The Northwest Arkansas real estate market has largely fared well during the COVID-19 pandemic as the price of homes continues to rise and the number of lots falls, an economist said.
Mervin Jebaraj, the director of the Center for Business and Economic Research (CBER) at the Sam M. Walton College of Business at the University of Arkansas, discussed the market in a webinar hosted by Fayetteville-chartered Arvest Bank. The bank on Tuesday (Aug. 25) released the Skyline Reports for residential and commercial markets in Northwest Arkansas for the first half of 2020. Arvest sponsors the semiannual reports that CBER completes.
“So far the pandemic has not seemed to hurt the real estate market in the region, and the three areas measured by these reports continue to reflect a consistent balance between supply and demand,” Jebaraj said. “Part of that consistency is a continued contraction in the supply of homes for sale across the region, which continues to drive home prices higher.”
Over the past five years, the average home prices have risen 36.1% to a record high of $273,000 in Benton County and 27.7% to about $250,000 in Washington County. In Benton County, home prices have risen along with the size of the homes. While the prices in Springdale and Fayetteville have risen over the past five years, the prices have started to fall in Washington County more recently as the average square footage of homes has declined in those cities.
Homes in Benton and Washington counties are not considered affordable for the median household as a median multiple of between 2.5 and 3 is considered affordable for median households, according to Jebaraj’s presentation. The multiple is nearly 3.5 in Benton County and almost 4.5 in Washington County.
Home sales continue to rise but at a slower rate. The pace of home sales was high between 2012 and 2016 but has moderated since 2017, the presentation showed. In Benton County, 2,999 homes were sold in the first half of the year and was the second-highest number since the inception of the Skyline Report in 2004. In Washington County, about 1,800 homes were sold in the first half of 2020, and that was a similar number compared to the past few years.
Jebaraj said that indicates the pandemic hasn’t “greatly depressed” the number of homes being sold. However, the number of homes that are listed for sale has declined.
In the first half of 2020, the number of homes listed for sale declined by 48.8% to 1,206, from 2,357 in the first half of 2019. Meanwhile, the number of available lots on which to build new homes decreased to 3,896 — the lowest point since the Skyline Report was started in 2004.
“It is possible that the pandemic may have suppressed, or delayed, individuals from listing their homes for sale, but the historic low-interest rates for mortgages [are] enticing many consumers to want to purchase. Until more inventory is available, it will be difficult for homebuyers to find a home to buy.”
Potential sellers would need to buy another home in which to live, and that is difficult with the limited number of available, he said.
The lack of available homes has led people to live in apartments, a contributing factor to a rise in multifamily space.
The apartment vacancy rate rose to 4.8% in the first half of 2020, from 3.5% in the same period in 2019. The rise can be attributed to the completion of new developments and new units in the market. However, the rate was down from 4.9% at the end of 2019.
The average rent prices increased by 4.7% to $729.82 in the first half of 2020, from the same period in 2019. The pace of multifamily construction is expected to remain strong in the short-term as a record $481.5 million in building permits were issued in the first half of 2020. The previous record for multifamily building permit values was $372.9 million in the second half of 2018.
Over the past decade, Northwest Arkansas has had the most people move into the region than any other area in the state, but the growth rate has slowed over the past year, Jebaraj said. Amid the pandemic, he expects the moderation in growth to continue.
“I think it’s fairly safe to say that there aren’t a whole lot of people moving during this pandemic between states and counties and moving for jobs, which there really aren’t a whole lot of new jobs being created during this pandemic,” he said.
The total value of commercial permits rose 17.9% to $196.2 million in the first half of 2020, from $166.4 million in the same period in 2019.
Building permit data showed the value of commercial permits issued declined to $42.1 million in the second quarter of 2020, from $154.1 million in the first quarter of the year.
“We’re not sure if this is a pandemic pause, or if it’s the fact that the fourth quarter 2019…and the first three months of 2020 were the highest back-to-back building permit levels we’ve registered,” Jebaraj said. “It could just be that we’ve put so many building permits in the pipeline in the last quarter of 2019 and the first quarter of 2020 that this is just a natural decrease in the number of building permits. Or it could be that people are holding back to some extent until they get some more certainty about what the business environment will look like, which unfortunately they have not gotten so far.”
The overall vacancy rate in the commercial market fell to 10.8% in the first half of 2020, from 11% in the first half of 2019. However, the vacancy rate rose from 10% in the second half of 2019.
Vacancy rates in the office submarket rose to 9.8% in the first half of the year, from 8.6% in the same period in 2019. But the rate in the retail submarket declined to 10.6%, from 10.8%.
While the office space vacancy rate has increased, he said the number of people who are not working at their usual workplaces has ranged between 40% and 45% during the pandemic. Jebaraj noted that might mean they’re unemployed or working from home.
He expects people to be working from home at least through the end of the year and possibly into the middle of next year. But he’s uncertain whether that would reduce the overall demand for new office space. Existing offices have had more open floor plans than in the past, and he expects offices to include more cubicles and walls not only as a result of the pandemic but also because people aren’t as productive in an open office environment. Adding cubicles and walls would require more space.
However, he said it’s too early to know whether the office space vacancy rate would continue to rise. In the first half of 2020, the rise in the office submarket can be attributed to the more than 330,000 square feet of new space added to the market — including nearly 108,000 square feet of office space added in the Pinnacle Hills area of Rogers and about 22,000 square feet added in Fayetteville.
Another rise in the commercial vacancy rate could be attributed to retail space. Vacancy rates have been rising in older retail spaces in the area of the Northwest Arkansas Mall in Fayetteville and the middle of Rogers. The rise could be attributed to the pandemic as many retail stores with multiple locations might look to consolidate amid a recession. Stores that were struggling before the recession will likely be the first to close during the recession, he explained.
“With many retail establishments feeling the impact of the pandemic, it isn’t surprising to have a small increase year-over-year in this submarket, and we will be watching this particular area closely in the coming months,” he said. “It is also important to note that, for the most part, this report doesn’t include the majority of restaurant properties since many restaurants have standalone structures and are not renting space from retail developers.”
The rise in the commercial space vacancy rate was offset by a decrease in the vacancy rate in the warehouse submarket to 8.3%, from 10.3%. More than 350,000 square feet of new warehouse space was added to the market in the period.