The Northwest Arkansas commercial real estate market showed continued signs of strength in the second half of 2023 with vacancy rates holding steady even as new properties became available, the Skyline report indicated.
The overall commercial vacancy rate in Benton and Washington counties stood at 6.4% for the last six months of the year, unchanged from the first half of 2023. The vacancy rate stayed steady for the period despite 623,288 square feet of new commercial development entering the market.
During the second half of 2023, the value of all building permits not associated with Bentonville-based Walmart Stores Inc.'s new headquarters campus, stood at $287.1 million, a new record. Only $500,000 in permits for the period were attributed to the retail giant during the second half of the year. That compares to the first six months of 2023 where the total value of building permits stood at $193.9 million with $168.5 million of that attributed to Walmart.
Mervin Jebaraj, director of the Center for Business and Economic Research at the Sam M. Walton College of Business at the University of Arkansas, said in an interview Tuesday the Northwest Arkansas commercial market remained balanced in terms of supply and demand, all while the rest of then nation is seeing vacancy rates on the rise. He said while Northwest Arkansas continues to add new commercial real estate, it is being leased quickly as it enters the market.
Jebaraj said the strong second half of 2023 was attributed to two major factors -- a long overdue shift to quality Type A office space and the willingness for folks in Northwest Arkansas to go into the office to work more frequently.
Jebaraj said Walmart's move to build its new headquarters campus in Bentonville has sparked an interest in similar quality office locations for those who do business with the retail giant, spurring demand and growth in the high end office arena. Prior to that, businesses had been willing to make due in less ritzy digs.
"They're moving into nicer spaces," he said.
In Northwest Arkansas, Jebaraj added, commute times still remain low, and as a result, workers are far more willing to visit the office more often compared to other metropolitan areas where workers may have extensive commutes. That willingness sparks demand for office space when compared to regions with people who are less willing to work at the office.
Steve Lane, managing director of the Northwest Arkansas office of Colliers International, a commercial real estate brokerage professional services and investment management company, agreed saying in Northwest Arkansas we're seeing a "flight to quality" where tenants are shifting from larger Class B office space to smaller Class A.
Lane added the overall commercial market in the region is tight with costs to build commercial property, from land prices, to construction costs and interest rates going up. As a result rents are on the rise as well.
"You don't expect to come to Northwest Arkansas and pay Dallas rents but its approaching that," he said.
According to the Commercial Market Insights December report from the National Association of Realtors Research Group, for 2023 nationally the office sector was the most significantly affected segment with the largest losses for the year. The report noted the sector saw vacancy rates that reached nearly 14%, with leasing activity dropping and a substantial surplus of office space. The report predicted the office sector would face a challenging 2024, with demand for office space remaining subdued.
In Northwest Arkansas, the office sub-market saw 203,815 square feet added in the second half of 2023, with a vacancy rate of 8.8%, up slightly from 8.4% year over year but unchanged from the first half of 2023. Strong leasing in the Type A office sector helped buoy the results.
Jebaraj said going forward the region should see continued strength in the office segment noting the area's limited resources for construction projects became more readily available in the second half of the year as construction at Walmart's new headquarters campus slowed.
"You kind of had to wait your turn," he explained.
Northwest Arkansas' retail sub-market vacancy rate remained unchanged at 7.9% for second half of the year even as 10,898 square feet of leaseable space was added to the market.
The vacancy rate for the warehouse sub-sector was 3.2% for the second half of the year, down from 3.6% for the first half of 2023, even though 262,415 square feet were added. A total of 575,000 square feet was added over all of 2023, with nearly all of that built in Springdale.
In an interview on Tuesday, Kelly Carlson, senior vice president and loan manager with Arvest Bank said in a statement the commercial real estate segment in the region was healthy and robust and he predicted continued growth in the sector. He said the bank is actively underwriting for construction projects for office space, including build to suit and even speculative projects.
He said quality office space is a perk and one that companies doing business in Northwest Arkansas are willing to offer to their workers to lure and keep quality talent.
The Skyline Report examines the residential, commercial and multifamily real estate market in Benton and Washington counties. Researchers at the University of Arkansas' Center for Business and Economic Research compile data for the report. Arvest Bank first sponsored the Skyline Report in 2005.