Office Space Q&A :
Flexible Spaces Flex Muscle in Market
What types of properties seem to be most in demand in your sector and why?
JEFF HATHAWAY: Highest demand has been for “flex” space (portions of space allocated to warehouse, storage, service functions) and for modern, open-plan Class A space in suburban locations with comfortable parking. However, there is still a solid base of demand for urban spaces with “cool” vibes that are valued most by younger employees.
HANK KELLEY: Some activity in Class A suburban office space has continued and slightly less activity in the downtown office market. Convenience oriented and visible locations are active for a variety of users both service and medically related.
CLINTON BENNETT: We had seen kind of sustained and growing interest in office leasing. The businesses that call on Walmart and the businesses that call on them and just the businesses that are growing just naturally because of the expansion in this market. They all seem to need additional office space. We’d seen a pretty robust office leasing market and a pretty tight inventory. That was a strong segment of the market.
ZACK KIFER: Most people are not wanting to make long-term decisions right now. They’re wanting to kind of sit this next six months out and see what the world looks like then.
TOM ALLEN: In northwest Arkansas we’ve seen a shift of many Class B office space tenants migrating upwards to Class A. Class A has been a new entry into this market. … There are many tenants that are looking to upgrade. So that’s probably what’s most popular right now.
Do you expect these trends to continue?
JEFF HATHAWAY: Yes. I don’t want to dismiss the value of live/work/play trends in urban core areas, which is real and will continue, but our market will continue to be primarily “commute by private auto” for the near future. In addition, the aftereffects of the pandemic will include a general turning away from dense occupancies and elevator rides, so I see a trend toward smaller, shorter buildings with more spacious layouts, which bodes well for high-quality suburban development in Central Arkansas.
TOM ALLEN: I don’t think the B spaces are necessarily doomed to have any long lasting negative effects as long as the B space upgrades. I think they’re going to have to offer some amenities in B spaces as well.
Pre-pandemic where did you see downward trends?
JEFF HATHAWAY: Aside from the pandemic, we continue to have rental rates in our market that are tenant-favorable and make it difficult to justify speculative, multi-tenant office development, so our pace of ground-up construction has been slow.
How did your sector perform in the previous year?
JEFF HATHAWAY: It was stable in 2019 and early 2020. As brokers facilitate moves and serve the needs of users, we’d like to have more options for large space requirements, but we’re also pleased that we have some market equilibrium. Landlords don’t need to make ridiculous concessions in structuring deals, and tenants enjoy rent levels that compare favorably to what they’d be paying in other markets.
TOM ALLEN: Class A, it was trending upwards. We had more inventory coming on the market. We had some people concerned about too much inventory. I was not one of them.
How has the pandemic affected the market from your perspective?
JEFF HATHAWAY: We’re hoping there will be a net balance between more people working from home and more square footage per person for the many businesses that conclude they work best by being together physically. For now, prospects are keeping us busy as we help them plan for growth and relocations, but the actual transaction volumes for 2020 are likely to reflect a dip due to the disruptions caused by the virus. Of course, no one yet knows how long or severe the pandemic will be.
HANK KELLEY: Most of our leasing and sales activity slowed significantly as no one wanted to make a long term purchase or lease commitment or even look at space for relocation or a new location. Some buying activity happened during the pandemic that had gone to contract prior to the pandemic. Over the last 75 days we have had less leasing and sales activity than any time in my 35 years in the industry.
ZACK KIFER: During the first couple months we’d do, on average, I’d say 50 to 100 calls a day. We did drop to five calls a day for a good month and a half during the heaviest of the COVID issues. We’re starting to see that activity picking up in the past month. … People were starting to call again, and not necessarily making decisions but at least looking.
How has the pandemic affected the day-to-day ways in which you do business?
JEFF HATHAWAY: Like most, we’ve used Zoom for both internal and client meetings. We take more videos of space for “virtual tours” than we used to. We’ve seen a diverse mix of how careful the prospects are when physically looking at space, but we remain very sensitive to the issue and take every possible precaution when accommodating a request to see space.
JOSH BROWN: Our employees have been able to work from home. Some of them like it. My partner asked me if I was able to fully utilize them — my response was easy — no way. We perform much better and more efficient when our team is in the office.
What was the biggest surprise of the past year?
JEFF HATHAWAY: Our firm was involved in two separate acquisitions of 100,000 SF suburban office buildings at pricing slightly below and slightly above $100/SF, dramatically less than it would cost to build the same properties now. Until we see a healthy dose of new construction around here to increase the supply of products, we may not see many more of those opportunities for a while.
TOM ALLEN: I guess I’ve been surprised at how strong the demand for Class A office space has been.
What’s the outlook for the office market for 2020-2021?
JEFF HATHAWAY: The office market will see a continuation of moderately rising rental rates, upgrades of older space, a vacuum of speculative new construction, and a solid occupancy rate hovering right around 90% and beating the national average.
JOSH BROWN: I think large office markets may be impacted the most. Little Rock may have some impact, but Jonesboro and other tertiary types of markets I think will be relatively stable.
HANK KELLEY: The office sector will reflect more vacancy as a result of an accelerated attitude about employees working from home instead of an office. This movement will cause most companies to experiment with pushing the envelope on which employees really have to be in an office versus an employee that can work remotely.
CLINTON BENNETT: My prediction is that we will see a little softening of demand for leases, leasing space, late this year and early 2021, but I feel like we move through that pretty quickly and get back on the path of strong absorption and expansion of the market. I’m extremely bullish long term. I may be wearing rose colored glasses because I’m up here living in what I feel is a very special place but I feel like we’re really going to keep growing in a very strong manner.
TOM ALLEN: I’m optimistic. The glass is half full for me. It’s actually three quarters full. With what we’re going through worldwide, the office market is really holding up strong. That’s the good news. If we can come out of this pandemic relatively quickly … I’m optimistic that we’re going to pick back up. Maybe not as strong because we were extremely strong when it hit.
Arkansas Business Article | June 29th, 2020