Central Arkansas Office Vacancies Hold Steady Amid National Surge

(Sarah Bingham)

As the office vacancy rate hits record highs nationwide, vacancies in central Arkansas are a little over half as high. And property managers aren’t sweating — yet.

In the second quarter, the central Arkansas office vacancy rate rose to 11.3%, up from 10.1% in the first quarter, according to the Colliers Arkansas market report for the second quarter.

The 11.3% rate is “still probably a little high for our market,” said Greg Joslin, senior broker for Colliers Arkansas. But the rate doesn’t make him “overly nervous,” he said.

Joslin expects the rate to fall going into 2026 and keep falling through 2027.

“I don’t think it’s going to happen with a snap of the fingers,” he said. “It’s going to take a little bit of time.”

Meanwhile, outside of Arkansas, the news is grim. The U.S. office vacancy rate reached another all-time high in the second quarter at 20.7%, according to Nick Villa, an economist at Moody’s, who wrote about it in a July 8 post on its website.

“As one would expect, vacancy rates have slowly inched higher from weaker tenant demand and new supply entering the market, while the long-term nature of most office leases has helped delay the full impact on net operating income,” Villa wrote.

But because Little Rock is a smaller market and not on a coast, “we always follow behind the bigger markets and in their trends,” Joslin said. “We don’t always see the big swings one way or the other,” he said.

Hank Kelley, CEO of Kelley Commercial Partners of Little Rock, told Arkansas Business that the “expansion market in Little Rock is better today than it’s been since COVID, meaning existing tenants are saying to us, we’re growing a little bit.”

An oversupply of office space does exist in Little Rock, he said. “But there is no new office space being built, and hasn’t been for five years, unless it’s a user that wants to go put their identity into a building,” Kelley said.

A major building does appear to be coming to central Arkansas. In April, the Conway City Council approved a memorandum of understanding with an unnamed Fortune 100 company to build a $1 billion, 300,000-SF data center. The building is expected to include significant office space.

Office Vacancy Rates Central Arkansas

(Source: Colliers Arkansas Research)

Joslin said one of the biggest challenges facing property managers concerns the return-to-office push after the pandemic cleared out office towers. In the third quarter of 2020, the office vacancy rate in central Arkansas was 20.3%.

Tenants are trying to determine how much square footage they will need, he said.

“We are seeing consistent messaging from the companies that are leasing from us that people are already in the return-to-the-office mode,” Kelley said. “They may not be 40 hours a week sitting behind a desk in an office building, but there’s much more attendance in the buildings than there was even a year ago, and much, much more than two years ago.”

AG Move

One of the reasons for the increase in office vacancy rates in central Arkansas in the second quarter was the move in June by the Arkansas attorney general’s office from the Tower Building at 323 Center St. in downtown Little Rock, where it had occupied nine floors and about 100,000 SF.

The AG’s office moved into the Boyle Building at Capitol Avenue and Main Street after a $35 million renovation handled by project developer Moses Tucker Partners of Little Rock. The 91,000-SF building was renamed the Bob R. Brooks Jr. Justice Building. The attorney general’s office will lease its space for a minimum of five years to allow Moses Tucker Partners to deploy historic tax credits. After five years, the state will have the option to acquire the property for between $35 million and $39 million.

Rebecca Catlett Cate, a partner at the Tower Building, said it was “a big shock” when the attorney general’s office left the 18-story building. “The Tower Building has pretty much been full through the years,” she said.

But she’s optimistic that she can lease the now-vacant space. Two of the floors, which are about 9,300 SF each, recently have been leased, she said, “and a third one we’re working on very seriously right now and hope to get that executed pretty soon.”

Cate said the partners are considering converting two or three of the upper floors into multifamily space. “People have asked us, would you consider leasing a floor or two for multifamily, and so that’s something we’re kind of tossing back and forth,” she said.

Kelley said the renovated Bob R. Brooks Jr. Justice Building is expected to improve downtown Little Rock. “Having an owner that cares as much about the surroundings as the attorney general does is a good thing,” Kelley said.

Still, downtown Little Rock still has a lot of office vacancies, Joslin said. The Colliers’ report said that in the second quarter total lease inventory of office space in downtown Little Rock totaled 1.1 million SF, the most of any submarket in central Arkansas.

“There’s a lot of cannibalization of one tenant from one property to another,” he said. “That’s … not a new news item. It’s been there for … many years.”

Shorter Rental Terms

Office tenants these days are looking for shorter rental terms, Joslin said. He said there’s been “a lot of requests” for two- or three-year leases, instead of the traditional five years.

Some tenants want the shorter leases because they are uncertain about the amount of the space they might need, Joslin said.

Kelley said that the companies that are looking for more office space are smaller firms with less than 5,000 SF.  “We’re not seeing this much expansion in the larger users relative to Little Rock’s market,” he said.

The industries that are expanding are in the financial services and legal sectors, he said.

Joslin said that he’s noticed that engineering firms and medical providers are looking to add space. “Everybody continues to need to go see the doctor,” he said.

The University of Arkansas for Medical Sciences continues to “be a pretty good economic driver in our market,” Joslin said. In the second quarter, UAMS leased 34,571 SF at the Premier Medical Plaza in west Little Rock, according to the Colliers’ report.

An interest rate cut by the Federal Reserve could help improve office vacancy rates, Joslin said. “It’ll make borrowing more attractive for landlords who need to potentially borrow money to throw into tenant improvements, to attract tenants, to reinvest in properties, to acquire properties,” he said.

“But with any downturn in any real estate market up or down, there’s always opportunity, always. And many people argue that it’s in down times when savvy investors make more money.”