All markets have cycles. That’s the conventional wisdom. You may be wondering where commercial real estate is in the economic cycle? I know I do. I get asked similar questions often. Specifically, I get asked about where Little Rock is in the cycle? You may have the same question. Or, you may have an opinion. If you have a perspective you’d like to share, I’d like to pass along a summary to the readers of this column. You will be credited, if you want to be. Shoot me an email.
Metro Little Rock is often referred to as having a stable commercial real estate market. For my twenty-five years in the business I’ve consistently heard some variation of statements along the following lines. Little Rock doesn’t have booms. Little Rock doesn’t have busts. Little Rock holds steady. If that’s generally the case, and I think it is, then what effects do macroeconomic trends have on the commercial real estate market in Metro Little Rock, and on Arkansas as a state? From a big-picture standpoint, a September report of Transwestern’s analysis of Real Capital Analytics data commented that commercial real estate investors have exercised “greater scrutiny” over recent years versus the previous business cycle. And that the U.S. commercial real estate transaction volume was nearly equal to the peak set in 2007. Most of us remember what followed 2007.
To me it seems that there’s not currently a consensus on the macro commercial real estate markets. I hear and read information that economic expansion is continuing, that it is ending, that the time to sell is now, that interest rates are increasing, that interest rates are decreasing. Everything cannot be going both up and down at the same time. Can it? I came across an interesting summary of five economists in National Real Estate Investor. I’ll excerpt a little from each of them here. Richard Barkham, global economist with CBRE says “Hold your nerve, be ready to buy from those that lose theirs. Don’t initiate development projects and be ready to compromise on lease-up.” One of the contributions by Barbara Denham, senior economist with Reis Inc. was “Industrial is still pretty safe, but many might feel risk-averse right now with the trade war. Eventually things should settle and strength in industrial should resume.” Jim Costello, senior Vice President with Real Capital Analytics offered “Whether we have a recession driving by the real economy … or one from the financial economy, the answer on how to survive a downturn is similar. Do not be too highly leveraged going into the downturn. The better question to ask though is what opportunities will come for commercial real estate investors out of any potential downturn …” Peter Muoio, chief economist with Ten-X Commercial suggests “The yield curve inversion is a very strong signal of a potential recession. It has preceded each recession in the modern era and has not flashed a false signal over that time.” And Jim Berry, U.S. real estate sector leader at Deloitte suggests “The commitment of allocated capital and desire to find longer-term returns while also seeing safe harbors in key markets such as the U.S. bodes well for certain smaller or tertiary markets and emerging parts of real estate such as non-traditional and mixed-use assets.” Non-traditional and mixed use might describe some of the investment in Little Rock’s East Village and SOMA neighborhoods.
Regarding industrial, I was visiting with a local broker of one of the world-wide brokerage firms last month about industrial property. He was lamenting that there is not enough available, modern, industrial product in the market. He observed that he had been given an assignment to locate a medium-size industrial property for a client considering Metro Little Rock and that he could not find the appropriate property available anywhere in the market. This was a 50,000-ish square foot need. According to him (Don’t shoot the messenger, I took his word for it. Industrial is not my strength.) the properties that had the space available didn’t meet the criteria, including ceiling height, truck doors, clear span, etc. And that the properties that met the criteria, did not have space available. It seems that demand may exceed supply in that segment of the local commercial real estate market.
One segment that seems to have reverse situation is downtown office space. This column started wondering over the summer about the effects of the State relocating offices from downtown to Riverdale. In October, Todd Galvin of CoStar offered a summary of some local market data on the same topic. He noted that “as of October, downtown vacancy rates have increased more than 350 basis points this year to about 6.6 percent.” Galvin also reported that 83 percent of the vacant space available space downtown are in contiguous spaces of 20,000 square feet or greater.” I read that as meaning the market is soft, and even softer for office space prospects needing greater than 20,000 square feet. In other words, it reads like it is a tenant’s market. That’s my experience. Lease rates downtown have generally not increased, particularly when accounting for inflation. Thank goodness for cost savings from energy-efficiency renovations. Galvin also offered this summary of the State offices relocating to Riverdale: Arkansas Insurance Division, 65,915 square feet; Arkansas Rehabilitation Services, 44,750 square feet; and the Arkansas Economic Development Commission, 28,754 square feet; among others. With the State’s additions to vacancies, the total will be more than one million square feet. One of the tall buildings downtown that went under contract for sale over the summer is now available again. How much did the softness in the downtown market contribute to the abandoning of that contemplated purchase? That’s a question, not an observation. My observation is that some of the downtown buildings are thriving and some are suffering. The difference often has more to do with the owners than with the properties themselves. Good owners have good buildings. Challenged buildings often have challenging owners. At least that’s the way I see it.
I came across a Preliminary Feasibility Report by Artspace Consulting for the Windgate Foundation. Now, I’m a self-acknowledged geek that enjoys reading things like feasibility studies, so I dove into it. I encourage anyone interested in commercial real estate to read this one though. It is well-executed, and it delivers a professional and objective viewpoint on a segment of the Little Rock commercial real estate market. Here’s an excerpt from Artspace’s self-description. “Artspace is a nonprofit organization that uses the tools of real estate development to create affordable, appropriate places where artists can live and work.” Some things in the report that jumped out at me included; “We were advised that downtown property is generally overpriced by about 10%. We think that estimate is low.” And “Perhaps this is one of the reasons why most of downtown Little Rock has yet to experience the kind of development boom that has occurred in many other midsize American cities in recent years: high real estate costs may be rendering projects financially unfeasible.” In reviewing the report and giving some critical thought to some of the examples, I have to join in on the wondering about the prices of some of the properties.
If you just returned from a trip out of the country, because that’s the only way you could have missed the PR blitz, Trader Joe’s opened in Little Rock last month.mPersonally, I disagree with those that assessed the grocery’s opening as putting Little Rock on the map. They are selling groceries, not world peace. I know, I know, the Trader Joe acolytes will throw rocks at me and call me names. I’m right though. With Trader Joe’s now having made Little Rock visible to the rest of the world (The Clinton Center, Heifer International or a dozen other things didn’t?) the next question seems to be “when will Costco open?”. I don’t know. I don’t know when Top Golf will open either. There’s plenty of gossip and rumors. Facts are in shorter supply. We’ll have to wait and see. I know this, I’m going to plan a trip out of the country the week that Costco opens.
The op-ed portion of the column chewed up the space this month. I’ll dial that back next month and report on October’s interesting transactions with November’s. Shoot me an email anytime. I appreciate the feedback. 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.