2015 was an exceptional year for commercial real estate and development in central Arkansas. We saw a number of significant retail developments come out of the ground, including the Outlets at Little Rock on the heels of Bass Pro Shops, along with the lowest Class A office and retail vacancy numbers in memory in the Little Rock area.
While development is generally the first thing that comes to mind when most people think of commercial real estate, other factors have a major influence on the industry — namely occupancy, CAP rates and interest rates.
Increased Occupancy
Several years of steady appreciation in commercial real estate values will continue into 2016 across all sectors of our industry, a major contributing factor to this trend is the continued increase in occupancy rates. Vacancy reduced across the board for each quarter in 2015 and is expected to continue in the coming months.
Space demand brought about by business expansion and startups in the office sector (7.8 percent vacancy in the forth quarter of 2015), as well as our growing attractiveness as an Metropolitan Statistical Area to regional and national retail groups (4.5 percent vacancy in Q4 2015) are the primary contributing factors.
Not to be overlooked, the industrial market has continued to show improvement (11 percent vacancy in Q4 2015) as well, predominantly in light industrial and warehouse/distribution properties.
The shared result of this upward trend in occupancy is, of course, increased cash flow.
Low CAP Rates
The capitalization rate, or “CAP rate,” is the ratio of Net Operating Income (NOI) to property asset value and is used as a quick measuring stick for an investor to determine his or her initial return on investment.
Retail and office CAP rates are at historic lows right now and have been trending in that direction for the past several years, fueled in part by the continued footprint expansion of stronger credit tenants and investment buyer demands. While our local market doesn’t see the type of CAP rate compression evident in neighboring metropolitan markets (Dallas, Nashville and St. Louis can run as much as 50-75 basis points below similar credit in our market), we have experienced the same trend in valuation described earlier for all of the same reasons: stronger occupancy rates and increased stability in credit.
Raised Interest Rates
The Federal Reserve raised its key interest rate at the end of 2015 for the first time in almost a decade signaling that the economy has emerged from recession.
The “slight” increase is perceived as healthy for the commercial real estate industry as it contributes to the economic confidence already in motion. It remains to be seen how future rate increases will affect the industry. However, there is a lot of money on the sidelines currently, looking for a return that outperforms conventional banking and one that’s less volatile than the stock market.
Ongoing Development
As occupancy rates increase and absorption of existing square footage continues, the obvious response is to add new inventory – for example, the ongoing development of a number of new lifestyle centers.
Gateway Town Center with Bass Pro Shops and the Outlets at Little Rock, Hurricane Creek Village in Benton and Lewis Crossing in Conway are just a few, and all contribute to a healthy level of large parcel land transactions and retail construction not seen in our market for a number of years. New construction fuels the local economy in so many ways including new jobs, increased production of building materials and equipment, and, of course, increased sales tax revenue. However, new construction also attracts higher credit tenants at higher lease rates, and thus lower CAP rates/higher values.
This all adds up to a strong economic indicator for central Arkansas. We’re experiencing a vibrant and healthy commercial real estate market right now that will bear fruit for some time to come. Sustaining that momentum will be the challenge we face in the coming years.
Photo: Aerial view of Gateway Town Center. Courtesy of Colliers International Arkansas.
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