Vacancy rate rises in commercial real estate market in Northwest Arkansas, office vacancy falls

The vacancy rate for the commercial real estate market in Northwest Arkansas rose 10 basis points to 10.9% in the second half of 2018, from the first half, as the vacancy rate for the office subset of the market fell 70 basis points to 8.4%, the lowest level since 2004, according to a new report.

Fayetteville chartered-Arvest Bank on Tuesday (March 26) released its biannual Skyline Report on the market for the second half of 2018. The bank also releases biannual Skyline Reports on single-family residential and multifamily housing. The reports are completed 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 for office space declined to the lowest level since the inception of the Skyline Report, while building permit values for the market rose to a record high in 2018. Commercial building permit values rose to $359.904 million in 2018, from the previous high of $350.740 million in 2005, and this indicates the pace of commercial real estate development and construction is expected to remain strong in the short-term, the report shows. The market added 136,394 square feet of office space, and 201,456 square feet of office space was absorbed, leading to the decline in the vacancy rate for office space. The retail and warehouse subsets of the market had negative net absorption of 79,422 square feet and 172,653 square feet, respectively, and this contributed to the slight rise in overall vacancy rates in the market.

“The office submarket in Northwest Arkansas has demonstrated over the past few years the ability to absorb new space coming online with relative ease,” CBER Director Mervin Jebaraj said. “We are, however, seeing the pace of development in the warehouse submarket get ahead of the market’s immediate demand, or need, for warehouse space. In the long run, we believe that the growth of online shopping, which requires warehouse space, will eventually increase the pace of demand for leasable warehouse space.”

The strong demand for office space is a sign of the strength in the business community in general, Jebaraj said. The demand is also a result of Bentonville-based retailer Walmart expanding its office space, and as a result, its suppliers are also expanding into new offices.

“Since Walmart’s building swanky new headquarters, the supplier community also wants swankier office space to attract younger workers,” Jebaraj said. “When you think about the types of office space available, say in the tech sector, you’re competing with that in terms of trying to get the best employees that are younger. And so Walmart for that reason is upgrading their headquarters, and a lot of the supplier community’s doing the same.”

This class A office space starting to be developed here offers nicer offices, common areas, food on site and other amenities unique to the area and other parts of the country, he said. Demand for office space is expected to continue in the short term.

When asked whether the warehouse submarket has been overbuilt, Jebaraj said it’s not, but it’s volatile because warehouse tends to comprise larger spaces, and when one space goes from occupied to vacant, it can lead to large swings in the vacancy rate. As for the retail vacancy rate, he said the rise is on trend as the demand in the submarket rises for class A space and falls for class B and C. The majority of retail includes services, and those often move into the class A space. The class B and C space that’s been geared toward selling goods has not been doing as well as class A.

“To see more than 136,000 square feet of new office space enter the market in the last six months of the year, while at the same time the office vacancy rate is at the lowest point in the past 14 years is evidence that if real estate developers remain focused on the types of projects and the locations in high demand, this market will reward those efforts,” said Levi Price, senior vice president and loan manager with Arvest Bank of Siloam Springs. “Across the entire region, our commercial bankers have been, and will continue to be, very busy working with our development customers to make those type projects a reality.”

When asked about the specific types of projects and the locations in high demand, Karen Gray, vice president/marketing manager for Arvest Bank, explained this includes “those that are strategically planned in the right place to meet a current and near-term need in the market. It could be a medical office building in one area or a class B office building in a different area, but whatever the project is and wherever it is, the best projects are those that meet a specific market need. As the area’s largest commercial lender, we work with our customers to help them plan projects that make sense.”