The Memphis office real estate market began showing signs of life in 2013, with the market for Class A office space in the East Memphis submarket fueling the resurgence.
In one of the biggest office stories of the year, Pinnacle Airlines vacated its space at One Commerce Square. But the state of Tennessee signed a lease to occupy more than 100,000 square feet at the building.
(Daily News File/Lance Murphey)
While the city’s overall office market numbers may not appear very strong, the city’s most desired office submarket – East Memphis around Poplar Avenue and Interstate 240 – began showing strong signs of improvement in the second half of the year.
The vacancy rate for what is described as “Class A-plus” space in six buildings along the Poplar corridor in East Memphis has been cut by more than half, dropping to 7.7 percent in the third quarter from its peak of 20 percent in 2010, according to Cushman & Wakefield/Commercial Advisors.
“I think the Class A market, especially the ‘A-plus’ market, is almost back to where it was pre-recession,” said Kemp Conrad, principal with Cushman & Wakefield/Commercial Advisors.
Several headquarters announcements and expansions paved the way for the improvement.
Wright Medical Group plans to move its corporate headquarters to Cherry Road in East Memphis from Arlington. Highwoods Properties is constructing a new office tower for Memphis-based International Paper, and National Bankers Trust will move its headquarters to 813 Ridge Lake Blvd. from 8245 Tournament Drive in Southwind.
In addition, Adams and Reese LLP is opening an East Memphis office, signing a lease for 13,500 square feet at Highwoods Properties’ Crescent Center. The law firm will also maintain a Downtown office in the Peabody Place complex on South Main Street.
Dobbs Management Service LLC expanded its presence at Highwoods’ Triad Centre III building, and Financial Federal signed a lease to occupy 27,000 square feet on the first and second floors of the Renaissance Center.
Also, Trustmark National Bank announced it would move its Memphis headquarters to 5350 Poplar Ave. in East Memphis from 1365 S. Germantown Road, and Monogram Foods announced plans to lease 30,930 square feet at 530 Oak Court Drive, relocating from its 19,300-square-foot location on White Station Road.
“Those are all good signs,” Conrad said. “In terms of IP, Wright Medical and Monogram Foods, I can’t remember so many decisions on 10,000 square feet or more.”
The increased activity in East Memphis has put landlords in a much stronger position. With few large blocks of available Class A space left in the submarket, landlords have been able to increase rental rates and reduce concessions.
“In the East submarket, particularly the Class A buildings, we have fewer blocks of available space, particularly blocks larger than 10,000 square feet, and rental rates and concessions are improving,” said Steve Guinn, vice president of Highwoods. “Owners of Class A space are in a better position than they have been in a while.”
That increasingly positive outlook for landlords means tenants that signed leases this year might have hit the “sweet spot,” locking in rental rates before they increased too much.
“The people that made deals this year struck at the exact right time,” Conrad said. “I think you’re going to see a pushing of rates until we see new construction, but I don’t see anything like that happening in the near future because you’re going to need 50 to 75 percent preleasing.”
The improving outlook for Class A space in East Memphis means tenants could look toward other markets for their needs.
“I think the popularity of the East Memphis market will continue,” said Guinn. “As the Class A spaces continue to tighten, there could be opportunities in the Class B buildings or other markets.”
While the East Memphis submarket was showing strong vital signs, questions about the health of the Downtown office market lingered.
Pinnacle Airlines vacated 170,000 square feet at One Commerce Square Downtown. However, the state of Tennessee, which is vacating the Donnelley J. Hill State Office Building, signed a 15-year lease for 104,673 square feet at the skyscraper at 40 N. Main St.
Adams and Reese LLP is leaving Downtown, and Raymond James, which acquired Morgan Keegan & Co. in 2012, has been shedding workers at its 21-story Downtown office building and could relocate in 2015.
The Downtown office market is being hurt by long-term demographic shifts – businesses and their employees have moved to East Memphis and the city’s suburbs over the decades, essentially shifting the city’s central business district from Downtown to the Poplar corridor – but could still remain attractive to certain employers.
“We’ve got a 24/7 Downtown, and for the right kind of company, that’s a great submarket to be in,” Conrad said. “But the center of our community has shifted to Poplar and I-240.”
“One of the challenges we have is the typical office worker lives in East Memphis or Germantown or one of the other suburbs. I think getting companies where most of their employees have a five-minute or 10-minute commute to having a 20-minute or 30-minute commute is still tough.”