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VOL. 123 | NO. 150 | Friday, August 1, 2008

Office Market Fares Well in Tough Times

By Eric Smith

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TREND BREAKER: The Legacy Center at 1661 Aaron Brenner Drive in East Memphis is another success story for office product in the Poplar Avenue corridor. Bolstered by its prime location and Class A space, the three-story, 65,000-square-foot building opened in the second quarter at nearly 100 percent occupied. -- PHOTO BY ERIC SMITH

In another case where numbers don’t paint the entire picture of the real estate market, consider the latest office statistics for Memphis compiled by the local branch of CB Richard Ellis (CBRE).

While the city’s office sector registered a disappointing 234,330 square feet of negative absorption during the second quarter (April through June), it doesn’t indicate any single employer’s mass exodus from the city. Instead, that figure resulted from FedEx shifting a large share of its employees in the airport area to its owner-occupied world headquarters at Hacks Cross and Winchester roads, vacating 255,067 square feet in the process.

Take away that anomaly and the office market fared OK in the quarter, especially in light of the nationwide economic slowdown.

While vacancy crept upward slightly, from 14 percent to 14.6 percent market-wide, four out of seven submarkets enjoyed positive absorption and overall lease rates increased.

Downtown saw 11,517 square feet of positive absorption for Class A and B space combined; the Tenn. 385 corridor saw 4,132 square feet of positive absorption; and Midtown saw 12,401 square feet of positive absorption.

But nowhere was Memphis office stronger than Class A space in East Memphis, which enjoyed only a 2.6 percent vacancy rate and 50,763 square feet of positive absorption.

Destination: Poplar

Not surprisingly, that submarket again carried the Poplar Avenue corridor to success. The city’s lifeline – with its collection of steel and glass landmarks – turned in another stellar quarter with the only construction in Q2 and more on the way.

“The Poplar corridor is where everyone has wanted to be,” Joe Steffner of Grubb & Ellis told The Daily News recently. “Over the past 15 years the market has grown and people have gone to the 385 corridor as kind of the second choice. Over the past several years, the tenants that either couldn’t find space on Poplar or didn’t want to be on Poplar for whatever reason have tended to come back to Poplar.”

The success in East Memphis was highlighted by completion of the Legacy Center, a three-story, 65,000-square-foot building that was the only office space delivered in Q2. The property was almost entirely preleased before opening, a phenomenal feat in any market.

Its developer, David Peck of Peck Investment Co., said the building enjoyed success because of a program that allowed some tenants to acquire undivided interest in the building equal to the square footage they leased.

And, of course, the center was aided by its location off Poplar between Massey Road and Kirby Parkway.

“There’s no question the Poplar corridor is head and shoulders above other markets in the city in terms of occupancy, rental rates and any other way you want to analyze it,” Peck said.

Other buildings might cash in on the demand for space along Poplar. The SunTrust building at 999 S. Shady Grove Road is slated for completion in Q3, and the Triad Centre III near Poplar and Shady Grove is coming down the road.

Location and luck

Peck, who worked for Weston Cos. for 32 years, said Legacy Center’s arrival at a time when nothing else came online helped make it unique compared to some of Memphis’ best-performing office complexes.

“We developed everything from the Crescent Center to the Forum to the Renaissance, a lot of high-profile buildings,” he said. “We never had this kind of success because it was a different concept of strictly building for the market. I’m not aware of any building in the city that has been 95 percent preleased before we opened the doors to let people in.”

Following Legacy Center’s lead, Class A office space in East Memphis dominated the categories of vacancy rate (2.6 percent) and lease rate per square foot ($25.19).

The submarket was followed in the vacancy ranking by Midtown Class A at 5.7 percent and 385 corridor Class A at 7.2 percent. As for lease rates, 385 Class A space came in second at $22.01 per foot and Northeast Class A came in third at $20.50.

Back to the future

Where office stats go from here is anyone’s guess. As the CBRE report noted, many businesses are taking a “wait and see” approach with regard to leasing, and the long-term affects could be increased vacancy and decreased rates to combat that.

Peck has been in the business since 1974, experiencing an oil and gas crisis in the 1970s, an interest rate fiasco in the early 1980s and revised tax laws in the late 1980s. But this period of credit crunch and faltering consumer confidence worries him more. Its impact might be felt for months and months to come.

“I’ve never seen it as shaky as it is,” Peck said. “The stability of the buildings, the occupancy levels and everything are OK right now. I haven’t heard or seen any companies that are dramatically downsizing in the office buildings, but the financial markets and insurance companies and things like that are cutting back. I don’t know how long it’s going to last. It’s certainly going to last this year and possibly through ’09.”

PROPERTY SALES 59 59 4,335
MORTGAGES 48 48 4,862
BUILDING PERMITS 100 100 10,251
BANKRUPTCIES 45 45 3,194