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VOL. 9 | NO. 22 | Saturday, May 28, 2016

Available Class-A Office Space Scarce in Memphis

By Madeline Faber

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ServiceMaster is looking to relocate its headquarters into a Class A office building, and Memphis just doesn’t have room.

The heart of Memphis' Class A office market is at Poplar and Shady Grove. Two Memphis-based public companies are looking for sizable square footage, but Class A space is scarce. Boyle Investment Co. and Highwoods Properties haven't said, but could be close to starting new buildings. (Memphis News File/Andrew J. Breig)

“For the past two years, we’ve been using those phrases,” said Ron Kastner, senior vice president with CBRE.

Real estate brokers describe the market for top-quality Class A office space as tightening, contracting or completely occupied.

In the highly desired Poplar Avenue corridor, availability has hit a 15-year low, with less than 100,000 square feet available in the entire submarket. If ServiceMaster wants to move into existing space, it’s out of options unless it looks to existing Class B buildings or works with a developer to build something from the ground-up.

“All the fundamentals point toward new construction, but again, here we are,” Kastner said. “We thought two years ago that everything would have pointed toward someone starting a new structure.”

One of the possible developers is Highwoods Properties Inc., which developed International Place, the office campus of International Paper Co. on Poplar near Massey Road. Steve Guinn, vice president with Highwoods, said he is working on a transaction for a parcel adjacent to International Place with a greater announcement to come by the end of 2016.

Highwoods’ Tower IV for International Paper, completed in 2015, is the market’s newest office building. It is fully leased by IP, so it didn’t add to the inventory of Class A space in the market.

Guinn wouldn’t comment directly on ServiceMaster, but said the 4.4-acre parcel he referenced “is a good site for an office building.” Rents for a new building there would be around $32 to $33 per square foot, he said. Highwoods currently commands the highest rents in the market at Crescent Center, which is $30.50 per-square-foot.

While it may be the largest user looking – earlier reports estimate it needs about 275,000 square feet – ServiceMaster isn’t alone in the search for office space.

Multifamily real estate investment trust MAA and Evergreen Packaging are also looking to relocate corporate headquarters. MAA is currently in 43,000 square feet in East Memphis and is reportedly looking for 70,000 to 80,000 square feet. Evergreen, a spin-off of International Paper, recently acquired two other companies and wants to establish its headquarters in Memphis. It needs about 40,000 square feet.

For the past five quarters, eyes have been on the last parcel in Boyle Investment Co.’s Ridgeway Center office park. Boyle has announced plans to build a new 175,000-square-foot Class A building, but the project is taking longer than expected to get off the ground.

If the user will consider Class B space, I could rattle off probably seven locations. If they want true Class A space, it doesn't exist."

–Ron Kastner, Senior VP, CBRE

In April, Mark Halperin, executive vice president at Boyle, said he has one letter of intent signed and three others in the process. If all of those offers come through, the new building would be fully leased before it is built. ServiceMaster currently leases space in Ridgeway Center, and a contract to anchor the new building would be the pin in getting it off the ground.

Further east is the 10-acre TraVure planned development in Germantown. The project is approved, but developer Gill Properties has yet to kick off construction. TraVure will include 150,000 square feet of new office space.

ServiceMaster declined to comment for this article, but the company also reportedly wants an open-floor plan to promote collaboration.

Kastner said the emphasis on an open-floor plan could be a strike against Memphis’ existing buildings.

“There are a lot of deficiencies in an older building that a modern user can't overlook, particularly in corporate America where a user has very specific furniture specs,” he said. “It's very modular, very open and they want to get efficiencies, whether it's 180 square feet per person or something like that.”

The tight columns, spread-out parking and oddly-shaped floor plates of older buildings can’t be adapted to a contemporary floor plan, he said.

If ServiceMaster does move into a Class B building, it would require a significant overhaul of the space. Still, that would take about half the time and cost a third less than constructing a new building, Kastner estimates.

He said that a major employer considers a relocation about two years out. A new building, from site prep to completion, could take 18 months. Moving from one building to another takes less than nine months.

Memphis hasn’t had to bear the major casualty of a corporation picking up for a new city and leaving behind 100,000 or 200,000 square feet for a corporate user, he said. It’s a good problem to have, but the issue remains that there isn’t space for ServiceMaster’s needs.

Class A space in a Class A location is nonexistent. Class B buildings can’t fit the requirements of a modern headquarters, and a developer has yet to announce a new building.

“If the user will consider Class B space, I could rattle off probably seven locations,” Kastner said. “If they want true Class A space, it doesn’t exist.”

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