Don’t bet against retail

The economic and commercial real estate markets of Northwest Arkansas have proven to be resilient amid the uncertainty generated by the pandemic and economic slowdown.

When the U.S. economy reports a 7% year-over-year decline in employment, the region is one of the cleanest shirts in the dirty clothes hamper, with -1.6% job losses. That bests neighboring Tulsa, Little Rock and other high-flying metros like Denver, Charlotte and Austin.

We must keep in mind that this was a healthcare crisis that evolved into an economic crisis. Northwest Arkansas’ stable economic underpinnings will serve it well during the recovery.

In comparison, rearview mirror economic forecasting has often proven problematic, and the pandemic’s trajectory will define 2021. In 2019, before heading into this mess, the region grew by 9,500 new residents and added 7,800 jobs, the fourth-best year in a decade. The quality of jobs created is an often overlooked aspect of growth. The median household income has increased by 33% over the past 10 years, reaching $59,100. Looking forward, we anticipate the recovery to begin in earnest during the second quarter of 2021, with 15,900 jobs. That’s about 10,000 short of the 26,800 lost — or expected to be lost — from the second quarter of 2020 to the first quarter of 2021. The region is forecast to add another 10,000 jobs in the second half of the 2021, returning to pre-pandemic employment levels by the end of that year.

Beyond the pandemic, no asset class has realized more seismic changes than retail. From disruptions in technology, the space devoted to the consumption of goods and services continues to evolve. Over the past decade, the market averaged 460,000 square feet of leasing annually. Northwest Arkansas has seen 393,800 square feet of activity year-to-date, no small accomplishment considering the headwinds the sector has been facing.

Big-box and struggling mall retailers have been taking quite a bit of the oxygen out of the room. The average lease size is just over 3,000 square feet. The lion’s share of these are locally owned businesses serving the community and serving as mini anchors to the growing work-live-play environment in dynamic downtowns. The vacancy rate has ticked up slightly in the past few quarters. But at 5.5%, it has remained relatively stable.

One would be remiss to discuss the retail market and not mention Walmart in Northwest Arkansas. The company is testing two locations in the area as multiuse locations. These locations will incorporate technology to serve both in-store and online shopping, including contact-free checkout technology, omni-assortment, and tools to increase inventory movement from the backroom to the sales floor.

If we were playing tennis, the office market is holding serve. Since January, the market has absorbed 325,600 square feet while adding 503,800 square feet of new inventory. While there may appear to be a disconnect at first glance, there is typically a lag in net absorption because it is not “counted” until a tenant occupies the building. As a result, the vacancy rate ticked up slightly. The market is still tracking 4% below the rest of the country. Leasing activity serves as a bellwether for future absorption. It has been a big year for the market, with 823,000 square feet leased, the second most active year in a decade.

Distribution and warehouse space have emerged as the darlings of the pandemic. Driven by increased demand for e-commerce and just-in-time logistics, many traditional brick-and-mortar retailers expanded their industrial footprints and shifted their business models. The market has absorbed 1.6 million square feet of space with strong momentum heading into 2021.

Paul Hendershot is the director of analytics with CoStar, which provides market data and reports about the real estate market in Northwest Arkansas and throughout the United States. The opinions expressed are those of the author.