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Paths Vary In Keeping Retail Rent Flowing in Northwest ArkansasLock Icon

6 min read

Matthew Dearnley has a 2,000-SF vacancy coming open in November at Evelyn Hills Shopping Center in Fayetteville, and prospective tenants are already lining up to fill the space.

Dearnley, the CEO of Flake & Kelley Commercial Northwest, is an owner of the 100,000-plus SF retail center and manages the leasing of approximately 35 units. A mattress store is leaving in two months, but Dearnley said he should have a replacement tenant soon.

Evelyn Hills isn’t a shiny, new retail center with all the modern bells and whistles — it was built in 1960 — but has a good location on North College Avenue and affordable rents. Dearnley said rents at Evelyn Hills top out at $12 per SF, and the center has been 100 percent occupied for some time.

The center is anchored by Ozark Natural Foods and a recent high-profile tenant is the restaurant chain Tacos 4 Life. Dearnley said the economic growth in northwest Arkansas has given great opportunities for older retail centers such as Evelyn Hills because there are still a multitude of companies that can’t afford the high rents associated with new development.

Dearnley said some spots on Martin Luther King Jr. Boulevard in Fayetteville are asking nearly $40 per SF, a bill a local restaurant may have a hard time footing. Overall, the vacancy rate in northwest Arkansas was 9.4 percent for the second half of 2016, according to the Arvest Bank Skyline Report, a slight increase from the first half of the year.

The rates for the four main cities of the northwest Arkansas corridor range from Fayetteville’s 5.6 percent to Springdale’s 14 percent, sandwiching Rogers (10.5 percent) and Bentonville (12 percent).

“Rents have been going up, and a lot of it is just because of [new] construction,” Dearnley said. “Construction prices have been nuts, and we haven’t even seen what is going to happen after Hurricane Harvey and Hurricane Irma. The big difference at Evelyn is we have been asking $9 to $12 a foot in rent; so many people who can open and pay $10 a foot rent can’t pay $40.

“It is all a factor of land costs and construction costs. If it is going to cost $3 million to get a building built, you have to get a return on the dollars. On the flip side, if that building could be built for $1.5 million, you can get half the amount of rent.”

Model Strategies
Alan Cole of Colliers International in Rogers handled the leasing for the retail center anchored by Whole Foods Market on College Avenue just south of the Fayetteville mall. The higher rents associated with a new construction and being close to Whole Foods meant that neighboring tenants were selected with a long-term view.

Similarly, Burke Larkin of Whisenhunt Investments said his company would be methodical in selecting tenants for its new retail centers on Pauline Whitaker Parkway, smack-dab in the middle of the hot Pinnacle Hills market in Rogers. A strong economy and stable rents allow for such a strategy.

Fortunately for the older centers, there are plenty of tenants to go around. Cole said an older shopping center may not look like much to the untrained eye, but a smart investor can see an income generator.

Cole said two strategies can keep the money flowing at an older shopping center.

The first is the occupancy model: An owner — typically one who has owned the property for a time — sets the rents low enough to cover costs in order to achieve 100 percent occupancy. When a tenant leaves, the owner just plugs in the next available tenant and keeps the cash flow flowing.

The second strategy is the value-add model: An owner, typically a new one, spends additional cash to improve the cosmetics of the center, restructure the layout and upgrade any amenities. That costs money but, even when added to the acquisition price, can still be cheaper than buying undeveloped land and building from scratch.

Still, rents will go up. The best developers, Cole said, know how much to improve to attract new tenants who can and will pay the higher rents.

“From an outsider’s perspective driving around, they say, ‘Ugh, that shopping center is old and tired and has seen better days,’” Cole said. “There are a lot of real estate investors and brokers like me who look at it and say, ‘There is a lot of upside there.’ It exists. It is built. It’s a lot cheaper to fix it up and re-tenant it as opposed to build new.”

Creative Renting
Sage Partners of Rogers doesn’t do much work with older shopping centers in northwest Arkansas, but it does elsewhere, said Scott Audrain, CFO and executive vice president.

Audrain said creativity can help fill retail slots, especially in a surging economy that can make it expensive for local companies. Let’s face it: A national brand such as Chick-fil-A has deeper pockets than a local family restaurant.

“You have to get creative and find new types of tenants other than the traditional retailers,” Audrain said. “We’ve gone out and found government offices, for example, and put them in shopping centers. They are looking for lower rents than traditional office buildings might be able to offer.”

Audrain and Dearnley agreed that online shopping has made life harder for goods-oriented retailers. Also, while rents are dramatically different from market to market and city to city in northwest Arkansas, they are generally remaining stable.

“The market is still good in northwest Arkansas for retail space because it is a product of the economy,” Audrain said. “If you get to some of the less-fortunate markets, it’s very competitive for retail space. Rents are not rising in the retail sector at this point, as you’re trying to keep your retail centers full. We’re not seeing the same bump in retail centers as we’re seeing in commercial office buildings, for example.”

Rent is, of course, negotiable in retail — “Just because someone asked for $35 doesn’t mean they get it,” Dearnley said. Dearnley said a tenant at a property on Joyce Avenue asked for lower rent because the tenant wanted to do the necessary renovations himself.

“You could drive up and down College Avenue, and right across the street from the highest rents in the market are the most favorable rents in the market,” Cole said. “If the guy built the building in 1990, he is probably debt-free and making good money on some cheap rents.

“He is just worried about his income. He’d rather keep his occupancy than jack the rents up and worry about re-leasing space. It all comes down to what the owner is trying to accomplish.”

Cole and Audrain said that northwest Arkansas has a nice mix of high-end renters and mid-to-lower renters. Likewise, downtown Bentonville attracts a different clientele than east Fayetteville.

“There is so much tenant demand right now, and there is so little [vacancy], and there is such a barrier to entry to develop something new,” Cole said. “Tenants are starting to say, ‘This may not be a Class A center in a Class A location. I won’t have the sales. But the location is good enough and the rents are low enough … that I may be able to make the same amount of money.’”

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