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VOL. 10 | NO. 7 | Saturday, March 01, 2014

Buzz Around Spec Office Space Starts to Swirl

By Amos Maki

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International Paper Co.’s new office tower in East Memphis is under construction now, but it’s been four years since the last speculative office building opened its doors in Memphis.

It’s been four years since the last speculative office building – the Triad Centre III building from Highwoods Properties on Poplar Avenue – opened its doors in Memphis.

(Memphis News File/Lance Murphey)

That was the Triad Centre III building from Highwoods Properties, which closely followed the arrival of the Boyle Development Co. building at 999 Shady Grove Road.

With vacancy rates for Class A space in the East Memphis office submarket declining steadily could Memphis see the announcement of a new speculative office building in 2014?

Several commercial real estate professionals think that prospect is possible, although unlikely.

For one, developers would need to achieve a significant amount of preleasing before they could break ground.

“For a developer to announce a new project they are going to need to prelease approximately 50 percent or greater,” said Ron Riley of Colliers International Memphis.

The Memphis office market, powered by an unusually strong fourth quarter, ended 2013 with positive net absorption of 40,558 square feet, according to CB Richard Ellis Memphis.

The vacancy rate for Class A space in the highly coveted East Memphis submarket, where the city’s prime office properties are located, dipped to 5.4 percent by the end of 2013, which amounts to around 143,947 square feet of available space.

The International Paper tower is being built in the highly coveted East Memphis submarket.

(Memphis News/Andrew J. Breig)

The diminishing amount of space available in the city’s premier office submarket has helped fuel speculation about the possibility of a new speculative office building.

“At this time I do not think you’ll see a new speculative office building coming out of the ground yet,” said Tony Argiro of Highwoods Properties at the Memphis Area Association of Realtors Commercial Council’s property forecast summit. “Even if one does come out of the ground I don’t think it will have an impact until 2016.”

But several large employers, including FedEx Corp. and Raymond James Financial Inc., could have to make decisions on their real estate needs later this year or early next year and may be attracted to the idea of a new office building.

“There are several large users of office space whose leases are rolling in the next 18 to 36 months and, given the overall tightness of the Class A market, it is possible that we will hear an announcement in 2014 of a new Class A office building,” Riley said.

One of the biggest trends in the local office market is tenants seeking to use as much square footage as possible by eliminating closed offices and moving toward a more open office environment.

“We think office users will look to have the most efficient space possible,” Argiro said. “If you’re paying for it, you don’t want to waste it.”

The move toward more collaborative space for employees could help trigger the development of a new building because it can be easier, and maybe even cheaper, to design space from the ground up.

“Larger users continue to look for ways to become more efficient and one of the main ways is for them to become more dense with shared working environments and collaboration areas,” Riley said. “It is very costly to achieve this in a second-generation space from both the landlord and tenant’s perspective. Having a blank canvas to work from for both parties is very appealing and landlords can design appropriately on the front end while preserving the overall integrity of the project.”

While there is a chance a new office building could be announced the year, Class B property owners are more likely to benefit in the near term from the limited supply of Class A space in East Memphis, especially if the properties have been upgraded.

“What we’re watching to see happen is the re-emergence of Class B space,” said Ron Kastner of CB Richard Ellis Memphis. ”Owners either invest in these properties and shine them up or they don’t and you see new construction. One or the other is going to happen.”

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RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 52 136 5,209
MORTGAGES 79 182 6,891
FORECLOSURE NOTICES 1 38 1,594
BUILDING PERMITS 328 328 12,307
BANKRUPTCIES 70 175 5,475
BUSINESS LICENSES 30 58 2,119
UTILITY CONNECTIONS 85 182 7,240
MARRIAGE LICENSES 19 43 1,501

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