Pinnacle Departure Brings Real Estate Challenge

By Sarah Baker

Pinnacle Airlines Corp.’s relocation of its Memphis headquarters to Minneapolis by May should have long-term leasing effects on the Downtown office market.

The regional air carrier occupied 170,000 square feet on floors 2 though 14 of One Commerce Square, 40 S. Main St. The current occupancy of the 29-story, 399,350-square-foot office tower is 77 percent, and will drop to 38 percent when Pinnacle and its 500 employees vacate.

In 2011, a total of 65,440 square feet was leased in Downtown, according to Bentley Pembroke, vice president with Cushman & Wakefield/ Commercial Advisors Asset Services LLC. One Commerce Square accounted for 65 percent of this total – more absorption than all other Downtown buildings combined.

“Obviously, nobody’s excited to lose your anchor tenant, Pinnacle Airlines, but what we’ve got going forward is newly renovated, current space with new building standard finishes, fully sprinklered office space for Downtown, which is pretty rare,” Pembroke said.

“We also have a couple of floors that Pinnacle’s giving back. We had the opportunity to do multitenant, put in common area corridors, cater to the 3,000- to 10,000-foot user, as well as market the space as a contiguous, 170,000-foot block, which is very unique in the market. We also have the capability to do anything from 13,000 to 50,000 to 75,000 feet.”

“To backfill 170,000 (square feet) based on the historical numbers is going to take a very long time.”

–Ron Riley
Senior vice president, Colliers International Asset Services

One Commerce Square’s ownership group, Memphis Commerce Square Partners LLC, has invested more than $20 million in the landmark Downtown tower since its $7.5 million purchase in 2010. Improvements specific to Pinnacle were $8 million, said partner Gary Prosterman.

“We do have a very reasonable basis in the building,” Prosterman said. “We’ve had a lot of our key tenants renew their leases since we acquired the building, we have redone their spaces as well. Gerber/Taylor renewed and has a new space, law firm Harris Shelton, same thing. Our tenants that are there I think are very stable and they know the building is stable.”

The Downtown Memphis Commission worked tirelessly two years ago to bring Pinnacle Downtown to occupy the majority of the not-so-long-ago dark tower. Paul Morris, DMC president, said Pinnacle’s departure opens up a lot more office supply Downtown and doesn’t necessarily change the demand.

“Anytime you have an over-supply of something and not enough demand, you’re going to hurt the economics of the deal,” Morris said. “So if you’re trying to fill space with one of these other competing properties, as was challenging as it once was, now you have to compete with some Class A office space at One Commerce Square that has got a real attractive price point.”

Ron Kastner, senior vice president with CB Richard Ellis Memphis, said any new product is competition. CBRE leases and/or manages Downtown office towers 50 Peabody Place, 88 Union Center, Brinkley Plaza, Pembroke Square and the Tower at Peabody Place.

“I view that space as being new inventory, meaning that 18 months ago when it was NBC SunTrust space it was unimproved, or at least it was 1972 improvements,” Kastner said. “What you have now are 2011 improvements in those spaces, so they’re market ready, whereas before they were not.”

Ron Riley, senior vice president with Colliers International Asset Services, said the Pinnacle situation is “a horrific blow for Downtown as it will have a ripple effect on the landscape.”

“Over the last four years, Downtown has averaged approximately 40,000 square feet of positive absorption and that includes the Pinnacle move in 2010,” Riley said, citing Xceligent data. “When you back that out, the absorption dwindles to nothing.”

Riley said historically, Downtown has had tenants that stay within the submarket and not a ton of new tenants moving there. Typically as the economy improves, the market sees positive absorption from existing firms expanding.

“To backfill 170,000 based on the historical numbers is going to take a very long time,” Riley said.