Tied to opportunity : Report indicates new construction continues to slow in some areas
Posted on Wednesday, August 13, 2008
NORTHWEST ARKANSAS — Oversupply.
When it comes to development in northwest Arkansas — commercial, multifamily or single-family — that word has figured into quite a few conversations. The majority of markets across the country have echoed much of the same.
On Tuesday, Arvest Bank released second-quarter commercial and multifamily real-estate statistics as part of the ongoing Skyline Report, a quarterly analysis of real-estate markets in Benton and Washington counties. Those looking to get their hands on single-family market statistics will have to wait a couple of weeks. But there is at least an indication that the level of oversupply in commercial office space is beginning to even out across the two-county area.
The commercial market reported the lowest level of new building permits since the Skyline Report began tracking data in the second quarter of 2004. The Skyline Report indicates $ 13 million in commercial building permits were issued over the past 13 weeks, down 79. 1 percent from the $ 62 million reported during the second quarter of 2007. In addition, the office submarket showed significant gains in absorption over the past year, rising from a negative net absorption of 270, 184 square feet to a positive absorption of 21, 854 square feet this quarter.
Vacancy rates held steady at just more than 19 percent across the two-county area during the period. And while that is far from healthy, according to economists such as Kathy Deck, who oversees research for the Skyline Report with the University of Arkansas’ Sam Walton College of Business, it’s a step in the right direction.
“ The increases we’ve been seeing in vacant commercial space has slowed significantly, ” Deck said. “ We appear to have finally started to level off in that area. This market is being given space, willingly or not. There’s a little bit of breathing room. ”
Deck’s “ willingly or not” comment refers to the fact many lending institutions are simply not providing loans for commercial projects unless the space had been pre-leased. One Benton County-based commercial developer said his past three office developments are fully leased, but he cannot convince a lender to support another complex until more of the overall inventory on the market has been absorbed.
In a release issued with the Skyline Report on Tuesday, Mark Ryan, executive vice president and loan manager at the Arvest Bank branch office in Rogers, said, “ This report shows that although building permits are down, the positive absorption reflects movement in the right direction. We still have relatively healthy demand in northwest Arkansas, and the opportunity exists for developers to have profitable projects. In the last year, 1, 800 jobs were created in our area. ”
At what rate absorption occurs in the areas of commercial, multifamily and single-family real estate will depend on whether the number of new jobs being created grows, Deck said.
“ The one thing we do know is that supply will eventually take care of itself if the opportunities are there, ” Deck said. “ For that to happen, we have to see a resurgence in job growth. That’s the key to this whole thing — commercial or residential. ”
While northwest Arkansas made national headlines for growing new job opportunities at a rate of up to 6 percent annually during the early part of the decade, she said that number has since slipped to about 1 percent.
“ Businesses are in a very cautious mode right now because of the tough economic climate, ” Deck said. “ It makes sense, but consolidation and cost cutting isn’t conducive to creating new jobs, which is what will help this market recover. One percent job growth is about on average with the rest of the country. ”
So Deck and fellow economists have their eyes on a couple of key areas they believe will determine just how strong and successfully the market turns around.
“ The question that has to be answered is, ‘ What’s going to fuel the next boom ?’” Deck said. “ The core growth in northwest Arkansas centered around its core companies: Wal-Mart, Tyson Foods (and others ). The second wave was the supply chains for those companies. The third wave was the amenities to serve the first two waves.
“ A lot of people are pointing to the tourism infrastructure being developed right now — with Crystal Bridges and the new ballpark. There’s a lot of momentum being created to turn this area into a Green Valley — where we grow as a hub for sustainability research. That could be the answer. ”
Time will be required to grow those seeds. In the meantime, those continually compiling data for the Skyline Report are looking at statistics that show several thousand more multifamily units being planned or breaking ground. This is in a market that’s already having difficulty leasing or selling its current multifamily inventory, Deck said.
According to the secondquarter Skyline Report, vacancy rates showed a slight decline from the first quarter of 2008, from 13. 9 percent to 12. 8 percent. However, in the past year, vacancy rates in the multifamily real-estate market have risen 2. 9 percentage points from the nearly 10 percent reported a year ago, and are up 5. 3 percentage points over the figure reported in the second quarter of 2006.
Siloam Springs had the lowest vacancy rate for the quarter at 9. 7 percent, down from 10. 4 percent in the first quarter of 2008, and Bentonville had the highest, reported at 17. 4 percent. Fayetteville and Springdale reported slight changes for the quarter, with vacancy rates of 10. 5 percent and 13. 9 percent, respectively, while Rogers sits at 14. 5 percent.
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