Roby Brock: Welcome to the Northwest Arkansas Business Journal Report. I’m your host, Roby Brock.
What’s trending in Northwest Arkansas real estate circles? We’ll dive deeper into the latest numbers with Marshall Saviers, CEO of Cushman & Wakefield | Sage Partners, on today’s Northwest Arkansas Business Journal Report.
Joining me now, Marshall Saviers. He is the CEO and principal at Cushman & Wakefield | Sage Partners. I always want to make sure I put the slash in there at the right—
Marshall Saviers: That’s right. Yeah. Always great talking and look forward to speaking again today.
Brock: All right. Overall I’m going to give a summary, and then we’re going to get into some specific questions here. Office vacancies remain below 5%. Retail growth continuing to outperform national averages. Industrial development seeing some uptick there. And let’s begin with office vacancy rates at 4.5% in the third quarter. That is well below the national rate of 20.7%—I mean, well below the national.
Saviers: Well. Well below. That’s right.
Brock: What type of demand are you seeing?
Saviers: Varied. The easy answer is the Walmart vendor phenomenon that happens in Rogers and Bentonville, right? But that’s just part of the story. We highlighted in our market report this quarter the startup culture just continuing to thrive up here. We have a rate of 37% of all businesses in Northwest Arkansas are startups. So when you think about that, that’s 2% higher than the national average. That just creates a need for office space. So it creates a really vibrant, healthy, growing office space community.
Brock: That’s awesome. All right. Your retail sector continues to show resilience. There’s a vacancy of around 3.5%—a little under 3.5%—rent growth of 2.4% year over year. My question to you on all of this is, is that healthy? Too healthy?
Saviers: That’s right. We need more space. So that sounds like a real estate guy, doesn’t it? But it’s the truth. We had 140,000 feet absorbed last quarter and very little supply delivered. So we need more retail space. We’ve talked about this in the past. It’s so hard to build smaller retail centers. But those neighborhood retail centers are what’s really thriving—where you go get your sandwich, where you go to get your dry cleaning, etc. Those centers are in high demand and for good reason, because people, even with the online phenomenon, still want to go shop at their neighborhood center. So those are great, but they’re really hard to build because they’re smaller. So we need more and more of those built, and we just need more space in general.
Brock: You’re talking lifestyle. You’re talking experience when you’re talking about some of the retail space and the size that you’re talking about there. I just don’t understand the economics of all that—you do—and I’m just looking for 100,000-foot elevation kind of speech. How does it work to make it more attractive for someone to do some of those smaller retail projects?
Saviers: Well, you’ve got to figure out a way to get the cost down and/or retrofit. What we’re seeing here now is people are trying to retrofit older buildings here, right? Because 20, 30 years ago there were no buildings here. So we don’t have a lot of legacy supply. They’re having to get creative and find an old warehouse or something else that is functionally obsolete at this point and turn it into some sort of retail experience, as you say—whether that be a brewery, you know, those are obviously in high demand, a restaurant, something that’s experiential, especially in the Fayetteville area where you’ve got some legacy supply there. We’re seeing more and more of that and expect that to continue to grow.
Brock: Tell me what you’re seeing on the industrial activity front. This is something that we talked about the last time we were together.
Saviers: Yeah, it’s upticked a bit as far as space available in the market. And we’ve actually got a couple new buildings that will be coming online either late this quarter or early next quarter, each about 200,000 feet. So that number, which is about 7%—which is the highest in three years—will probably go up a bit. That’s not all the story, because if you look at smaller warehouse spaces, 15,000 to 20,000 feet, those are still in really high demand, especially if it’s on I-49, and rents continue to increase as a function of construction costs and demand. So rents are going up 2% to 3% a year. So that’s good. We’re still seeing healthiness there, but some of the bigger spaces are taking longer to lease.
Brock: It sounds to me like it’s a good time to be in the real estate sector in Northwest Arkansas.
Saviers: Always. Yeah. It has been for quite a while now, and certainly I’m right place, right time here. It makes me look smarter every day.
Brock: Let me ask another question here. Multifamily vacancies. And through the lens of housing, we’re nowhere near accomplishing what we need to accomplish in terms of meeting demand for affordable housing in the region. This is a long, long, long—no doubt—strategy here. But tell me, when you look at the numbers for the third quarter here, are we making progress?
Saviers: Right, no doubt. Yes and no. Our vacancy ticked up. It’s almost 10%, which is the highest of any of the sectors we’ve talked about. Most of those are Class A buildings that are being delivered, whether that be in Rogers and Bentonville specifically. So that’s not really helping the affordability crisis that’s happening here and in other growth places across the country. We need more workforce housing delivered and affordable housing delivered. It’s just hard to make those pencil, which is why you’re seeing Class A deliveries outpace those workforce deliveries.”
Brock: Do you have any doubt that those Class A spaces will get filled?
Saviers: They’ll get filled over time, because there’s not as many deliveries on the back end of these. These are the very end of what I call the free-money phase from three, four years ago where interest rates were cheap so that you could get a great construction loan, get it built. That’s not happening anymore. Plus, developers are being savvy and seeing that there’s an uptick in vacancy. So they’re going to wait, let this fill up, then go on to the next deal. But as far as how do we fix the workforce and affordable crisis that we’ve got here and in other places: That’s going to be a multi-pronged approach with nonprofits being involved, benefactors being involved and then developers as well.
Brock: Lastly for you—this is your report focuses specifically on Northwest Arkansas—but you see a lot of data that points to what’s happening in other areas of the state and in the region as well. Give me some sort of microcosm for what’s happening in Northwest Arkansas in the context of what’s happening, say, in Central Arkansas.
Saviers: Sure, yeah. Retail is probably the biggest parallel. Retail is still really low as far as vacancy goes in Central Arkansas as well, and that’s true across the country because of the lack of construction starts that’s happened in that area. Office in Central Arkansas mirrors the rest of the country—it’s going to be around that 20% mark. So that’s just an anomaly of Northwest Arkansas that nowhere else in the country has and hard to compete with. Similar on the industrial side as well. I think the last I saw, Central Arkansas was actually a little bit less on the industrial side as far as vacancy goes, mainly because it’s more of a traditional distribution hub. It’s got the river, it’s got multiple highways, more rail. Industrial is going to be more robust in Central Arkansas for the long term than it is in Northwest Arkansas. And on the multifamily side, I’d say it’s pretty similar, except that there hasn’t been as much supply delivered in Central Arkansas, and that won’t be happening. So you have less peaks and valleys on the multifamily side in Central Arkansas versus Northwest Arkansas.
Brock: I said ‘lastly,’ but I’ve got one more last question for you here. The Feds have reduced the fed funds rate. Could translate to some lower interest rates—not hugely lower—but we do seem to be on that trajectory now. Tell me how that’s going to change the potential for some projects to move forward.
Saviers: Yeah, it does unlock some projects that have been sitting on the sidelines for a while. The projects that have been happening here—actually, we had $290 million in commercial permits in Northwest Arkansas in the first half of this year, which was a significant increase, almost a 50% increase from the second half of last year—but those are mostly just bigger projects. Those are projects that are high in scale. And this is mostly non-Walmart. When you hear those numbers, you think that’s the Walmart campus. Most of that’s non-Walmart related. But they are bigger projects. So these interest rates going down will help some of these smaller projects pencil.
Brock: That’s Marshall Saviers, CEO of Cushman & Wakefield | Sage Partners. You can catch more of our conversation at NWABusinessJournal.com. That’s all for this edition of the Northwest Arkansas Business Journal Report. Until next time, take care.
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