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VOL. 6 | NO. 24 | Saturday, June 8, 2013

Government Largesse

State’s, FBI’s need for space bolstering commercial real estate

By Amos Maki

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These days, it seems like office real estate brokers are fighting tooth and nail to find office space for government tenants.

While office brokers are typically chasing new business to town or urging existing firms to grow, they’re now looking for office space for government agencies, which have emerged as prominent players in the local office real estate sector.

For instance, the state of Tennessee has been out looking for space with two requests for proposals totaling more than 300,000 square feet, according to a first quarter office market view from CB Richard Ellis Memphis.

“I don’t remember a time when government was the leader looking for office space in the market,” said Larry Jensen, president and CEO of Cushman & Wakefield/Commercial Advisors. “Government has finally figured out they need to do a better job at facilities. As costs have risen, people are saying we can do things more efficiently. That means the people in government are asking the right questions.”

The state of Tennessee is preparing to abandon its 100,000 square feet of space at the Donnelley J. Hill State Office Building at Civic Center Plaza Downtown.

The state, following a consultant’s recommendation, said it would be cheaper to vacate the Hill Building than bringing it up to modern standards. Tennessee Gov. Bill Haslam pledged the roughly 900 workers there would be relocated elsewhere Downtown.

While the drama unfolds with the state, another government agency – the FBI – is looking for around 95,000 square feet of office space. Currently, the FBI occupies East Memphis office space at the Eaglecrest 1 office building at 225 N. Humphreys Blvd., behind Christian Brothers High School and adjacent to Baptist Memorial Hospital-Memphis offices.

Representatives with Cushman & Wakefield/Commercial Alliance would not confirm or deny if they had bid on the state office space but did say they were working with the Greater Memphis Chamber to land a large tenant to absorb the roughly 170,000 square feet of space Pinnacle Airlines is leaving at One Commerce Square.

Other than the government contracts out there, office brokers will likely focus on retaining current tenants, bringing in firms new to Memphis or poaching tenants when their leases begin to expire at their current locations.

“When we take out what the government is looking for, we’re still tracking 600,000 square feet of tenants eligible to sign leases, new and existing tenants,” said Ron Kastner, senior vice president of CB Richard Ellis Memphis. “When you work with organizations to bring new business to Memphis that’s when you really win.”

While pursuing new tenants, brokers also keep a close eye on tenants whose leases may be coming to an end.

Kelly Truitt, president of CBRE Memphis, said his firm is tracking 1.2 million square feet of active transactions in the office market, including the government projects and some speculative projects that are also looking at other markets. In addition, CBRE is tracking existing businesses and when their leases will expire.

The possible government tenants could provide some relief to the Memphis office sector.

In the first quarter, the market gained 57,912 square feet of empty space. Pinnacle Airlines is in the process of abandoning 170,000 square feet of space at One Commerce Square.

Pat Gamble, vice president at CB Richard Ellis Memphis, said one word describes the local office market: stability.

“We haven’t seen job growth and we’ve seen some layoffs but not a lot,” Gamble said. “So it’s all about jobs, which creates the demand for office space and then drives the cost of rental rates.”

Analysts predict the office recovery will be a long, hard slag.

“With looming move-outs, slow activity, and predicted slow employment growth, the Memphis office market appears to have a long road ahead for recovery,” read a first quarter office market report from Cushman & Wakefield/ Commercial Advisors.

Things are a bit different on the industrial side.

The Memphis industrial market recorded positive net absorption of 951,683 square feet during the first three months of the year, marking the fourth straight quarter of positive absorption, according to a first quarter industrial market review from CB Richard Ellis Memphis. Compare that to last year’s fourth quarter, when the industrial market gained 1.6 million square feet of empty space.

The increased optimism in the industrial sector has led developers to announce new buildings.

Industrial Developments International Inc. delivered a new building in DeSoto County, an 869,000-square-foot structure inside Crossroads Distribution Center. Earlier this year IDI officials said they would add two more structures inside the 475-acre industrial park, a 241,994-square-foot building to be complete in October and a 430,212-square-foot building that should be complete in December.

The last two buildings from Industrial Developments International are part of a trend of tenants looking for smaller spaces,

“The market is seeing a trend from large, Class A bulk requirements to smaller requirements of less than 200,000 square feet,” said a first quarter analysis from Cushman & Wakefield/Commercial Advisors. “Of the ten most notable transactions in first quarter, eight, (percent) were less than 200,000 square feet. There were only two deals greater than 200,000 square feet.”

In addition, Panattoni Development Co. has said it plans to build a 500,000-square-foot speculative facility, expandable to 1.5 million square feet, at Gateway Global Logistics Center, which straddles Fayette and Marshall counties.

Industrial real estate executives are feeling bullish.

“I think it’s two-fold,” said Jim Mercer, executive vice president of brokerage services at CB Richard Ellis Memphis. “There are smaller users in the market, those at 200,000 square feet or below, and they have been active. Secondly, I don’t think there is a lot of capacity out there.”

PROPERTY SALES 74 74 17,939
MORTGAGES 95 95 20,660
BUILDING PERMITS 141 141 36,977
BANKRUPTCIES 59 59 11,485