NWA office sector returning to ‘normal’

by Paul Hendershot ([email protected]) 671 views 

After a challenging 2020 and early 2021, in which the economy of Northwest Arkansas shed 17,000 jobs, the region has made a remarkable comeback over the last two quarters, gaining 36,600 jobs for a net gain of 19,000.

Moreover, over the previous 12 months, the region’s employment grew by 4.5%, reaching 276,400 jobs, besting neighboring Oklahoma City, Little Rock, Tulsa and other high-flying metros like Tampa, Fla., and Charlotte, N.C..

In addition to a solid economic recovery, commercial real estate is proving to be remarkably resilient as well. It is anchored by robust leasing activity and a stable and sustainable construction pipeline across all asset types.

The extended work-from-home environment and the rapid deployment of technology have transformed the future of the office. As a result, employees are armed with a new sense of empowerment and are voting with their feet. The office will always serve a key role in defining corporate culture and provide a common area for face-to-face interactions. Still, many companies are now facing the reality of the hybrid work model and a greater emphasis on work-life balance to retain and attract talent.

Paul Hendershot

Many organizations are right-sizing by putting unwanted space on the sublease market. Nationally, the amount of sublease space available remains at a near-record high at 200 million square feet. In Northwest Arkansas, there is currently 192,000 square feet of sublease space available. An increase from the 173,300 square feet the market reported at the end of the first quarter of 2020.

In contrast, many firms are expanding their footprints to accommodate more private offices and increased social distancing. As a result, office leasing in the region has reached 740,000 square feet year-to-date, the third-highest level achieved in a decade and already surpassing the 724,800 square feet the market averaged from 2017-2019.

One of the most significant new leases was Colgate-Palmolive joining General Mills when it signed an 11,500 square foot lease in Founders Plaza in Rogers. Overall, the office market has remained stable, with 269,300 square feet of net move-ins and 223,800 square feet of new space delivered. The vacancy rate is 6.7%, well below the national average of 12.3%.

Since 2010, Northwest Arkansas has added 122,000 new residents, for a total population of 580,000. In addition to the strong population growth, the median household income has risen from $44,200 in 2010 to $62,500 today. This growth has enabled the retail sector to come back faster than other parts of the country. Retail can be described as the Lazarus of asset types.

After experiencing two consecutive quarters of negative net move-outs in 2020, ending the year with 151,400 square feet of negative net absorption, the market is experiencing a strong rebound in 2021, with 440,700 square feet of net move-ins at the end of the third quarter. CoStar is forecasting the momentum to continue into the fourth quarter with an additional 220,000 square feet. Companies signing new leases include Burkes Outlet, Caliber Collision, Dollar Tree and Golden Cakes (IHOP franchise). The vacancy rate for the retail sector is 4.3%.

Driven by increased demand for e-commerce, many traditional brick-and-mortar retailers are expanding their distribution footprint to meet the increased demand. As a result, distribution and warehouse space has emerged as the new storefront.

Year-to-date, there has been just over 1 million square feet of leasing activity, the second-highest level achieved in a decade.

Paul Hendershot is the senior director of market 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.