In the first half of 2018, the total value of commercial building permits rose 61.4% to $188.504 million, from the same period in 2017.

When asked if he’s seeing a decline in financing for commercial projects, Thornton said not yet as customers still look to lock in financing for projects, with interest rates on the rise.

“It is very encouraging to see the commercial real estate market in Northwest Arkansas continue to grow and remain well balanced. We continue to work with our real estate development customers to help them identify the specific types of developments needed to match the growth in the market,” Thornton said. “Our commercial real estate financing teams will continue helping customers build the right projects at the right place and in the right time.”