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Rethinking Office Space in New Era of Hybrid WorkLock Icon

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Office Trends
Little Rock has some soft spots in the office space market, and one of them is downtown. Employees like the easy parking of more suburban work spaces, and some of Jeff Yates’ clients “were really tired of the panhandling” downtown, he said. ( Sarah Bingham)

The landmark Bank of America Plaza in downtown Little Rock sits about half empty, but developer Keith Richardson isn’t fretting.

Since acquiring the 24-story skyscraper and an adjoining seven-story parking deck for $8 million in June, Richardson has been busy with long-deferred maintenance and repairs. Those have cost him about $2 million so far, and he plans to spend another $1 million to $1.5 million on the property in the next five months.

“Then we’ll start actively trying to lease the space,” he said. The building will be rebranded 200 West, the new name marking its spot on West Capitol Avenue. 

Richardson’s renovation comes at a time of uncertainty in the office space market, with hybrid work schedules becoming normal for many businesses.

Real estate experts are also examining the best possible uses for office buildings in an evolving environment, with many questioning whether the use of central offices will ever return to pre-pandemic levels.

Central Arkansas’ office market is performing slightly better than other areas of the country. The central Arkansas market started 2022 with a 14.1% vacancy rate and ended the year at 13.2%, according to the central Arkansas market report from Colliers’ Little Rock office.

The national vacancy rate was 15.7% at the end of the year, according to the Toronto firm, which offers real estate and investment advice. 

The 13% rate is “pretty darn good,” said Jeff Yates, managing partner at ARK Commercial & Investment Real Estate of Little Rock.

Some areas of Little Rock have a strong demand for office space.

“If you want to try to find office space in the middle of Little Rock, it’s a really tight market,” Yates said. 

But the market also has some soft spots, including downtown. 

Home Work Nearly Triples

“The Covid-19 pandemic caused a major shift toward working from home,” said a report released last week by Metroplan of Little Rock, “Little Rock Regional Economy in 2023.” Metroplan is the planning agency for central Arkansas.

The report said the region’s share of home workers nearly tripled from 2019 to 2021, and 11% of local employees now work from home. 

“This change suggests long-lasting implications for Central Arkansas districts hosting large amounts of office space, especially downtown Little Rock,” the report said. 

But Richardson has already had success attracting tenants.

Landmark CPA, which has offices in Arkansas, Alabama and Arizona, has leased the 17th floor, and that space is being renovated, he said. And another tenant has a full floor pending. 

“It’s amazing,” Richardson said. “We’ve not been marketing out there, but people are contacting us, which is a good thing.”

Defaults Looming?

Mark Bingman, vice president and executive broker at the RPM Group of Little Rock, a full-service real estate firm, said CEOs are wondering whether they need as much office space as they had before the pandemic, which could lead to office landlord defaults coming to central Arkasas.

“I think it’s inevitable, when you have less demand for space,” Bingman said. 

Nationwide, office delinquency rates are expected to increase as Class B and older buildings continue to struggle with demand, said Stephen Buschbom, research director of Trepp of New York, a provider of data, insights and technology services to the structured finance, commercial real estate and banking markets. 

“The mounting office loan distress, however, isn’t exactly comparable to the housing market spillover in 2008,” Buschbom said in an email to Arkansas Business.

“At this point, it seems like the office market will play out similar to what we’ve seen with regional malls,” he wrote.

Office Trends
Jeff Yates of ARK Commercial & Investment Real Estate says a 13% office vacancy rate is “pretty darn good.” ( Jason Burt)

Buschbom said it will take years for the problem properties to work through the system, especially since many loans may not default until they reach maturity if the underlying properties still have positive cash flow.

A Trepp’s research note in February said that the commercial mortgage-backed securities delinquency rate rose 25 basis points to 1.83% in January from the previous month for office properties in the United States.

In November the delinquency rate was 1.7% for office properties. 

What Tenants Want

RPM’s Bingman said it’s a tenant’s market now and will be for the rest of the year.

He expects to see discounted rents and landlords offering amenities such as free parking, a fitness center or day care to lure potential tenants.

Trepp’s Buschbom said some tenants want a collaborative, welcoming environment that has been described as a “clubhouse feel.”

“In other words, returning to the simple cubical life is meeting perhaps some long overdue resistance,” Buschbom said.

“Workers became accustomed to the creature comforts associated with remote work, so amenities have been an important tool for motivating people to return to the office willingly.”

Amenities are becoming more important to tenants, said John Martin, principal and vice president of brokerage at Moses Tucker Partners of Little Rock.

In addition to building improvements such as new flooring, lights and paint, tenants also want the newest electronic equipment in the office. The owners who provide those amenities and are responsive to tenants “are the ones that are having success,” Martin said. 

Slight Rent Decreases

Colliers’ report said that office rents in most central Arkansas submarkets saw “very slight decreases this past quarter, but remained largely stable across all central Arkansas submarkets.”

Colliers started collecting office and retail vacancy rates in central Arkansas in early 2020. It reported a high of a 20.3% office vacancy rate in the third quarter of 2020, about six months after COVID-19 was detected in Arkansas. 

Yates said that one of his clients recently moved from downtown to west Little Rock because of several factors, including improved parking and the ease of getting to the office. And “they were really tired of the panhandling,” he said. 

Office Trends
Notes: Central Arkansas includes Conway, Benton, Bryant, Jacksonville, Little Rock, Maumelle, North Little Rock and Sherwood. ( Source: Colliers Central Arkansas Market Report and Colliers of Little Rock)

Other companies want to be closer to the suburbs to offer shorter commutes and easier parking for their employees.

“The suburban office, I think, is going to become more attractive than it has in the past, and simply because you’re already going to be working maybe three to four days a week in the office,” Bingman said.

“And you know, the other times you’re working from home and being remote.”

Office workers also want to be close to places that offer food and drinks. 

Richardson, the developer, said he plans to have a restaurant on the first floor of the building. The space has “big, open 20-foot ceilings,” he said. “I just need to find the right restaurant that wants to move into the building with us.” 

Four-Day Workweek?

Still, the question remains about whether employees will be in the office five days a week. 

“If hybrid work results in higher productivity, better employee retention, and in some cases lower overhead cost for companies, I think that it’s highly unlikely office usage rates will return to pre-pandemic levels,” Buschbom said.

“Especially when you consider that there’s been a lot of talk about a four-day workweek, at least for some industries, and that Europe and Asia, who lead the U.S. in terms of back-to-office rates, have usage rates that are still well below pre-pandemic levels,” Buschbom said.

Meanwhile, it remains a tough time for Little Rock’s downtown office buildings, said Yates, of ARK Commercial & Investment Real Estate.

With the high vacancy rates for the downtown skyscrapers, the question becomes “is the highest and best use of some of those buildings office anymore?” Yates said.

He said residential or commercial might be the better fit. 

Richardson said he’s not ready to add residential to his building, but “that is obviously an option,” he said. “But right now we’re really trying to fill it back up as office use. It’s a little bit more challenging than it has been in years past, but we think we’ll get there.”

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