A decade past the crisis that led to the Great Recession of 2008, just about everything is looking up. Steady increases across the board in various economic sectors over the past ten years have re-stabilized our economy, and by some accounts, made it better than ever.
In Arkansas, growth doesn’t always keep pace with the nationwide scale, but the decade since the recession has been good for the state, too. Last month, Arkansas Money & Politics highlighted the construction industry in the state, which is seeing some of the largest success in modern history. This month, the magazine is examining commercial real estate, a segment that is seeing its own historic pinnacle of success.
“Best year ever,” Jeff Hathaway, president and CEO of Hathaway Group, says as he rattles off his company’s recent ventures. “Our revenue [is] coming at a record pace through the first half of the year.”
The progression of commercial real estate in Arkansas has created a climate of success throughout the state, which Hathaway refers to as “solidly strong.”
These words are not just shallow hyperbole. The Hathaway Group has been in the commercial real estate business since 1976 and has seen the economy fluctuate between ups and downs. So, the repetition of adjectives like, “best,” “record” and “solid” from the president and CEO himself holds a considerable amount of weight and are certainly not thrown around lightly. Excitement builds when other commercial real estate professionals say their companies are seeing the same success as Hathaway.
Chris Moses, president and CEO of Newmark Moses Tucker Partners (NMT), is just as exuberant.
“This is projected to be a record year,” he says. “we will outpace any year that we have ever had, and we have been in business since 1985.
“Brokers are busy closing quality deals in both the central and Northwest markets,” Hathaway says. “And what I’m seeing is a healthy mix of investment deals, land sales for new construction, leases at rising rental rates and building acquisitions by businesses for their own use.”
Hathaway also identifies an interesting factor for commercial real estate correlated to construction.
Across the United States, the upward construction trends are similar to that of Arkansas. In fact, even with the success the state has seen, the construction business throughout the country is moving much faster than it is in Arkansas. Despite this, in Hathaway’s mind, it can play to the advantage of the commercial real estate companies.
“While there are markets around the country with much more construction activity than we see in central Arkansas,” Hathaway explains, “people tend to forget that also means we have less supply, which keeps the market tight, enhances values and puts a sense of urgency on the buyer side. People who want the quality space but don’t jump right in are getting left behind.”
Kris Upton, president and CEO of RPM Group, is seeing similar results to Hathaway, Moses and the rest of the state.
“Things have gone very well for our firm this year,” Upton boasts. “I think there’s a strong [commercial real estate] climate.”
Isaac Smith, president of Arkansas’ branch of Colliers International, is just as optimistic.
“It is an exciting time and most would say that we [in Arkansas] are late in a long run of positive economic growth cycle as a nation,” Smith says. “This allows steady commercial growth in central Arkansas and the ability to capitalize on the vibrant activity in Northwest Arkansas.”
However, no matter how good things are, for any sector, there will always arise challenges requiring agility and adaptability to circumnavigate.
In fact, the pace of the commercial real estate market is a challenge in-and-of-itself, according to Smith.
“The economy and overall market is good,” he says. “[But] when things are going well in commercial real estate, there is less need for expertise. We still add a great value in bull markets, but we meet clients’ needs the most when we can help them find creative solutions to their problems when times are challenging.”
Moses says that the rising costs of construction have been the biggest thorn in his company’s side.
“We continue to see an uptick in those labor rates and material costs, which creates challenging opportunities to either develop, redevelop or renovate space for our tenants,” he says. “We have seen a ridiculous amount of increases year over year in the last couple of years, and this year, I think, we’ll see 10 percent increases in overall pricing.”
Another challenge that Upton noted is a change in the use of office space.
In the modern world, the need for formalized office space has shifted, and it continues to do so with each passing year. More and more vocations enable the ability to work remotely, which provides companies with a more flexible range of options when it comes to physical office space requirements.
Arkansas is no stranger to startup businesses. A tactic that startups will often utilize to find footing, as it relates to commercial real estate, is with reduced rate incubators, which are virtually what the name suggests – a warm place for early-stage companies to “hatch.” These incubators often give the startups a place to get up and running with resources, supplies, space, and so on, without having to invest so much money into obtaining a formal office.
“There is certainly still strong demand for it,” Upton says of office spaces. “I think it is just a matter of staying abreast of technology.”
As it relates to these changing trends, Brian Shaw, CEO of Sage Partners, says that his firm has noticed other changes that companies are making.
“Some companies are maximizing their square footage by putting more people into their offices, creating denser and more flexible office layouts,” Shaw says.
He also notes that many companies are looking for office space that they can use as a selling point, to attract talent in the modern world. Open floor plans with increased uses of glass for natural lighting and a wide range of in-office amenities are some of the trends that companies shop for in office settings.
All of these changes in office space have required commercial realtors and firms to update their strategies and pivot from some of the more traditional methods of working the market.
One of the largest challenges to the commercial real estate sector is related to the retail market. As the online markets continue to expand, more and more corporations are working the ground between brick and mortar stores and online marketplaces. For commercial real estate, this would mean the potential for less retail space sales. But, Shaw says that it is not as black-and-white as it seems, which is part of what makes it such a challenge.
“You see Walmart on one end – it has a lot of bricks and mortar but is moving towards the online market,” Shaw explains. “Then there is Amazon on the other end, which is primarily online and moving the other way and has started looking at brick and mortar locations. So, the retail market has to meet somewhere in the middle.”
While retailers continue to figure out what this middle ground is, their commercial realtors do the same; constantly working to adapt to their customers’ preferences.
“That’s our job,” Shaw goes on to say. “To help these companies figure out how to maximize their real estate strategies to how it fits into their business strategy.”
And an increase in online markets does not have to be a detriment to commercial realtors. Shaw points out that, even if a company is “all online,” they have to have a physical footprint somewhere. Due to that, warehouse space is in demand across the country.
Overall, for commercial real estate in Arkansas, things are going very well as of late. Supplies are matching demands, and the state’s firms are seeing an increase in revenue virtually every year. But looking ahead sometimes requires a look back, and that is something that Shaw is doing to stay grounded and make sure that the trends continue upward.
“Across the board, commercial real estate has a very active market and things are very healthy right now,” Shaw says. “But, I think everyone is always looking ahead and making sure that we don’t get in a position where we were pre-recession, in 2005, 2006, and 2007.”