VOL. 126 | NO. 41 | Tuesday, March 1, 2011
Looking for Opportunities in the Economic Fog
Take one look at the economic trends of the Memphis office real estate market over the past year and the impact of the recession becomes all too clear. A fog of uncertainty, created in large part by low consumer confidence and the lack of a crystal ball to predict the future recovery, has had many companies sitting on the sidelines.
While many are waiting for the fog to clear to better assess the impact of the recession and sluggish recovery, they are looking for creative ways to reduce expenses. Some companies are finding that a slow office market offers tangible opportunity. Strategies have included downsizing square footage (especially for those that have incorporated staff reductions), consolidating operations, moving to a lower-cost alternative location or perhaps renewing a lease early to capture current lower rates. While this is positive from the perspective of the tenant, this is not always the case for building owners.
One of the harder-hit sectors in the Memphis office market has been Class A space. The cost for maintaining the quality and amenities expected is typically higher than for Class B buildings, resulting in a need for landlords to maintain relatively higher rates. Though some Class A landlords are lowering rents for existing tenants in return for extended term commitments, the inflow of new tenants to Class A space has waned and Class B owners have become beneficiaries.
Class B space vacancy rates have decreased to their lowest levels in several years. With an economic and business climate that has encouraged companies to seek overall cost-reduction strategies, landlords of Class B space have found themselves with a new audience of cost-conscious prospects. These prospects are finding that they can negotiate great deals – some that even include relocation expenses – for space that can actually be very similar to their current Class A offices. They may have to give up amenities like on-property fitness centers, luxurious lobby space or covered parking, but they may also end up with office space that isn’t materially different than what they had before.
We don’t know when the economy will rebound, nor do we know how long the current conditions in the Memphis office market will prevail. We do know that in general, commercial real estate lags the overall economy, with office real estate tending to lag industrial. Most believe – and we agree – that we will need to see sustained job growth before we see a significant improvement in office real estate. Many companies have downsized but have chosen to remain in their existing space. This underutilized, or “shadow space” will have to be filled again before these companies consider larger spaces.
A recent influx of new business, particularly in the industrial/manufacturing sector, has already provided a much-needed shot of adrenaline to the city and may just provide the jump-start we need to see recovery in all sectors. The fog may just be lifting.
Chris Cook is a broker with Colliers International