Two institutional investors from the coasts completed separate acquisitions in Benton County worth a combined $66.2 million just a few days apart in early October.
Institutional investors are typically diverse companies or organizations like a hedge fund or mutual fund that invest money for other people instead of private investors who use their own money.
In a multifamily trade, California-based Canyon View Capital paid $25.6 million to buy three properties in downtown Bentonville. The principal of Newell Development in Bentonville, Jake Newell, built all three from 2017 to 2020 and sold them with a combined occupancy of 97% across 85 units.
Newell described the purchase price of approximately $301,000 per unit as “record-setting” for the region.
In an office deal, New York-based Global Net Lease (GNL), a publicly-traded real estate investment trust (REIT) listed on the New York Stock Exchange, paid $40.6 million for a 90,334-square-foot office building on Southeast J Street in Bentonville that Walmart leases. A limited liability company managed by longtime real estate executive and entrepreneur Ramsay Ball of Bentonville was the seller. The three-story building opened last year.
“When you have national groups that are coming to our market and seeing the potential and investing here, it validates the market,” Ball said. “Some [institutional investors] we had who were looking a few years ago [viewed this] as a tertiary market. We’ve had a hard time cracking that. It’s continued evidence of the attractiveness of the market.”
Those acquisitions indicate that the commercial real estate market in Northwest Arkansas is maturing and gaining greater visibility among institutional investors. Still, among various commercial real estate executives, it is debatable whether they are a bellwether.
“For the most part, and in most sectors, I don’t think the institutional money has shown up [in Northwest Arkansas] yet,” said Steve Lane, managing director of Colliers Arkansas in Rogers. The Little Rock-based company is the largest commercial real estate firm in Arkansas, with more than 18 million square feet of commercial space leased and managed.
“Our experience from talking to many larger investment houses is that they like to do deals in big markets. Markets where they can build a portfolio.”
Northwest Arkansas commercial real estate broker Clinton Bennett, who owns Bennett Commercial Real Estate in Rogers, said he still considers the region a tertiary market. Still, defining a tertiary market is subjective, and Bennett believes investors are warming to the idea of putting more of their money in Northwest Arkansas.
“I think we are seeing investments made by groups that traditionally would not have looked at tertiary markets,” he said. “In the past, a refrain we would hear is, ‘We like those assets, but your market just isn’t big enough.’ It seems like now they are comfortable with the size and trajectory of our market. Maybe the trajectory is the same, but the demand has expanded significantly.
“Because of Crystal Bridges, the Walton investments, the Northwest Arkansas Council, University of Arkansas, the quality of life amenities and investment — I think we’ve hit on a whole different layer of investors.”
According to the U.S. Census, the Northwest Arkansas metro remains just outside the country’s 100 largest regions with roughly 550,000 residents (No. 105). Still, the population has grown by nearly 25% since 2010, one of the fastest-growing regions in the country.
BY THE NUMBERS
Paul Hendershot, an analyst with commercial real estate data and analytics business CoStar Group, said the Northwest Arkansas market is seeing an increase in the number of institutional buyers.
“I would say it is higher [in 2021], but it is hard to pinpoint since one deal can have an outsized influence on the percentage,” he said.
CoStar data indicates that institutional buyers comprised 25% of Northwest Arkansas’ office market sales volume of $166.1 million year-to-date in 2021.
The institutional activity this year compares with 4% in 2020, 19% in 2019 and 2% in 2018 and — as Hendershot indicated — is almost entirely attributed to the $40.6 million Global Net Lease acquisition in Bentonville. According to CoStar, that deal is the only Northwest Arkansas purchase by institutional investors that’s eclipsed $1 million this year.
Hendershot says many out-of-state and institutional investors look to Northwest Arkansas for less expensive assets and higher returns that many primary and secondary markets cannot provide. The office market cap rate — a real estate valuation measure of a property’s ROI — of 9% is higher than the national average of 6.9%
The total sales volume in Northwest Arkansas’ office market is also increasing. It’s at an all-time high this year. The only other year that office sector sales volume topped $150 million was 2016 ($156.8 million).
“Looking at the data, investors have found Northwest Arkansas,” Hendershot said. “It’s a vibrant market with solid economic underpinnings and a stable tenant base. That’s increasing the exposure to national investors.”
This year, Northwest Arkansas also sees a significant increase in multifamily sales volume, reaching nearly $290 million year-to-date. The price per unit has also reached an all-time high of $105,502 per unit.
In terms of buyer type, Hendershot said 17% are institutional, 15% are private equity and 68% are private. Private equity refers to real estate funds that cater to high net-worth individuals who raise equity to purchase real estate. Private refers to companies whose control is private and whose business is primarily geared toward operating, developing or investing in commercial real estate.
“I think everybody likes multifamily right now,” Lane said. “They [investors] are all chasing returns. The cap rates are getting so low in the big metro areas, and we are starting to show up on the radar.”
Lane said Northwest Arkansas doesn’t lack buyers, no matter who they are or where they come from.
“We have a lack of product,” he said. “You pull up CoStar at a given time and see what’s for sale, and there isn’t a whole lot in this market. There’s a lot of opportunity for development. We need more square footage on the ground.”
Jason Slear leads the acquisitions group for Global Net Lease, which has a market capitalization of approximately $1.59 billion and a diversified portfolio of more than 300 properties in 12 countries worldwide.
Slear said GNL’s Bentonville acquisition was the company’s first in Arkansas. He said it was an “interesting opportunity” for GNL because of the tenant and the location.
“One of the things we look for when we buy assets is the creditworthiness of the tenant, and Walmart’s credit is pretty much as good as it gets right now,” he said. “It ticked all the boxes from an investment standpoint — lease duration, the tenant’s credit and rental increases.”
Walmart has seven years remaining on the building lease term.
Would GNL’s interest in Northwest Arkansas have been just as strong if the building tenant was an entity other than Walmart?
“I’m an avid mountain biker, so any property that’s in Bentonville is worth its weight in gold to me,” Slear joked. “If it was another tenant, same credit, different name, same market, I think we would have underwritten it the same way. [Northwest Arkansas] is exploding. We did our research, and you can’t not read about the whole area. It’s a good marketplace, and it’s in the path of expansion. Which is where you want to be if you are a long-term real estate investor.”