Changes aren’t permanent, but change is. So goes the powerful opener to Rush’s underappreciated 1981 album, “Moving Pictures.” Adaptation was a theme for lyricists Neil Peart and Pye Dubois in that percussion-fueled anthem titled, “Tom Sawyer.”
Of course, those words ring true still, and adapting to change — real change — has become job one in the commercial real estate game.
AMP visited with a few of Central Arkansas’ top CRE brokers about current trends in the Little Rock market and what change might look like in the decade ahead.
AMP: Is retail truly back, and if so, will it last?
Jessica Flake Dearnley, CEO and co-founder, Flake & Company:
Changing demographics and online shopping are still hurting traditional retail. This can be seen with the recent bankruptcies and store closings of Tuesday Morning; David’s Bridal; Bed, Bath and Beyond; Christmas Tree Shops AND Party City!
Some retailers have adapted by adding services to get people into their stores. The mixed-use tenants can cut very favorable deals to absorb big-box space, so yes, the trend will last until there is no economical method for them to lease or purchase space (the empty big boxes run out, and there is no new construction).
Chris Moses, principal, president and CEO of Moses Tucker Partners:
I think so. I think brick-and-mortar developments will need to have a true sense-of-place feel that’s walkable and with a heavy emphasis of mixed-use with great connectivity to major linkages.
Kris Upton, president and CEO of RPM Group:
Certainly, redevelopment of retail, entertainment, and notably, office in areas that better serve suburban households have good momentum. Commonalities among these examples are that they are located with easy access to I-430 or I-630 and generally proximate to more dense and suburban footprints.
And I would quickly add that there is a dwindling and finite supply of undeveloped land at or near these interchanges, so demand will increasingly outpace supply.
Pavlion in the Park, post-tornado (Photo provided)
AMP: What does a resuscitation of Park Plaza mean for the market, midtown Little Rock in particular?
Moses: I think Park Plaza needs to be totally rethought. The new owners need to be very considerate of Dillard’s, but need to really push for heavy density of housing, outdoor spaces and specialty retail/food/beverage.
Upton: Increased occupancy and activity in this space is good for the midtown ecosystem as a whole. In particular, businesses with good access along the North University corridor will benefit disproportionately.
Dearnley: As we own Pavilion in the Park, which was 100 percent occupied and hit by a tornado, we believe there is strong demand for locations in Midtown. We have the opportunity to re-create the space and create an environment that is relevant, full of energy, with luxury fashion, aesthetic services and medical. Plaza West is 100 percent occupied.
New ownership of Park Plaza is a step in the right direction, but the mall needs a lot more than a banner that says ‘Under new ownership.’ Does the new ownership have a vision and plan that they are going to implement to change the desirability of the mall? If not, I predict more of the same.
AMP: Office vacancy in Central Arkansas is down once again this quarter. Given the staying power of hybrid work schedules, do you expect this to last?
Upton: We have likely flattened out on average office vacancy rates, although the overriding trend of displacing office occupancy — and accompanying retail and entertainment consumer spending — from urban to suburban areas will continue to highlight strength in suburban offerings.
Dearnley: “Work from home” is a nationwide phenomenon, and that is all the next generation knows. Companies that require collaboration are returning to work. I believe that productivity plummets when working from home and am a strong return-to-the-office proponent.
However, there needs to be a change in the office environment. Even before the pandemic, we saw companies wanting smaller personal work spaces, more open meeting areas and overall smaller footprints. When you do have an office, it needs to sparkle and invite energy. The Class B/C, commodity product, building-block-style office is not going to work anymore.
Little Rock may be able to absorb this space since there has not been new construction, but larger cities like San Francisco, Chicago and New York are seeing more space converted to multifamily.
Moses: I think office space will always be needed, but the type that will probably have the highest occupancy going forward will be buildings and spaces that offer a more open and collaborate spaces in areas that have some sort of vibrancy.
AMP: What factors are causing businesses to choose “second-generation” office space over new builds?
Moses: Overall, costs to occupancy (rent) is the biggest reason. Construction costs are starting to come down from all-time highs, but office buildings built during this time and ones that warrant higher rents will be challenged unless they have some type of spaces that appeal to tech-oriented companies, are walkable and have some type of connection to food/beverage/entertainment uses. Also, mixed-use is the key here.
Dearnley: Interest rates, construction costs and the supply chain are precluding businesses from going this direction. We have met with architects and contractors about new projects/redevelopment, and as soon as I quote rental quotes for even a sub-10 percent return to investors, the tenants go radio silent.
The risk needs to match the return, and tenants still don’t have the appetite (or budget) to pay the lease rates they are paying in Northwest Arkansas. They can still have the same business model and profit margins without renovations. The purpose of renovations or a new office space would be able to attract new talent, and that is still a problem everywhere since The Great Resignation.
AMP: The Central Arkansas industrial market is as strong as it’s been in a while, with vacancy rates at historic lows. What’s led to this increased demand?
Dearnley: We had low inventory to begin with and a need for more fulfillment centers. However, nationwide, industrial is underperforming and overbuilt, as everyone was racing to build it. The continued dominance of Amazon and other online retail is pushing demand, along with big-box stores such as Walmart, Lowe’s and Home Depot offering free home delivery.
Moses: Covid, low cost of land and Arkansas’ great linkages
The Port of Little Rock (Photo provided)
AMP: Will the Port of Little Rock continue its momentum with more new tenants throughout 2023?
Moses: I think so.
Dearnley: The Port of Little Rock has been a great success story for Central Arkansas. Having a dedicated area for large industrial users that has access to river barge and rail traffic has proven to be a success in drawing investment dollars to the region. Mayor [Frank] Scott has been a visionary to make this a priority.
AMP: Where’s the next big growth spot in the Central Arkansas market?
Upton: While we have much more work to do, significant interstate and infrastructure improvements on I-40 north to Conway, northeast on Highway 67 and I-30 south to Hot Springs present superb growth opportunities.
Dearnley: Financial institutions have made a considerable investment in the Chenal and Rahling Road areas. With all the bank headquarters and multi-family under construction, this will bring more density to that area. We purchased Village at Rahling in November 2022 as a mixed-use development with multiple restaurants and accessible office space.
Moses: East Village has a lot of momentum with the new Lyon College veterinary and dental schools. This is a massive win for all of Arkansas, but think it’s huge for downtown Little Rock and Central Arkansas.
AMP: What does the Central Arkansas commercial real estate market look like in five years? In 10 years?
Moses: Think the next couple of years might be a little difficult, but Central Arkansas’ low cost of living, abundance of land, decent population growth and low unemployment is a good thing.
Upton: Artificial Intelligence will reshape business models and create a premium for skills beyond those that can be replicated.
Over the next few years, I suspect the market will reflect more projects stalled as a function of monetary policy or properties that are forced to change hands in light of tighter underwriting criteria. Of course, potential rotation in these assets presents opportunities on the buy side, and we are positioning accordingly.
Additionally, migration from concentrated urban centers to more disperse suburban areas will define the post-pandemic decade for office and accompanying day-time consumer spending.
Dearnley: Due to construction costs and the supply chain, we have not seen much new product come to market. Once we get through this looming recession, the office vacancy levels off, properties that can’t be refinanced turn over and capitalization rates increase, we will begin to see more new development.
There has not been a major new development of office or retail space in years. The commercial real estate market in Central Arkansas continues to thrive and show why Little Rock is the capital city. Medical continues to be a driving force along with state government. Plus, regions such as Bryant and Benton continue to boom, as well as Conway.
We are not growing the way Northwest Arkansas is, but I believe that when you combine the new developments with the redevelopments throughout the region, you will see the Central Arkansas commercial market continue to grow over the next five to 10 years.
READ ALSO: CARTI Cuts the Ribbon on New Surgery Center
