Commercial development

New commercial buildings dotting Northwest Arkansas' landscape illustrate the economy's fast growth.

IHS Global Insight released a report last spring that showed the area's economy is expected to grow by 4.2 percent annually through 2020, ranking it third among large metropolitan areas.

"Overall, we're seeing substantial activity in most all the markets," said David Erstine, executive broker for CBRE Northwest Arkansas, a commercial real estate firm. "We are also seeing land activity pick up."

The first half of the 2000s buzzed with building activity before development stalled during the recession that ran from December 2007 to June 2009. Some projects left empty buildings and lots, which have slowly filled in the last five years. New construction is picking up.

Burke Larkin, senior vice president of Whisinvest Realty, said most of the area's premier bank-owned property has been sold or is under contract.

"It's a great sign the market is strong and getting stronger," he said.

Kathy Deck, director of the Center for Business and Economic Research at the University of Arkansas, said speculative building is increasing after years of developers focused on build-to-suit projects. Speculative projects are constructed without a specific tenant in mind.

"Building permits are still not at 2005 levels, but they are picking up," she said. "I don't think we'll see people building hand-over-fist."

City planners said the number of commercial building permits issued by the area's four largest cities rose 37 percent between 2013 and 2014, while the value of those permits shot up 119 percent. Cities issued 127 permits valued at $260.8 million last year compared to 93 permits valued at $119.1 million in 2013.

Greg Fogle, president of Midwest Operations for Nabholz Construction Services, said his company has seen an increase in business.

"It hasn't been a dramatic, write-home uptick," he said. "But it is definitely better than it's been. It's a bright outlook for 2015."

The new buildings are easing low vacancy rates across the commercial market, particularly in the retail sector. Xceligent, a commercial real estate information firm, reports a 5.6 percent vacancy rate in the area's available retail space at the end of 2014.

The local office and industrial categories saw vacancy rates increase slightly to 9.2 percent and 6.9 percent, Xceligent reports. The national rates were 12 percent and 6.8 percent respectively, according to Cushman & Wakefield, an industrial brokerage firm.

The growing economy attracts new businesses. Area Development, a site and facility planning publication, ranked Northwest Arkansas No. 69 of 379 metropolitan statistical areas emerging as economic development front-runners.

Retail

Fayetteville has the area's most retail space with 5.6 million square feet. Rogers has the lowest vacancy rate, according to Xceligent. Rogers, with 4.6 million square feet total, has a 4.8 percent vacancy rate.

Clinton Bennett, vice president at CBRE, said he sees north Fayetteville, Sunset Avenue in Springdale and the Interstate 49 corridor in Rogers as prime areas for retail growth.

"We've had a lot of growth around the Pinnacle Hills area," he said of the area along the interstate in Rogers, which includes the Pinnacle Hills Promenade, The Shoppes at Pinnacle Hills, North Pinnacle Point and Pinnacle Hills.

John George, Hunt Ventures executive vice president, said the Pinnacle area will have than 1.5 million square feet of retail, 100,000 square feet of restaurant and 830,000 square feet of office space by the end of the year.

Hunt Ventures owns and manages much of the Pinnacle area, and George said it still has about 60 acres of undeveloped land on both sides of the interstate.

"We're satisfied at building it ourselves and maintaining the land for our priorities," he said.

Rogers is also slated to gain something Bennett said the area is missing, new large retail spaces. The Sitton Group of Pennsylvania plans to build six buildings adding 128,955 square feet of retail space to the market near the intersection of West Pleasant Grove Road and South Dixieland Road.

Rogers is not the only town experiencing retail growth.

Troy Galloway, Bentonville's community and economic development director, said the city has been under served for retail, and development is increasing across town.

He pointed to the redevelopment projects in downtown, including the Midtown Center on Northwest Second Street between Northwest A and North Main streets. The center includes two, three-story buildings that will have 8,000 square feet of retail space on the ground floor in the east building and 5,500 square feet in the west building. The top two floor will be office space.

The center is a project of Walton Enterprises and will include a Neighborhood Market and a three-story parking deck. Erica Jones, a Walmart spokeswoman, said the market is scheduled to open by July.

Springdale is also benefiting from Walmart's expanding footprint with a Neighborhood Market scheduled to open this summer off the Don Tyson Parkway interchange, Jones said.

"The new interchange created a whole new area for development," said Patsy Christie, Springdale planning director.

"We have land available to develop," Christie said. "More land than some of the other towns have."

Joseph Donaldson, owner of Sam's Furniture, is moving into a new store under construction in a new strip center being built on a piece of undeveloped land along the interstate. Donaldson said the new store will be about 800 feet from his current site at 1010 S. 48th St., in the Ozark Center Point Place in Springdale.

"We have no freeway frontage where we are," Donaldson said. "We've done a ton of business here, but we face the back of Cracker Barrel. We wanted to stay in Springdale."

Andrew Garner, Fayetteville planning director, said retail construction is catching up with residential growth on the city's west side. He said builders met the demand for nonresidential projects around the Walmart Neighborhood Market on West Wedington Drive. Development in the area includes everything from medical clinics, restaurants and fitness centers.

Fayetteville is also getting the area's first Whole Foods. The grocer will anchor a retail development at 3425 N. College Ave., near the Fayetteville flyover that opened in July.

Bennett said the area around the Fulbright Expressway is a prime spot for growth, but the complete development plan needs to be kept in mind.

"We don't seem to have many players in the market right now willing to take that kind of risk. It would take years to develop the whole area," he said.

Office

Nearly three-quarters of Northwest Arkansas' office space is in Benton County, and construction is following that trend.

Bentonville had 4.8 million square feet, and Rogers had 2.7 million square feet of office space at the end of 2014, according to Xceligent.

Butch Gurganus, principal and executive vice president of commercial real estate firm Colliers International, said the area's office market in general does not stretch east of I-49.

The majority of Bentonville's office space, 3.1 million square feet, is classified as Class B. West Rogers, including the area immediately to the east of the interstate stretching to the city's western limits, has the area's largest concentration of Class A space with 1.4 million square feet.

Class A buildings represent the highest quality buildings in a market, are in good locations with good access and provide many amenities. Class B buildings are generally a bit older and are often single-story buildings. The oldest buildings are considered Class C and are in less desirable areas and are in need of extensive renovation.

About half of the area's total office space, 3.2 million square feet, is Class B and had a 10.5 percent vacancy rate. The 3.2 million square feet of Class A offices had a vacancy rate of 11.2. The tightest market was Class C, with a 2.4 percent vacancy rate for its 1.9 million square feet.

Gurganus said many of the area's speculative office construction is Class A in the Pinnacle area, and he sees opportunities for new Class B offices.

Erstine said a lack of available Class A space helped push lease rates up last year. Class A space typically demands the highest prices, but Class B space in Bentonville had the highest rate at the end of last year at $24.02 a square foot. The rate jumped from $15.56 per square foot in the third quarter.

Class A lease rates averaged $19.83 per square foot across the region.

Erstine said some older Class B properties that had been stagnant for many years, such as the Bentonville Commerce Center, got tenants last year because of major renovation projects.

A Colliers report showed almost 900,000 square feet of new office space is being marketed or under construction in Northwest Arkansas.

The biggest addition the market will see this year will come after the 10-story, 240,000-square-foot Hunt Tower opens Nov. 1. George said the building was 50 percent leased when construction started, and said it should take about 30 months to fill. He declined to say how much space was leased.

"We haven't seen construction of this magnitude since 2007. We've had some building here and there, but nothing of mass to address a speculative market," Erstine said.

Deck said there are still limited options for businesses looking for large offices. Xceligent reports only five buildings had blocks of 25,000 to 50,000 square feet available as of Dec. 31, and only one had 50,000 square feet available.

"If you need a large space, you will have to build-to-suit and leave another space open," she said.

Industrial

Gurganus said most of the calls he gets about industrial space is about land.

"I think everyone has figured out there are no buildings," he said.

He rattled off three land sales in Lowell's Commerce Park: 9.25 acres to Delta Systems, 8 acres to Source Gas and 10 acres to A&B Distributors.

"These are just some of the people that could not find buildings that fit their needs," Gurganus said.

Commerce Park is 19.5 acres on West Monroe Street just west of the interstate. He said finding sites near the highway is getting tougher in many places, adding to the growth in Lowell.

Bill McClard, managing partner of Rogers Warehouse Development, built and filled last year a 21,300-square-foot warehouse with a small office on the northeast corner of Lincoln Street and Commercial Avenue in Lowell.

He is also working with some unnamed partners on J Street Development, a 260,000-square-foot project with space for light assembly, warehouses and offices near the intersection of Southeast 28th and J streets in Bentonville.

The first phase included a 143,000-square-foot building that is finished and has its first tenant. Team 1, a Bentonville supplier service firm filled about 83,000 square feet, McClard said.

The second building will be 100,000 square feet and should be done in June, he said.

Marshall Saviers, a partner with commercial real estate firm Sage Partners, hopes to fill phase one of CrossMar Park soon. The 150,000-square-foot building is almost ready for its first tenants. He said his company owns 170 acres on the southwest corner of Rainbow Farms Road and Regional Airport Boulevard, near the Walmart distribution center in Bentonville. Sage plans to turn all of it into an industrial park in several phases.

"I think this is something the market really needs, both for current companies looking to expand or new ones wanting to come to the area," he said.

Mike Harvey, chief operating officer of the Northwest Arkansas Council, said manufacturing is a challenge for the area, but needs to be a priority.

"Older space is harder to sell or repurpose," he said. "The new spaces are steps in the right direction."