I will elaborate on my comment above, as you wished.
The main reason for this behavior of your IME software is that it is configured to make guesses about what you want to type. Since there are so many Chinese characters with the same pinyin initials and finals, it has to. But it also tries to save you from typing, so that you don't have to type out long sequences of pinyin to input something in Chinese. Here's some basic info:
In Chinese the Big Rule No. 1 is that:
Every character is one syllable and every syllable is one character. (It's of course not true for 'erhua' 儿, but we'll get to that.)
A syllable can be represented with pinyin, where it has an initial and a final. (There are some vowel only syllables, of course). An initial is typically a consonant at the beginning of the syllable, while a final is a vowel (single or diphthong), optionally followed by -n or -ng (not all combinations are "valid", though, check such tables.)
So to save you from typing to much you can omit the finals in one or all of the pinyin syllables you are typing out. e.g. You don't have to type:
zhongguo to get
中国, it's enough to type the initials
zhg and you are given a list of options where either
中国 is the first or second. Since
zhg will not get you 中国 directly, but you have to choose, which takes effort and requires extra key hits (selecting the desired characters via a numeric key, or even browsing a long list of pages of characters), so you decide to refine your tactics and enter the final part of one ot the syllables. Let's say you decide for
(first initial + second full syllable) which is perfect, because this will very likely get
中国 as the no. 1 result and you only have to hit the space bar and you're done. You could also try
(full first syllable + second initial), that will also work fine, but will require you to type more, since
zhongg is longer than
zhguo. So I hope you see, what we are doing, optimizing the input process (typing less and faster to get the same characters as by typing out every initial and final).
By now you have probably realized that when you type nar it is interpreted as
(first full syllable + second initial) in the algorithm of your IME, that's why you are given this option.
The reason you think it should be giving you
那儿 is that you are not typing the correct pinyin for
那儿. This is a strange phonetic phenomenon of Northern Chinese speakers, especially Beijing and surrounding geographic areas, but it is not found or rarely found in other parts of China, especially in the South. This erhua final -r is sort of an exception in the Chinese phonology, since the only finals in Chinese are those that end in a vowel (like, -ao, -ua, -ie, etc.) and those that end in -n or -ng (-an, -un, -ang, -iang, etc.) If you check the pinyin table above, there are no syllables that end in -r (except for er, which then again is a full valid syllable). But since Northern speakers retain these final -rs it gets some sort of representation in writing throug 儿 (er), which in these cases is reduced to an r sound and also modifies the final of the preceding syllable (this mostly means that final -n and -ng are dropped, like
点儿 dian'r --> "diar" [approx.])
So by now, you should have an understanding of this erhua syllable. I am not qualified to decide whether this is a Northern slang or it is widely accepted in speech in writing in the North (since I have never lived there) but I do know that in the South this -r is very rarely heard and almost never written. A Southern speaker of Mandarin will use
那里 both in speech and writing instead of
那儿 and will simply omit 儿 even in cases where it is a fix part of words (in the North) like
事儿, etc. these are simply 点 and
事, since those
儿 absolutely add no meaning to them, let alone the fact that 儿 originally means 'son', so this erhua use of 儿 is really only a "phonetic stop-gap measure" and IMHO should be avoided in writing for this reason, but also because of the speed of typing. (Type only what you need to type, don't add an extra character which doesn't alter the meaning). So I would say replace
那里 and omit 儿 in writing everywhere you can. (OK, if you are a big fan of erhua and like this because you have lived in Beijing, then it's up to you, but otherwise I don't see any point why one would write like this)
I really don't know if this amateurish "crash course" is useful to you or not, it is based on my experience using IME software and personal opinion on 'erhua'.