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The iconic Bank of America Plaza in downtown Little Rock is nearly half empty, but real estate developer Keith Richardson is unfazed.

Since purchasing the 24-story skyscraper and adjacent seven-story parking lot for $8 million in June, Richardson has been busy with long-delayed maintenance and repairs. It has cost him about $2 million so far, and he plans to spend another $1 million to $1.5 million on real estate over the next five months.

“Then we will start actively trying to rent out space,” he said. The building will be renamed 200 West, and the new name will identify its location on West Capitol Avenue.

The Richardson renovation comes at a time of uncertainty in the office space market, with hybrid work hours becoming the norm for many businesses.

Real estate experts are also exploring the best possible uses for office buildings in a developing environment, with many wondering if central office use will ever return to pre-pandemic levels.

The Central Arkansas office market performs slightly better than other parts of the country. The central Arkansas market started 2022 with a vacancy rate of 14.1% and ended the year at 13.2%, according to the Colliers Little Rock office’s Central Arkansas market report.

The nation’s vacancy rate was 15.7% at the end of the year, according to a Toronto-based firm that offers real estate and investment advice.

A rate of 13% is “fucking good,” said Jeff Yates, managing partner at ARK Commercial & Investment Real Estate of Little Rock.

In some areas of Little Rock, there is a high demand for office space.

“If you want to try and find office space in downtown Little Rock, it’s a really tight market,” Yates said.

But the market also has weaknesses, including the city center.

Homework nearly tripled

“The Covid-19 pandemic has caused a major shift towards working from home,” Metroplan of Little Rock’s Little Rock Regional Economy 2023 report released last week said. Metroplan is the planning agency for central Arkansas.

The report says that the proportion of home-based workers in the region nearly tripled from 2019 to 2021, with 11% of local workers now working from home.

“This change has long-term implications for areas of Central Arkansas that house a large amount of office space, especially downtown Little Rock,” the report said.

But Richardson has already been successful in attracting tenants.

Landmark CPA, which has offices in Arkansas, Alabama and Arizona, has leased the 17th floor, he said, and the space is being renovated. And another tenant has a queue for a full floor.

“It’s amazing,” Richardson said. “We didn’t do any marketing, but people contact us and that’s good.”

Are defaults coming?

Mark Bingman, vice president and executive broker of RPM Group of Little Rock, a full-service real estate firm, said CEOs are wondering if they need the same amount of office space they had before the pandemic, which could lead to default of lessors. in the center of Arcasas.

“I think it’s unavoidable when you have less space requirements,” Bingman said.

Nationwide, office delinquency rates are expected to rise as Class B and older buildings continue to struggle with demand, said Stephen Bushbom, director of research at Trepp of New York, a provider of data, insights and technology services for structured finance. commercial real estate. and banking markets.

“However, the growing problems with office loans are not quite comparable to the expansion of the housing market in 2008,” Bushbaum said in an email to Arkansas Business.

“At this point, it looks like the office real estate market will develop in the same way that we have seen in regional malls,” he wrote.

Little Rock has weaknesses in the office space market, and one of them is downtown. Employees love the convenient parking of suburban jobs, he said, and some of Jeff Yates’ clients are “really tired of begging” downtown. (Sarah Bingham)

Bushbaum said it would take years for distressed properties to move through the system, especially since many loans may not default until they reach maturity if the underlying properties are still positive cash flow.

A Trepp research note published in February said the arrears rate on commercial mortgage-backed securities rose 25 basis points to 1.83% in January from the previous month for office real estate in the United States.

In November, the level of overdue debt on office real estate amounted to 1.7%.

What tenants want

RPM’s Bingman said it’s a renter’s market right now, and it will be until the end of the year.

He expects to see rent discounts and landlords offering amenities like free parking, a fitness center or daycare to lure potential tenants.

Trepp’s Bushbom said some tenants want a collaborative, welcoming environment that has been described as “a clubhouse feel”.

“In other words, a return to a simple cubic life may be meeting long overdue resistance,” Bushbaum said.

“Workers have grown accustomed to the comfort of working remotely, so convenience has become an important tool in encouraging people to return to the office willingly.”

Amenities are becoming increasingly important to tenants, said John Martin, director and vice president of brokerage firm Moses Tucker Partners of Little Rock.

In addition to building improvements such as new flooring, lighting, and paint, tenants also want the latest electronic equipment in the office. Owners who provide these amenities and are responsive to tenants “have success,” Martin said.

Slight rent reduction

The Colliers report said that office rents in most submarkets in central Arkansas “decreased very slightly last quarter but remained largely stable across all submarkets in central Arkansas.”

Colliers began collecting data on vacant office and retail space in central Arkansas in early 2020. The company reported a high vacancy rate of 20.3% in the third quarter of 2020, about six months after COVID-19 was discovered in Arkansas.

Yates said one of his clients recently moved from downtown to the west side of Little Rock due to several factors, including improved parking and ease of commuting to the office. And “they are really tired of begging,” he said.

Notes: Central Arkansas includes Conway, Benton, Bryant, Jacksonville, Little Rock, Momel, North Little Rock, and Sherwood. (Source: Colliers Central Arkansas Market Report and Colliers of Little Rock)

Other companies want to be closer to the suburbs to offer their employees shorter commutes and convenient parking.

“I think the suburban office will be more attractive than in the past, and simply because you will already be working in the office three to four days a week,” Bingman said.

“And you know, other times you work from home and you’re remote.”

Office workers also want to be close to food and drink offerings.

Richardson, the developer, said he plans to open a restaurant on the ground floor of the building. According to him, the room has “large open 20-foot ceilings.” “I just need to find the right restaurant that wants to move into our building.”

Four day work week?

However, the question remains whether employees will be in the office five days a week.

“If hybrid work leads to higher productivity, better employee retention and, in some cases, lower overhead costs for companies, I think it’s unlikely that office occupancy rates will return to pre-pandemic levels,” Bushbaum said.

“Especially when you consider that there has been a lot of talk about a four-day work week, at least for some industries, and that Europe and Asia, which lead the US in back office rates, are still well below pre-pandemic levels.” Bushbom said.

Meanwhile, office buildings in downtown Little Rock have fallen on hard times, said Yates of ARK Commercial & Investment Real Estate.

Given the high vacancy rate in downtown skyscrapers, the question arises: “Is the best and best use of some of these office buildings?” Yeats said.

He said residential or commercial might be a better fit.

Richardson said he’s not ready to add living quarters to his building, but “it’s obviously an option.” “But right now we’re really trying to fill it in for office use. It’s a bit more difficult than in years past, but we think we can handle it.”

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