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VOL. 119 | NO. 127 | Tuesday, July 19, 2005

Business Growth Leads to Slow Office Rebound

LANCE ALLAN | The Daily News

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" Probably 80 percent of all newly absorbed square footage I would bet within the last 18 to 24 months has been from existing companies that are expanding or moving around."
- Ron Kastner
senior VP of asset services, CB Richard Ellis

As more businesses recover from tough economic conditions in recent years, many are realizing a need to expand. The trend is having a big impact on the Memphis-area office market - existing space that has sat vacant for years is slowly beginning to refill.

And since there hasn't been much new construction in the market, that positive absorption means declining vacancy rates.

"I think the A market has tightened up pretty nicely," said Steve Guinn, vice president of Highwoods Properties. "The B market is still pretty soft. There's a lot of space in the B market, particularly inside the (Interstate) 240 loop. But I think the top buildings from an occupancy standpoint are doing pretty well."

Ready for rebound. The signs of a recovering market are due to a local economy that has weathered the storm and is ready for a rebound. Ron Kastner, senior vice president of asset services with CB Richard Ellis, said many companies went into a hiring freeze even before 9/11.

"Typically where most cut costs is marketing and employment, and they've done both," he said. "They did it in advertising first and labor second. All these companies for three or four years have done nothing but tighten their belts.

"Now that everybody has had three, four years to look at what has truly been the outcome of all this, they look around and say, 'It's not that bad.' The general economy is improving; people's confidence is better."

The result has been increased marketing in an effort to boost sales. That has led to a need for bigger staffs and, as a result, more office space.

"That growth has driven local office expansion, and probably 80 percent of all newly absorbed square footage I would bet within the last 18 to 24 months has been from existing companies that are expanding or moving around," Kastner said. "Or maybe they are staying put and expanding and pushing out the smaller tenant next to them. That tenant has to go out to the market and has to find the new space."

Corporate moves. The market hasn't seen much recent movement among businesses coming in from outside Memphis, but Guinn doesn't believe it's because Memphis is an unattractive market.

"I would be interested to see if there are moves into any city," Guinn said. "There are moves, and Memphis has been getting moves, but you don't read about a 100,000-foot move into Memphis. But I don't think you see it anywhere.

"Last year, we had International Paper move 60,000-feet of people from Savannah, Ga., here. That was a big move. I think that was a positive deal that didn't get a huge amount of press. We dwell on the negative more than the positive."

No new space. The fact that there hasn't been much new product delivered in recent years has had a positive impact on the market.

"We're seeing health in the local office market like we did in '97, '98, '99 and early 2000," Kastner said. "The only difference is this time around, you don't have a lot of new building on the horizon. Last time the market was healthy, Poplar Avenue got to 95-plus percent (occupancy) and people started building buildings."

In turn, the market became saturated, causing rental rates to fall as vacancy approached 10 percent.

"Landlords were fighting for all the same deals," Kastner said. "This time around - especially in the suburban markets, I think - you don't have anybody building other than office medical space. That industry in general is very healthy and growing and it can support new development. But just typical, speculative, plain old office space, nobody is building any more of it right now because the cost to build it is so high and the cost to own it is so high versus the amount of rent an owner can command."

Technology trends. For a time, fears surfaced that businesses would need less office space as technology drove down demand for physical offices. The trend has made an impact, but overall need for space is still growing.

"I think people are becoming more efficient with the space they are needing," said Jill Schmitt, who represents tenants as a senior associate with CRESA Partners. "We're working with a group right now; they're in about 7,800 square feet currently. They're looking at moving to another, larger space but possibly have a couple of satellite offices because Memphis is spreading out.

"Collierville is starting to have a healthy office and flex-type space market. With people living all over the place, we're seeing companies that need basically a hub where people come and can print things out and do that sort of thing and check in and have some sort of synergy with the people they're working with. I think it's probably been going on, but because of how we're using the Internet and computers, it's increasing. It's becoming a lot more prevalent than what we saw five, 10 years ago."

Business growth. Smaller-scale activity, such as the growth of satellite offices and increases in hiring, will ultimately lead to improved occupancy rates. Kastner doesn't see much opportunity on the horizon for major business growth - like the last decade, when growth was driven by the dot-com boom. But as local companies begin to hire again, landlords are making minor improvements to properties to attract expanding businesses.

"I don't know who will replace that kind of user to stimulate more activity in the market," Kastner said of the loss of many dot-coms. "In the meantime, we're relying on a lot of law firms, ad agencies, your typical bread-and-butter kind of businesses that have been around a while. Banking - those kind of tenants are moving around, growing, and if they can't grow where they are, they've got to move out of that building and go to another property, and that's what's stimulating most of the velocity in the market right now."

PROPERTY SALES 79 321 2,586
MORTGAGES 90 426 3,033
BUILDING PERMITS 146 789 6,857
BANKRUPTCIES 36 212 1,999