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VOL. 127 | NO. 235 | Monday, December 3, 2012

Slow and Steady

Flow of small deals helps bolster city’s office market

By Sarah Baker

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The local office market saw little change in the third quarter, and brokers say the fourth quarter will likely yield similar results.

The International Paper headquarters at 6400 Poplar Ave. could help provide a bright spot for the city’s office market. The company is expected to increase its presence, including a new build-to-suit building.

(Photo: Lance Murphey)

Memphis’ vacancy rate ended the quarter in the mid-14 percent range, the same levels as 2008, according to Colliers International Memphis’ Q3 office report. Vacancy during that period in 2007 was below 12 percent.

“We continue to see tenants go from building to building and leveraging the ability to get the best possible deal that they can,” said Ron Riley, senior vice president of Colliers International Asset Services’ office division. “We are seeing relatively few new net absorption in any submarket.”

Riley said he’s not aware of any large leases out for signature by year-end, but there is some activity on the horizon that will definitely impact the market when it transpires. For instance, whether or not Pinnacle Airlines Corp. will choose to stay in Memphis or move to Minneapolis remains uncertain.

“At this point, based on what I know, it’s a coin toss,” Riley said. “If they stay, they’re certainly not going to come out of this (bankruptcy reorganization) with the amount of square footage that they had before, but they should come out of it obviously in a much better financial position.”

The fourth quarter will also reveal the new owner of former headquarters of Harrah’s Entertainment Inc. at 1023 Cherry Road, which was auctioned in November through Auction.com. The 113,556-square-foot, two-building complex is empty but represents the market’s largest office sublease, with Harrah’s terms for the 59,159-square-foot building not expiring until April 2017.

Additionally, Lenox Park Professional Buildings A and B are facing a foreclosure sale Friday, Dec. 7. Riley said it’s an interesting deal because CWCapital holds the note and is the expected buyer.

Local deal flow is steady among users of 5,000 square feet or less, according to CB Richard Ellis Memphis’ Q3 MarketView report. Those accounted for 51 percent of the total square footage absorbed from July to September.

But what drives the office market is white-collar job growth, and Memphis hasn’t seen that, especially in the form of professional services. Kelly Truitt, president of CBRE, said at The Daily News’ recent commercial real estate seminar that what has happened is the sector makes “a few strides forward, and then something happens.”

“Really, that doesn’t have to do with the market, it has to do with mergers and acquisitions and some downsizing,” Truitt said.

While it may have flown more under the radar than Pinnacle’s financial woes or Raymond James Financial Services Inc.’s acquisition of Morgan Keegan & Co. Inc., Excel Transportation had 25,000 square feet in the East submarket that it recently vacated following being bought out by Hub Group last year.

Direct Insurance is another example. Truitt said that company had a large presence by Memphis International Airport and provided solid jobs, but was acquired and is getting ready to make the move to Plano, Texas.

Moving forward, industry professionals are watching closely the status of First Horizon National Corp.’s First Tennessee Bank, which has given some space back to become more efficient.

“They’ve got quite a bit of sublease space that’s on the market right now,” Riley said. “They appear to be doing continued consolidation, no different than many of the corporations out there. It’ll be interesting to see how (First Tennessee’s buyout package offered last month to 400 employees) kind of affects the local marketplace with some additional people that will be on the streets.”

Meanwhile, Accredo Health Group, a homegrown pharmaceutical company that was purchased by Medco Health Solutions and then Express Scripts, is also in flux.

“They’re at Century Center, really in a more of an industrial-type environment, but they’re a huge employer here, great jobs, and there’s been a concern,” Truitt said.

On a brighter note, a handful of looming deals could be a boon to the office market. International Paper is expected to increase its presence in Memphis, including construction of a new build-to-suit building, which could be opportunistic for white-collar job growth.

There’s also a requirement circulating from the U.S. Government to lease 95,580 square feet of space here, with a preference in Downtown’s Central Business District. The lease term is 20 years beginning April 2015, and could be a chance for build-to-suit construction.

Truitt is also encouraged by the resurgence of the city’s banking industry, especially community banks that have been working hard to get back on track.

IBank, in particular, they’ve had great performance, and had some growth,” Truitt said. “I think First Tennessee is taking some steps. I really anticipate the banking industry to improve here and thereby positively impacting the office market.”

PROPERTY SALES 57 280 1,209
MORTGAGES 55 244 916