Report: NWA startups continue to ‘thrive,’ more office space needed

Marshall Saviers, CEO of Cushman & Wakefield/Sage Partners, recently provided an update on third-quarter real estate numbers from his company’s Northwest Arkansas market report. There is strength in key areas, and a rebound in a few shaky spots.

Office vacancies were around 4.5% in Northwest Arkansas, well below the national rate of 20.7%. Saviers said Walmart is driving the demand as is the region’s startup scene.

“The easy answer is the Walmart vendor phenomenon that is happening in Rogers and Bentonville,” Saviers said. “But that’s just part of the story we highlighted in our market report this quarter. The startup culture is just continuing to thrive up here. We have a rate of 37% of all businesses in Northwest Arkansas are startups. When you think about that, that’s 2% higher than the national average. That just creates a need for office space. It creates a really vibrant, healthy growing office space community.”

The retail sector in the region also continues to show resilience. There’s a vacancy of around 3.5% and rent growth of 2.4% year over year. Saviers said those numbers are too healthy.

“We need more space,” he said. “So that sounds like a real estate guy, doesn’t it? But it’s the truth. We had 140,000 [square] feet absorbed last quarter and very little supply delivered, so we need more retail space. It’s so hard to build smaller retail centers, but those neighborhood retail centers are what’s really thriving. A place where you go get your sandwich, where you go to get your dry cleaning, etc. Those centers are in high demand and for good reason. … Even with the online phenomenon, people still want to go shop at their neighborhood centers. So those are great, but they’re really hard to build because they’re smaller. We need more and more of those built, and we just need more space in general.”

“You’ve got to figure out a way to get the cost down or retrofit,” he added. “What we’re seeing here now is people are trying to retrofit older buildings here because 20-30 years ago there were no buildings here, so we don’t have a lot of legacy supply. They’re having to get creative and find an old warehouse or something else that is functionally obsolete at this point and turn it into some sort of retail experience, as you say, whether that be a brewery — those are obviously in high demand — a restaurant, something that’s experiential, especially in the Fayetteville area where you’ve got some legacy supply there. So we’re seeing more and more of that and expect that to continue as the area continues to grow.”

There has been an uptick in available industrial space with new construction bringing inventory.

“We’ve actually got a couple of new buildings that will be coming online either late this quarter or early next quarter, each about 200,000 [square] feet,” he said. “So that number (the industrial vacancy rate), which is about 7%, which is the highest in three years, will probably go up a bit. That’s not all the story because if you look at smaller warehouse spaces, 15[,000] to 20,000 square feet, those are still in really high demand, especially if it’s on I-49. Rents continue to increase as a function of construction costs and demand. So rents are going up 2% to 3% a year, so that’s good. We’re still seeing healthiness there, but some of the bigger spaces are taking longer to lease.”

When asked about the reduction in interest rates from the Federal Reserve Bank, Saviers indicated that it will likely grease the wheels for some deals that have been sitting on the sidelines.

“It does unlock some projects that have been sitting on the sidelines for a while,” he said. “Actually, we had $290 million in commercial permits in Northwest Arkansas in the first half of this year, which was a significant increase, almost a 50% increase from the second half of last year. But those are mostly just bigger projects. Those are projects that are high in scale, and this is mostly non-Walmart specific. When you hear those numbers, you think that’s the Walmart campus. Most of that’s non-Walmart related, but they are bigger projects. So these interest rates going down will help some of these smaller projects.”