Despite an uptick in the vacancy rate, direct asking prices continued to rise in the Memphis office market during the first quarter of 2018, according to research complied by commercial real estate firm Avison Young.

The overall vacancy rate in the Memphis office market increased 180 basis points year-over-year to 20.8 percent to end the first quarter, but in spite of this, direct asking rents rose 0.3 percent to $18.04 per square foot.

Shane Soefker

“Vacancy rates in the East submarket took a hit due to ServiceMaster’s move Downtown, but more than half (154,558 square feet) of ServiceMaster’s former space is already leased by Thomas & Betts, which will move into 860 Ridge Lake Drive later this year,” Avison Young principal Shane Soefker said. “Vacancy rates will fluctuate a bit over the next year as large users like Thomas & Betts, MAA, Sedgwick Claims Management, Pfizer and Mueller Industries consolidate operations and relocate in the market.”

On the other side of the coin, ServiceMaster’s move added 315,000 square feet to the Downtown office market and pushed office completions over 1 million square feet.

“With ServiceMaster’s delivery this quarter, office completions over the past 12 months exceeded 1.1 million square feet – a significant amount for the Memphis office market,” Soefker said. “Inventory growth will continue at a slower pace over the remainder of the year as tenants begin to move into two of the three remaining office buildings under construction – TraVure and the Universal Life Building – in the second quarter.”

Mueller Industries’ new 55,000-square-foot office headquarters in Schilling Farms in Collierville is expected to deliver closer to the end of the year.

SERVICE-MASTER BUILDING OFFICIALLY DELIVERED: Office vacancy rises above 20 percent in the first quarter, but asking rental rates still tick upward in the Memphis market, according to Avison Young. (Daily News File/Houston Cofield)

“Overall, quarterly net absorption came in at negative 84,675 square feet, marking the first quarter since 2016 that total market absorption was in the red,” Avison Young director of research Lauren Goddard said in her quarterly report. “The majority of negative absorption occurred in the Northeast and East submarkets, where ACH Food Companies and United BioSource Corp. gave back nearly 90,000 square feet in Goodlett Farms and ServiceMaster relocated from approximately 280,000 square feet in East Memphis to its new headquarters.”

Meanwhile, leasing activity for the quarter exceeded 244,000 square feet, while sales volume dropped precipitously year-over-year from $67 million in Q1 2017 to a single transaction located at 7800 Wolf Trail Cove for nearly $3 million.

The most notable office leases signed in the first quarter of 2018 included Pfizer’s 65,593 square feet at 949 Shady Grove Road in the East submarket; FedEx’s 22,290 square feet in the Forest Hill Tech Center in the 385 Corridor; V. Alexander’s 20,368 square feet at Germantown Park in the Northeast submarket; CBRE’s 10,824 square feet at Triad Centre III, also in the East submarket; and America Works Tennessee’s 8,139 square feet in the Falls Building in the Downtown submarket.

A few of the top market trends Avison Young identified to keep an eye on include the effect of e-communing on some users’ minimum space requirements, the increasing popularity of flexible office layouts and a diversification of geography and product type by investors.