Inventory of Class A office space expected to swell in 2020

The Class A office sector in Northwest Arkansas is set to get a much-needed jolt in 2020.

According to a new report by CBRE, the construction of five Class A buildings totaling approximately 370,000 square feet of office space will be completed and ready for tenants next year.

There is no definitive formula to characterize building class among A, B and C. Class A buildings generally represent the newest and highest quality buildings in a particular market. They are buildings with the best construction and have high-quality building infrastructure. Class A buildings are also well located, have suitable access and are professionally managed. As a result, they typically attract the highest quality tenants and also command the highest rents.

Those rents are rising even higher.

David Erstine, a real estate broker with CBRE in Fayetteville and the author of the new report, said construction costs at an all-time high are driving up lease rates. Because of additional major construction projects that are coming down the development pipeline, the labor market is likely to remain strained for the foreseeable future. As a result, landlords will pay at a premium for new construction, which will keep pushing lease rates higher for new office space.

“Historically, Class A office space was in the range of leasing from $20 to $24 per square foot,” Erstine said. “In today’s world, new Class A space is from $27 to approaching $30.”

MARKET BREAKDOWN
The most significant addition to the Class A inventory will be in Rogers, where more than half of the region’s premium office space already resides. That includes Benton County’s largest office building, the 10-story, 226,000-square-foot Hunt Tower.

Three new buildings from separate development groups will increase that percentage next year.

Northgate Plaza, a six-story, 118,000-

square-foot building and adjacent parking structure on J.B. Hunt Drive, should be ready for tenants by early February. Northgate Holdings, the building/parking and landowner, is a partnership between the Blass family of Little Rock and Johnelle Hunt, chairman of Hunt Ventures in Rogers.

Cushman & Wakefield/Sage Partners in Rogers is the developer consultant.

In The District at Pinnacle Hills, a 54-acre mixed-use project along Pauline Whitaker Parkway, a 40,000-square-foot office building is in development. It will be the third office building in the development, led by Whisinvest Realty of Little Rock.

Also on Whitaker Parkway, Hachem Investments Inc., led by Laurice Hachem, is building One Uptown. The three-story, 60,000-square-foot building will have retail, restaurants and roughly 20,000 square feet of office space.

Erstine said those three projects would help alleviate a tight market in the Pinnacle Hills area. He mentioned a variety of factors that are driving demand there. They include merger and acquisition activity among retail suppliers.

“The growth we see in that area is not necessarily a net growth,” he explained. “Let’s say two [supplier] teams come together, each in 10,000 square feet of space that now need 15,000 square feet. It’s a net loss of 5,000 square feet, but because contiguous space footprints are limited, when new [buildings] are built, that’s who they are attracting.”

Erstine, who has worked in Northwest Arkansas’ commercial real estate industry for nearly 20 years, said traffic congestion and proximity to Interstate 49 are also driving interest in Pinnacle Hills.

“If you have a sizable team of 20-plus [employees] and searching for office space, it’s common for us to hear from the occupier that they collectively live throughout the greater Northwest Arkansas region,” Erstine said. “Working in Pinnacle Hills is far less impactful on team members’ drive times than it would be to locate in certain areas of Bentonville further away from the interstate. I think we would all agree that in Northwest Arkansas, it’s a lot more efficient to travel north and south than it is east and west in most any community.”

The first two buildings in the 33-acre Rice Office Complex (ROC) will give Bentonville new Class A properties near the interstate when they are finished next year. The office park is situated along northbound I-49, north of the Arkansas Highway 72 exit.

Cushman & Wakefield/Sage Partners is the developer. The two buildings total 112,000 square feet. Erstine said it’s believed that the larger of the two buildings (72,000 square feet) has already been fully leased. The activity is thought to be related to relocation efforts surrounding Walmart’s new corporate campus construction. ROC will ultimately help ease the vacancy rate in Bentonville. It’s the highest in the region at 11.71% among Class A properties, but that’s a drop of nearly 6% in the past year.

Erstine termed the Bentonville market as being in a “lull period” following Walmart’s 2017 announcement that the company would build a new corporate campus in Bentonville. The new corporate campus will be built to the east side of Southeast J Street, between Central Avenue (Highway 72) and 14th Street (Highway 102), with Eighth Street running through it. In the 350-acre footprint where the campus will be built, there are several Walmart-owned buildings and operations. Walmart is in the process of moving employees to new locations so it can raze the buildings, build new structures then move employees back in.

“Many reviewing office occupiers are still determining whether it is best to relocate themselves closer to the new headquarters site or remain in their current space,” Erstine wrote in the report. “Some have taken the ‘wait and see’ method [since] the headquarters may not be fully complete for another seven years. Average lease terms for these office occupiers range from five to seven years.”

The Fayetteville submarket, according to CBRE, has the lowest vacancy rate in the region among Class A properties at 3.76%. That’s down from nearly 5% in the second half of 2018. Erstine said that’s forcing occupiers who require more than 10,000 square feet of contiguous space to look elsewhere.

There is one Class A development scheduled to be completed by the summer of 2020. It’s a two-story, 39,000-square-foot building in the Vantage Drive Office Park, a new 13-acre office park situated north of the U.S. Postal Service at 1590 E. Joyce Blvd.

Kyle Naples, owner of NAPA Construction in Fayetteville, is partnering with CBRE to develop the property. Erstine said the new building would be the first new Class A multitenant building in Fayetteville in over a decade.

Overall there are 45 Class A office buildings in Bentonville, Fayetteville and Rogers totaling 2.57 million square feet. The overall vacancy rate is 7.35%.

Erstine said Springdale is not included in the report because “historically there has been little to no sizable [Class A] office demand or supply for the Springdale market.” He said that could change over the next decade, specifically in the area around the Don Tyson Parkway interchange, as companies look to be more centrally located in Northwest Arkansas.