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VOL. 9 | NO. 34 | Saturday, August 20, 2016

Downtown Office Market Picking Up, Industrial Market Could Get Hotter

By Madeline Faber

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Memphis’ office and industrial markets saw strong second quarters, with increased absorption and positive outlooks for the rest of the year.

ServiceMaster's announced move to Peabody Place could give Downtown office space more momentum, especially with a tight East submarket.

(Memphis News/Andrew J. Breig)

The quarter was dominated by ServiceMaster Global Holdings’ announcement that it was moving its headquarters from East Memphis to the shuttered Peabody Place mall. The home services and tech company will transform the former mall into a $27 million, Class A office building.

ServiceMaster’s high profile move could flip the script on Downtown office trends, said Gray Fiser, a senior leasing associate with CBRE’s Downtown Memphis branch.

“ServiceMaster is a large corporation that's been in East Memphis, at Interstate 240 and Poplar. Its move Downtown has taken that barrier down for large corporations in the East submarket or Southeast submarket who in the past hadn't thought of Downtown,” Fiser said.

The top three office leasing transactions of the quarter all took place Downtown, according to second quarter data from Cushman & Wakefield/Commercial Advisors.

Tetra Tech signed a 8,155-square-foot lease in the Toyota Center at 175 Toyota Plaza. Law firm Lewis Thomason renewed and expanded its lease at One Commerce Square, 40 South Main, for a total 21,200 square feet. Health care organization Meritan announced plans to relocate its headquarters from East Memphis to the Edge District on the outskirts of Downtown’s Central Business District. Meritan will convert a 17,000-square-foot vacant industrial building at 345 Adams Ave. into office space to house 50 employees, according to C&W/CA data.

Downtown also suffered a few vacated tenants in the quarter, which pushed availability in the submarket from 18.9 percent last quarter to 19.5 percent. Downtown saw 38,762 square feet of net absorption, pushing average rental rates for Class A up from $18.03 per square foot in the first quarter to $18.63.

Most notably, Raymond James moved out of 52,000 square feet at its namesake tower at 50 S. Front St. This move was written into an earlier lease agreement, and there are no associated personnel changes.

As Downtown moves more into the spotlight, the East submarket grows tighter. Total vacancy in the East submarket was 10.1 percent at quarter’s end, with rental rates averaging $19.36.

In the second quarter, Boyle Investment Co. announced construction of a 155,000-square-foot office building in the Ridgeway Center office park. The Class A office building will be Memphis’ first substantial office project with speculative space in nearly 10 years.

Boyle also delivered a 52,000-square-foot office building in Collierville’s Schilling Farms development. The building is half occupied by Helena Chemical Co.

“An additional element factoring into a firm’s decision to locate Downtown is the lack of available Class A office space in the popular East submarket,” the C&W/CA report noted. “As long as availability in the East submarket remains tight, Downtown will remain an attractive alternative.”

In the industrial sector, the market is on track to close 2016 with 6 million square feet of positive absorption, according to second quarter findings from CBRE.

In the second quarter alone, the industrial market saw 1.1 million square feet of absorption, bringing the overall vacancy rate to 7 percent.

Construction activity, mostly concentrated in DeSoto and Marshall counties, came in at 1.8 million square feet. Of those projects, the largest is ProLogis’ build-to-suit warehouse for Sephora in ProLogis Park DeSoto. Panattoni Development Co. broke ground on Building III at its sprawling Gateway Global Logistics Center in Marshall County. The warehouse is 554,040 square feet, expandable to 975,190 square feet. Panattoni also began 615,600-square-foot Building IV at Gateway.

Continued positive absorption and declining vacancy rates are attracting a new group of out-of-town investors looking to build the next industrial park, said Patrick Walton, principal with C&W/CA.

“There are a few others that are well known outside of the Memphis market that are about to make their entrance when the time is right, as the vacancy rates for different product types are in the single digits for the first time in our history, so the supply is needed,” he said.

Activity is healthy across all asset types, Walton added. With several big transactions in the second quarter, 2016 is on track to surpass the previous year’s 8.1 million square feet of absorption.

“One other very important trend is the organic expansion that's been going on,” Walton said. “I would say 60 percent of the new Class A deals this year have all been from companies that are already located in Memphis.”

The second quarter also saw a significant policy change, as the Memphis-Shelby County Economic Development Growth Engine approved a new tax incentive program intended to spur industrial construction in Memphis.

The newly established Fast Track PILOT, or payment-in-lieu-of-taxes program, streamlines the application process and caps associated fees at a lower threshold.

Walton said the fruits of the new program could be delayed, but it is likely to make Memphis and Shelby County a more attractive option for new construction, which DeSoto and Marshall counties have been getting the majority of in recent years.

PROPERTY SALES 57 94 2,713
MORTGAGES 16 37 1,820
BUILDING PERMITS 303 621 6,322
BANKRUPTCIES 138 138 1,115