Experts think the commercial real estate market in northwest Arkansas is returning to normal; those who make their living in the industry agree. And they like the new normal.
Vacancy rates for commercial space dropped nearly 2 percent in the first half of 2014 compared with the second half of 2013, according to Arvest Bank’s Skyline Report, which was released in early September. The report, which covers Benton and Washington counties, was put together by researchers with the Center for Business & Economic Research at the University of Arkansas’ Walton College.
The report also said that commercial building permits had more than doubled from $35.3 million in the first half of 2013 to $78.2 million in the first six months of this year. That is a sharp difference compared with the dearth of building that occurred — or didn’t occur — in the aftermath of the recession a few years ago.
“Building permit activity is back,” said Kathy Deck, the director of the Center for Business & Economic Research. “We see a number of new projects throughout the region.”
After the recession “it felt like we were never going to build again. That’s not where we are. We are in a normal place from a building permit perspective. It held back new construction for a long time.”
Deck said vacancies are still a bit of a sticking point. The commercial sector — which includes office and retail buildings and warehouses — saw more than 700,000 SF of space “absorbed” in the first half of the year while more than 56,000 SF of new space was created. The overall vacancy rate dropped from 13.6 percent to 11.7 percent.
Deck said part of the problem is that some companies look for a specific type of building to move into so some spaces get rejected because of the lack of modern conveniences or aesthetics.
“There remains a lot of unused space,” Deck said. “There has been a lot of improvements, but there is a lot of space not making money for the people who own it. It’s either the wrong space or in the wrong place.
“There are unmet needs that people are trying to meet by building new.”
Clinton Bennett, a managing broker with CBRE Northwest Arkansas, said he is optimistic about the region’s commercial real estate environment. He said vacancy may stick a bit longer but the future is promising.
“We’re going to see a little tick up in vacancy, but I expect that to be brief,” Bennett said. “I predict 12 months of positive absorption. We’ve seen a fair amount of demand in office space and even more demand in retail. We’ve seen properties that have been vacant for five years getting multiple offers made on them.”
Bennett said that while many companies may overlook some existing structures because of particular needs, that means smaller businesses can find some good deals. It also means more construction should be coming.
“I do think that the international and national companies that do business in northwest Arkansas have been making investments in people and real estate, and the local and regional businesses are starting to participate in that same trend,” Bennett said. “There is a fairly solid demand for new buildings in all segments. It’s not perfect, but there is a significant amount of demand. It is more than what we’ve been accustomed to the last few years.”
It’s a welcome change for Ramsay Ball, a commercial real estate broker with the Bentonville office of Colliers International. Ball doesn’t think the turnaround in the market is another bubble but is instead something that appears sustainable and healthy.
“We’re seeing a pretty good runway on it, quite frankly,” Ball said. “There’s nothing that gives you any sense of worry about the market. We’re seeing strong demand from tenants. It looks like a fun time to be in the real estate business, again, after a brutal time to be in real estate.”
Ball doesn’t see any overbuilding happening in any of the three main commercial segments. Colliers considers multifamily buildings — such as apartment complexes for University of Arkansas students — a commercial category, and Ball thinks that is the only area where overbuilding may be happening.
It’s not a major concern, though. As demand improves, some of the long-vacant spaces are being scooped up.
“The market is very much improved,” Ball said. “There certainly has been a turnaround. We’re seeing a pull rather than a push, and by pull I mean demand.
“We’re seeing a lot of demand, pent-up demand to some degree. Some of the [overbuilt] stock is coming out of that market.”
Neither Bennett nor Ball seemed concerned about market optimism turning into a lemmings-into-the-sea scenario. Ball said financing protocols are much improved, and developers and builders have said in the past months that few major projects are started without cash — and tenants — in hand.
“The standards for financing are tighter than during the boom of the boom,” Deck said. “There is a lot less risk.”
Ball said those who lived and survived the down times have good memories — and it wasn’t that long ago anyway.
“I think the recession and the real estate bubble were so recent that they are still on everybody’s mind,” Ball said. “By nature, it has to be more rational. Underwriters are using better data and asking more hard questions. It becomes a lot more rational with more prudent decisions.
“We work hard to get commitments to pre-lease. We’re not building spec on office buildings and retail.”
Deck said vacancy rates for the commercial segments could be better, of course, but are still in a good range. “We saw vacancy rates improve or remain stable across the board,” she said. “We’re in the healthy range. Nothing screams it’s out of whack.”
Bennett said there is an issue with some non-modern buildings not being desired by major companies looking to move or expand into the northwest Arkansas market. That can also lead to some benefits, though.
A major company looking for a specific building will find it more convenient to just have one built. And that could leave the leftovers available for smaller local companies.
“The expectation from modern tenants is they want big, tall, open spaces,” Bennett said. “There is such a heightened sensitivity to how people operate. When it is cheap enough, people decide they can deal with the inefficiency. That type of building — local and regional companies have more flexibility in how they operate. [Older] buildings will become appealing options to them. They can lease space for significantly less money.”
With the economy continuing to improve, Bennett takes it as a good sign that some companies are deciding to build. It stands to reason that if there were unsure conditions, companies would hunker down and not overly invest in new offices or warehouses.
“It’s an indicator of confidence,” Deck said.
Ball said that in the real estate business, most concerns revolve around big economic issues that aren’t really controllable on the regional level anyway.
“Northwest Arkansas has a very strong growth economy,” Ball said. “This is a healthy real estate market. We monitor most of the activities and projects in the pipeline. There’s not anything to cause alarm. We see the market moving up.
“If you have a general fear in the real estate market, it’s associated with economic activity like a recession. That’s a macro issue on the global level. From the nuts and bolts, the intermediate future looks good.”