- As printed in The Daily Record
Metropolitan Musical Chairs
You know, sometimes things change. The Commercial Real Estate Council of Metro Little Rock program date changed to March 26. More information is available at .crecmlr.org.
Dr. Pakko gave a great overview of the Arkansas economy last month at the Q1 CRE lunch. The question and answer session was terrific. Lots of great questions were asked. By the way, Dr. Pakko’s Institute for Economic Advancement offers services to the private sector. They do way more than you can imagine. If your company has any economic or data-driven business development needs, look up Dr. Pakko down at the UA Little Rock.
As an aside to the where do you live from last month—addresses, city limits, school districts and county lines don’t always line up to make things simple. One of the sales last month is a good example. It is in Pulaski County, with a Cabot address. I don’t know who picks up the trash at this property. Someone told me recently that whoever picks up the trash is a good indicator of what town you are really in. Anyway … Cardinal Holding Group, LLC paid Justice Road Rentals, LLC the sum of $365,000 for a 13,620 square foot metal building sitting on 2.39 acres at 3814 E. Justice Road, Cabot, Pulaski County, Arkansas. By the way, this property is in the Jacksonville School District, which was carved out of the Pulaski County Special School District a few years back. This property is a good example of why it is important to do the homework to have a full complement of facts on the property being purchased or sold.
Another metal building sold not too far down the highway from Justice Road. This 1,600 square foot building on a half-acre at 770 Soto Lane in Sherwood sold for $100,000. Another $100,000 bought the new owner, Islamic Center of Little Rock, Inc., a 500 square foot metal building sitting on a two lots combining to just over 1.2 acres at 3200 Mary Street in Little Rock.
It has been widely reported that Arkansas Development Finance Authority purchased Building Four on the Verizon campus, formerly known as the Alltel campus. What has been widely speculated is what will be the end use for all that office space. I’m not reporting, or even speculating, on what the use might be. I think it is relevant though to consider how this purchase, and the State’s purchase of the former Timex property in North Little Rock, and any other State purchases of property affect the demand for commercial property. The Department of Community Corrections will be vacating nearly all of the Two Union building at the corner of Capitol and Louisiana, which has put the future of that property in limbo. If State agencies are relocated to Building Four, even over time from privately owned properties, then there will be a lessened demand. One could argue that the inventory is unchanged and that with what is effectively more of the “musical chairs” that seems to be common in the market, there will be no change in net absorption. HOWEVER, if you are a property owner of a property being vacated (like Two Union) the net market absorption is not of nearly as much interest as the net absorption of YOUR building. And, there’s a ripple effect. Vacant buildings that aren’t collecting rent are paying little if any property management fees. The demand for building staff, janitorial staff, preventive maintenance work, parking and many other things is reduced, or at least shifted. Is State ownership of real property beneficial to the taxpayer? I challenge you that there is a case to be made on either side of that question. I’m not questioning either position as right or as wrong. It is just an observation that with the amount of State-leased property in the market and a sluggish demand especially for downtown property, this sort of action bodes well for keeping rents favorable for tenants.
Also already widely reported, there are several buildings downtown for sale. In addition to the Two Union, the Donaghey Building and the M.M. Cohn building are for sale on Main Street between Capitol Avenue and 6th Street. Bank of America Plaza two blocks off Main at 200 West Capitol is also for sale. Between just those four buildings, that’s over a half-million square feet of buildings for sale. Two of those are currently vacant. One is half occupied. And the fourth is staring at the coming of considerable vacancy. Downtown is seeing gentrification. Downtown is seeing increased occupancy in many property types. Downtown is seeing increased private and public investment. However, in a downtown the size of Little Rock, the vacancies in those four buildings and the other normal vacancies around the market add up to be a material amount of inventory in play. Look at the AT&T building, formerly known as the Southwestern Bell building, further down Capitol Avenue. As previously noted, it sold at what could only be described as a wholesale price.
The properties above are just a sample of the inventory available for sale. There are many more properties in the market that are available for purchase. And the inventory that is available for lease is a multiple of what is for sale. I’m not suggesting that the office space inventory in the Little Rock Metro is troubled. Overall, occupancy and vacancy in the market are within historical norms. Generally speaking, all property types illustrate typical occupancy levels. The thing is, there is not a lot of activity in any of the property types, absent multi-unit housing. There’s been growth in multi-family. That’s been a macroeconomic trend nationwide. And other than maybe hospitality, there has not a lot of deal velocity. Without net demand, there is not net absorption. That is a key reason that the market occupancies hover pretty steady quarter after quarter. Typically, there is not material net gain or loss of occupancy because typically there is not a material change in demand. So … absent a change in demand, who fills the vacant spaces? Businesses already in the market. That’s who. It is musical chairs. All metropolitan areas have a game of musical chairs. Successful metros also have economic growth that brings new demand to the market to add to the demand created by the growth of the existing local business. How does economic growth happen? The answer to that is bigger than my ability to answer and certainly bigger than the space available in this column. However, as a guidepost let me borrow from a good friend of mine that uses this word often. Be intentional.
Tips and suggestions, well most of them anyway, are appreciated. Hope you found something interesting in the column this month. Check back again next month for the things that didn’t get included here this time and that pop up between now and then.