‘Super A’ Office Space Trails Overall Absorption in 4Q

Streetsmart NWA produces quarterly reports pertaining to the real estate market in Benton and Washington Counties. The reports focus on the single-family residential, multifamily residential and commercial sectors of the market.

In this article, discussion is presented on the professional office sector of the commercial market in Benton and Washington counties. In particular, the Class “A” sector is examined. Class “A” buildings are the most prestigious buildings competing for the premier users, with rents above average for the area. These buildings have high-quality standard finishes, state-of-the-art systems, good accessibility and a definite market presence.

In the fourth quarter of 2008 Streetsmart researched slightly more than 2.9 million SF of Class “A” professional office space in Benton and Washington counties. Of this total, between 20 percent and 21 percent represented vacant space.

Benton County reflected a vacancy rate between 16 percent and 17 percent, while the Washington County rate was between 31 percent and 32 percent. The average annual per SF lease rate reported for occupied space was slightly more than $19.40, with the mean lease rate in Benton County being slightly more than the overall average and the mean lease rate in Washington County slightly less than the overall average.

These rates are based on full-service lease arrangements, with the exception of janitorial service. In a true full-service lease, the lessor pays all expenses, including: real estate taxes, building insurance, utilities, maintenance, management, janitorial, miscellaneous, and reserves for replacement of short-lived items. However, in the Northwest Arkansas market, full-service leases typically do not include janitorial.

The Class “A” office market has actually improved since the fourth quarter of 2007. Our research reflected near a 22 percent vacancy rate for the fourth quarter of 2007, not including the Superior Square office building in Bentonville. This is a near 400,000-SF building, with minimal occupancy, that came off the market in the third quarter of 2008 as a result of the sale of the property for the new general offices of Sam’s Club. The average annual per square foot lease rate for Class “A” office space in the fourth quarter of 2007, based on our research, was slightly less than $19.75.

Year-on-year comparisons reflect between a 6.5 percent and 7 percent decline in the vacancy rate for Class “A” office properties, and between a 1.5 percent and 2 percent decline in the average annual per square foot lease rate.

In the fourth quarter of 2008 Streetsmart classified a new category of professional office space in Benton and Washington counties, Super “A.” The Super “A” category represents the very upper end professional office properties in the market.

These office properties are leased under full-service arrangements, with the exception of janitorial service, at annual per square foot lease rates of $20 and up. Of the total Class “A” professional office space examined, near 37 percent represented Super “A” space. The overall vacancy rate for the Super “A” space was reported at slightly more than 28 percent, with Benton County reflecting a vacancy rate near 25 percent and Washington County near 41 percent. The average annual per square foot lease rate for Super “A” professional office space was reported near $22.60 in Benton County and near $21.85 in Washington County.

With respect to occupancy, the overall Class “A” professional office sector is performing better than the Super “A” sector, however, vacancy is too high with respect to both categories. It should be noted that Class “A” vacancy is significantly lower in Benton County than in Washington County. This is also true for the Super “A” category, even though the average per square foot lease rate in Benton County is higher.

Reports from commercial real estate brokers in Benton and Washington counties indicate leases in Class “A” properties are still being executed at rates reflecting minimal, or no discounting.

Obviously, this is a positive sign. It is not uncommon to see lease rates being advertised in Class “A” properties at near $15 per SF triple net. This is not necessarily indicative of a discounted rate. Converting this to a full-service lease would result in an annual per square foot rate near or above $20.

The professional office sector in Benton and Washington counties remains a concern, however, the overall market is slowly improving. Job creation is a necessity for the absorption of vacant professional office space. It is important to note that we did have positive net absorption in the overall market, Class “A” and “B,” in the two-county area in the fourth quarter of 2008.

(Tom Reed is a partner in Streetsmart NWA. Company offices are located at 2804 Main Street, Suite C, Fayetteville. The phone number is (479) 575-9100.)