Northwest Arkansas' commercial real estate market is showing continued signs of strength in the second half of 2023, with vacancy rates remaining stable even as new properties are sold, according to a Skyline report.
The overall commercial vacancy rate in Benton and Washington counties was 6.4% for the second half of the year, unchanged from the first half of 2023. Vacancy rates remained stable during the period despite 623,288 square feet of new commercial development entering the market.
In the second half of 2023, the value of all building permits not related to Bentonville-based Walmart Stores Inc.'s new headquarters campus reached a new record of $287.1 million. Of the permits in that period, only $500,000 was attributable to the retail giant in the second half of the year. By comparison, building permits in the first half of 2023 totaled $193.9 million, of which $168.5 million was attributable to Walmart.
Marvin Jebaraj, director of the Center for Business and Economic Research at the University of Arkansas' Sam M. Walton College of Business, said in an interview Tuesday that Northwest Arkansas' commercial market is balanced in terms of supply and demand, while vacancy rates are rising in other parts of the country. He said new commercial properties continue to be added in Northwest Arkansas, but they are being leased quickly when they hit the market.
Jebaraj said the strength in the second half of 2023 is due to two main factors: a long-awaited shift toward quality Type-A office space and Northwest Arkansans' willingness to come into the office to work more frequently.
Jebaraj said Walmart's move to build a new headquarters campus in Bentonville is stimulating demand and growth for luxury offices by sparking interest in similar quality office locations among companies it does business with, who previously made do with less-luxurious space.
“They're moving on to better spaces,” he said.
Jebaraj added that commute times remain short in Northwest Arkansas, and as a result, workers are much more willing to travel to the office frequently than in other metropolitan areas with longer commutes. This willingness is stimulating demand for office space compared to areas where people are less willing to work in an office.
Steve Lane, managing director of the Northwest Arkansas office of Colliers International, a commercial real estate brokerage professional services and investment management firm, agreed, saying Northwest Arkansas is seeing a “flight to quality,” with tenants moving out of larger Class B office space into smaller Class A space.
Lane added that the overall commercial market in the region is tight, and the costs of building commercial property, from land prices to construction costs to interest rates, are rising. As a result, rents are also rising.
“You wouldn't think you'd come to Northwest Arkansas and pay Dallas rent, but we're getting close,” he said.
Nationwide, the office sector was the hardest hit in 2023, suffering the largest annual losses, according to a December Commercial Market Insights report from the National Association of Realtors Research Group. The report noted that the sector's vacancy rate is nearly 14%, leasing activity has declined and there is a significant surplus of office space. The report predicts that the office sector will face a tougher time in 2024 as demand for office space remains sluggish.
In Northwest Arkansas, the office submarket added 203,815 square feet 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 boosted performance.
Jebaraj noted that limited resources for construction projects in the region became more readily available later this year as construction on Walmart's new headquarters campus slowed, and that the region's office sector should remain strong going forward.
“I had to wait my turn,” he explained.
The vacancy rate in the Northwest Arkansas retail submarket remained unchanged at 7.9% for the second half of the year, despite 10,898 square feet of rentable space being added to the market.
Vacancy rates in the warehouse subsector fell from 3.6% in the first half of 2023 to 3.2% in the second half of the year, despite the addition of 262,415 square feet. A total of 575,000 square feet were added throughout 2023, nearly all of which was constructed in Springdale.
Kelly Carlson, senior vice president and director of lending at Arvest Bank, said in an interview Tuesday in a statement that the region's commercial real estate sector is healthy and strong and that the sector is expected to continue to grow. The bank is actively underwriting construction projects for office space, including built-to-suit and speculative projects, he said.
He said quality office space is a perk and something companies doing business in Northwest Arkansas are happy to offer to their employees in order to attract and retain top talent.
The Skyline Report examines the residential, commercial and multifamily real estate markets 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.