Professional Office Space Lease Rates Increase in 1Q

(To view the lease guide, click here for a pdf. The retail lease director is available here.)

In the first quarter of 2008, Streetsmart Data Services researched 3,113,578 SF of Class “A” and 2,898,824 SF of Class “B” professional office space in Benton and Washington counties.

Streetsmart found that the overall vacancy rate for Class “A” office space in the two-county area was indicated to be about 31.9 percent, based on research conducted by Streetsmart Data Services. This represents an increase from 20.3 percent in the first quarter of 2007. Out of the total 3,113,578 SF of space researched, approximately 992,530 SF were reported to be vacant.

Bentonville reflected the highest vacancy rate at slightly under 49 percent, with Fayetteville second at near 34.5 percent. These high rates are primarily reflective of the recent introduction of new product. This is particularly true for Bentonville where a near 400,000 SF Class “A” office building came on the market in the third quarter of 2007, with little or no pre-leasing. Removing this building from the survey results in the vacancy rate for Class “A” office space in Bentonville decreasing to slightly below 19 percent, and the vacancy rate for the two-county area decreasing to near 22 percent. The lowest vacancy rate among the cities researched was in Lowell.

Lowell does not have a substantial amount of Class “A” space. A positive indicator in the first quarter of 2008 was that Class “A” office space in Benton and Washington counties experienced positive absorption of about 30,414 SF.

The average annual lease rate for Class “A” office space in the two-county area in the first quarter of 2008 was $19.73 per SF of building area, based on research conducted by Streetsmart Data Services. This was up from $18.82 per SF in the first quarter of 2007. Fayetteville reflected the highest average lease rate at slightly under $22.00/SF, with Bentonville reflecting the lowest rate at near $18.00/SF.

With respect to Class “B” office space in the Benton and Washington counties, the overall vacancy rate in the first quarter of 2008, based on our research, was indicated to be 16.7 percent.

About 483,419 SF were reported to be vacant out of the 2,898,824 SF researched. Rogers reflected the highest vacancy rate at slightly below 24 percent, with Fayetteville not much better at near 22.5 percent. Lowell experienced the lowest first quarter rate at between 6.5 percent and 7.0 percent. However, Lowell has a much lower amount of Class “B” office space than any of the other cities researched. Bentonville has the most Class “B” space at about 1,741,723 SF. This is due to the heavy concentration of Wal-Mart vendors in Bentonville. The first quarter 2008 vacancy rate for Class “B” space in Bentonville was indicated to be slightly above 14.5 percent. Springdale experienced a first quarter vacancy rate between 12 percent and 12.5 percent. Negative net absorption of approximately 13,220 SF occurred in the overall Class “B” market in the first quarter.

Our research supports an average annual lease rate for Class “B” office space in the two-county area in the first quarter of 2008 of $13.25 per SF of building area. The average annual lease rate in the first quarter of 2007 was $12.85. Lowell experienced the highest average rate at slightly above $16.00 per SF, with Springdale the lowest at near $11.50 per SF.

The professional office market continues to be of concern in Benton and Washington counties due to the current supply of vacant space. Considering both Class “A” and “B” space together, the vacancy rate was near 24.5 percent in the first quarter.

Overall positive absorption occurred in the first quarter, which is a positive sign. Additionally, there were year on year increases in reported lease rates for both Class “A” and “B” space. Class “A” lease rates increased near 5 percent between the first quarter of 2007 and the first quarter of 2008, with Class “B” rates increasing slightly over 3 percent. However, there are slightly more than 80,000 SF of professional office space announced/under-construction in the two-county area. Without pre-leasing, the introduction of new product at the present time is not positive for the overall market. Also to be considered is the significant slowdown in annual non-farm job growth. In the Fayetteville-Springdale-Rogers MSA, for the March 2007-March 2008 time period, non-farm job growth was reported at only 300 jobs. Job creation is critical to the absorption of professional office space.

(Tom Reed is a partner in Streetsmart Data Services of Fayetteville, which provides quarterly reports pertaining to the single-family residential, multifamily residential, and commercial sectors of the real estate market in Benton and Washington counties. Reed may be reached at (479) 575-9100.)