Northwest Arkansas? Pro Office Vacancy Rate Improves (Market Analysis)

Commercial real estate in Northwest Arkansas had another strong year of absorption in 2005. It was also another year of continued heavy construction activity, which resulted in either unchanged or higher vacancies in the various commercial real estate sectors. At mid-year 2005, Real Estate Market Data Inc. (REMDI) predicted as each sector attempted to absorb construction activity from 2004, “higher vacancies and flat rental rates” would be expected for year-end, which, at the moment, remains a reality.

The professional office market actually improved during 2005 from the previous year. Although the year-end 14.5 percent vacancy for Class A and B space was relatively unchanged from mid-year’s 14.8 percent, it is an improvement from year-end 2004’s 17.2 percent.

Absorption for 2005 was notable considering the amount of space that has been added in the past two years. At year-end 2005, total net absorption for the year was over 250,000 SF. Considering over 1 million SF of professional office space has been added in the past two years, absorption remains steady, and leasing activity of office space in Northwest Arkansas is obviously strong. As of year-end 2005, REMDI tracked more than 4.7 million SF of professional office space in Northwest Arkansas.

The Bentonville market ended 2005 with an overall professional office vacancy above 20 percent for both Class A and B space. Improvement in this market in 2006 is not expected as an additional 400,000 SF remains under construction. This market is also beginning to experience a decline in overall rental rates. Although at year-end 2005 there was only a slight decline in rental rates, concessions have started to appear as building owners seek creative ways to fill empty office space. It is unknown at this time how this will affect the overall Northwest Arkansas professional office market, but overall rental rates are likely to remain flat as construction activity begins to heat up in other areas.

Another important office market to note is in Fayetteville. This market continues to improve and looks to be underserved at the moment with Class A space. Currently, there is about 125,000 SF of Class A office space under construction here, which will most likely increase vacancy in 2006. However, leasing activity is expected to remain strong throughout the year. Looking forward, this market has five known office projects planned, which (depending on timing of completion) could possibly soften the Fayetteville professional office market in 2007.

Although construction cooled in the office/retail market in 2005, absorption for the year was approximately a negative 17,241 SF in Class A and B space. This market is still suffering from more than 150,000 SF delivered in 2004, as vacancies climbed to 11.9 percent at year-end 2005.

As of year-end 2005, REMDI tracked more than 2.2 million SF of office/retail space in Northwest Arkansas. The Bentonville market has the highest vacancies in both Class A and B office/retail space, nearly 20 percent for both types. Fayetteville, however, has rebounded and had more than 13,000 SF absorbed during the second half of 2005. As of year-end 2005, there was more than 190,000 SF of office/retail space under construction in Northwest Arkansas. The bulk of this space lies in the Rogers market, which at year-end had a 14 percent vacancy.

At year-end 2005, REMDI tracked more than 2.9 million SF of retail space in Northwest Arkansas. The overall retail market had a slight increase in vacancy at year-end to 8.1 percent, but remains relatively healthy at this time.

Absorption was negative at year-end due to more than 70,000 SF added during 2005, following the previous year’s addition of about 83,000 SF. Currently there is more than 1.4 million SF of retail space under construction in the Rogers market alone. The additional retail space located near Interstate 540 is likely to change the region’s retail landscape as historically the Fayetteville market has had about 44 percent of the total retail market share.

Another area of commercial real estate in Northwest Arkansas that is experiencing growth is the hotel market, which has more than 4,500 rooms.

In 2005, Bentonville had an increase of more than 300 rooms added to the overall inventory. It also has two major projects under construction, which will add another about 349 rooms. Fayetteville, which has nearly 1,500 existing rooms, currently has approximately 381 rooms under construction and planned in four projects.

REMDI has also added the emerging medical/office market to its commercial real estate database in 2005. This market will be exciting to watch in the coming years as surrounding development around area hospitals, such as Northwest Medical Center in Bentonville, add to the medical/office inventory. At this time, the medical/office market is predominantly located in the north Fayetteville market and remains quite healthy.

The commercial real estate market in Northwest Arkansas ended 2005 with no major surprises. Leasing activity remained strong, but the struggle to fill empty space added to the inventory in the past two years has kept vacancies in check. At the same time, certain areas of the market remain particularly healthy and will benefit from additional space under construction in 2006.

Note: Total inventory, square footage amounts and property class are based on the information gathered for the REMDI database. Buildings are chosen based on quality, age, condition, market compatibility and rental rates.