8W Center, under construction in Bentonville.
The six-story office building Troy Link is building across from Wal-Mart Stores Inc. headquarters in Bentonville is expected to be completed later this year.
Link, who owns Link Snacks Inc. of Minneapolis with his father, Jack, has kept a close eye on the construction of the $21 million 8W Center. The new office tower will have retail space on the ground floor, three floors of parking and two floors of office space. David Erstine of CBRE in Fayetteville said that type of office construction is growing in northwest Arkansas.
“Most of the focus on new construction appears to be in that Class A office sector,” Erstine said. “Most of what we’re seeing there is multi-story buildings being constructed in an effort to attract larger tenants. A lot of the construction activity over the next 12-18 months appears as though it will be in line with that quality of a building. We haven’t seen any buildings being presented that will approach that 10-story mark.”
By larger tenants, Erstine said he was referring to companies that require space in the range of 10,000 to 15,000 SF. That is a change from a decade ago, Erstine said, when companies wanted about half that amount of space.
“Historically, the tenant sizes have not been what they are today,” Erstine said. “It is a little bit of a challenge finding existing suitable space, so most of the existing space on the market will require a major interior renovation to be suitable for that next move-in.”
Erstine said the office market overall is healthy and vibrant, but there is an oversupply in the smaller office space market, specifically in Bentonville. If you want to find 2,000 or so SF, you will have a bushel of choices to choose from.
But that seems to be only in Bentonville, Erstine said. Finding suitable smaller offices — for medical uses and the like — is a challenge in Springdale, Fayetteville and the popular Pinnacle Hills area in Rogers.
“Right now it’s an extremely healthy market for most of the office market,” Erstine said. “When you peel back the layers, you’ve got an oversupply of 2-3,000SF spaces in Bentonville. Those are easy to find and identify for availability.”
Erstine said rents and lease agreements are also making new construction feasible. Rent is inching up and tenants are signing longer-term leases, so developers and property owners are more confident of making an investment in building new, especially when construction costs also rising.
“Tenants have still stepped forward and struck rental deals on these Class A spaces that keep inching up on that per SF basis more and more,” Erstine said. “That is allowing developers to underwrite some of these Class A projects. They know in this market they’ll be able to achieve a rental threshold that will justify a project.”
That is especially true in the Wal-Mart supplier community in Bentonville. Erstine said companies are signing long-term leases that were rare in the past.
“Past experience would say a five-year lease term was the maximum lease terms you would see in most situations; Obviously not all situations, just looking at the biggest block of information,” Erstine said. “Now, we’re seeing seven-year lease terms prevail in the market and in some cases we’re seeing tenants agree to 10-year lease terms. That has not been the ordinary thing to see in this market.”
Erstine said he believes the long-term leases are coming from long-term companies in the area. Not necessarily local companies, but companies that have been doing business in northwest Arkansas for decades and are settling in for another long run.
“I think most of these deals are not move-ins,” Erstine said. “They’re companies that are not based in northwest Arkansas, but they’re here for a specific line of business. Now that they’ve been here for up to 25 years in some cases, they’re more comfortable with northwest Arkansas and more comfortable with that business relationship they’re here to serve.”
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