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VOL. 126 | NO. 45 | Monday, March 7, 2011

Gaining Momentum

Large users bolster once-struggling office market

MICHAEL WADDELL | Special to The Daily News

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The office leasing market in Memphis is gaining momentum in the first few months of this year, following a slow but steady 2010.

Last year, smaller users kept the market afloat. But in the past month, an influx of interest from large users has been a welcome – and pleasant – surprise for the market.

“It’s crazy, just in the past few weeks we’ve seen a dramatic increase in the larger users. Right now, we have 10 large user prospects totaling 205,000 square feet,” said John Mercer, director of leasing at Highwoods Properties. “It’s an encouraging sign for the rest of the year.”

An interesting contrast is seen with Highwoods’ portfolio. So far this year, only 44 percent of its transactions have been below 4,000 square feet. Last year, 66 percent of its transactions, including new leases and renewals, were for suites of 4,000 square feet and less.

“So far this year, there’s much more activity than there was in 2010,” said Anthony Lopes, principal broker at Investec Realty Services, which is active in the East, Midtown and Northeast submarkets. “Larger users seem to be expanding and looking for additional space and/or new space. We’re starting to see some light at the end of the tunnel.”

Lopes expects to see an uptick in activity from smaller users later this year if the economy improves. When that happens, plenty of space will be available. Across Memphis, there are currently more than 300 vacant suites measuring 1,000 to 3,000 square feet.

Don Drinkard, senior associate with CB Richard Ellis who specializes in office leasing in the Downtown submarket, said he expects much of that space to get filled.

“The typical downtown office user leases 2,500 square feet,” Drinkard said. “We expect most of the positive absorption Downtown this year to come from local Mom and Pop-type businesses. Activity is definitely picking up in the first few months of this year.”

With few Fortune 500 companies entering the market for office space, growth will be dependent on the expansion of existing local companies. Smaller businesses were not affected as much by layoffs as the larger companies during the economic downturn. And the smaller users don’t have “shadow space,” or empty, unused space that they are leasing. So when they hire new people and expand, they will have to occupy a larger space.

Overall for all classes of office space in the Memphis area, which totals more than 19 million square feet, the vacancy rate dropped from 19.9 percent to 19.5 percent from year-end 2009 to year-end 2010. The overall asking rental rate dropped from $18.90 per square foot to $18.50 per square foot during that time.

Mercer said improved vacancy rates hinge on one thing – job growth.

“Larger users seem to be expanding and looking for additional space and/or new space. We’re starting to see some light at the end of the tunnel.”

– Anthony Lopes, Investec Realty Services principal broker

“Using a rough rule of thumb for occupancy of four jobs equaling 1,000 square feet absorption, even modest job growth can have a positive impact on vacancy rates,” he said.

With no new office construction on the horizon and none for the past couple of years, vacancy rates are expected to continue to drop.

“It’s not a ripe environment for speculative construction,” Mercer said. “Rates need to increase and vacancies need to drop before that will happen. What we may see this year or next is an increase in build-to-suit projects. If we can whittle down this vacancy rate, then maybe next year the environment might be better for new construction.”

Mercer cites the fact that large leases were spread out across the city last year as a healthy sign. Different industries – health care, transportation/logistics, medical research and legal – took space in a variety of submarkets.

NYK Logistics took down a big block of space in the Northeast submarket at Goodlett Farms, Pinnacle Airline Corp. finalized plans to move Downtown, Southern Avenue Charter Schools leased space in the Airport submarket, Acorn Research signed a lease at In-Rel’s 655 Quince building, and Glankler Brown PLLC consolidated their East and Downtown offices into Highwoods’ Triad One building in the Poplar corridor.

Thanks to Pinnacle taking down 170,000 square feet last year, the Downtown submarket enjoys the lowest vacancy rate for Class A office space at only 5 percent. Overall for the Memphis market, Class A space clocks in with an 11.2 percent vacancy rate, up 1.3 percent from the year before.

Prime Class A space is available in the East market. Highwoods has space in its Triad III building that came online at the end of 2009, and the entire top floor is still available at Boyle Investments’ building at 999 Shady Grove.

One area of concern this year is the airport submarket because it will lose Pinnacle’s space when it moves Downtown. There should be opportunities near the airport for companies to get into office space at affordable rates thanks to the aerotropolis campaign that is revving up over the next several months.

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