Avoiding a ‘Field of Dreams’

The commercial real estate market in Northwest Arkansas is “very healthy,” according to Mervin Jebaraj, the lead researcher for the Arvest Skyline Report. If commercial developers in other parts of the country were aware of our market conditions here, they would be envious.

Despite rapid development over the past decade, we are enjoying historically low vacancy rates across all sectors of commercial space. And the emergence of remote and hybrid work options that are creating challenges for metropolitan areas across the country have yet to impact us. It almost seems too good to be true — like something from a movie.

Suppose you’re a baseball fan like me (Hogs and Yankees). In that case, you’ve probably seen the 1989 movie “Field of Dreams” starring Kevin Costner as an Iowa farmer who builds a baseball field in the middle of a cornfield because a voice in his head tells him, slightly paraphrased, “If you build it, they will come.” Against the advice of his family and, ironically, his banker brother-in-law, Costner’s character builds the field, and everything works out in the end.

While it may seem that Northwest Arkansas commercial developers can build new offices and warehouses with an expectation that they will be quickly occupied, history whispers in our ears to avoid this “Field of Dreams” mentality and approach new commercial development with a healthy dose of caution.

If you were in Northwest Arkansas nearly 20 years ago, you were here when homebuilders were buying land, developing neighborhoods, and erecting new homes as quickly as possible to meet the insatiable need for housing. Then suddenly, in 2006, they looked up, and everything had changed. The number of complete but unoccupied new homes increased by more than 300% in 24 months, and many residential developers were devastated.

I am not saying this scenario will happen with commercial development in Northwest Arkansas.

My point is that, as a region, we must focus on the fundamentals of intelligent development. We must act like we are in a “normal” market. How?

We must remember the importance of the age-old phrase detailing the three most important aspects of real estate: “location, location, location.”

Developing a new commercial office building in the Pinnacle Hills area is different than doing the same on the outskirts of Pea Ridge. That example might be over-the-top, but the reality is that the type of development that might work at location “A” could be a failure at location “B” just a mile or two down the road. Location matters, and it matters a lot.

We must consider nearby amenities, current and planned infrastructure, existing competition and future competition.

Then there are financing costs. In today’s volatile rate environment, a developer needs to consider the details of their financing rates. Some lenders may offer a low rate that can change quickly. In contrast, others will provide a responsible rate that is fixed for a longer period, offering a hedge against interest rate volatility. Those are two factors that can have a significant impact depending on the state of the economy. It’s important to work with an experienced lender who knows the market and be sure to pay attention to the details of your financing package.

Another critical element of intelligent development is pre-leasing. The best developments emphasize securing an anchor tenant before breaking ground. While this can be hard work on the front end of a project, having an anchor tenant is like a first-inning home run.

As a long-time commercial loan professional and resident in Northwest Arkansas, I want to ensure our communities can continue to thrive with a focus on intelligent development as we grow. Let’s make sure that we build to the benefit of all so we can, hopefully, avoid the pains that other markets may experience in the future.

Levon Ogden is a commercial loan manager for Arvest Bank in Springdale. The opinions expressed are those of the author.