The nation’s residential housing market may be sinking, but commercial real estate in Memphis has remained afloat.
The city’s office sector received a positive checkup for the second quarter of the year as outlined in “2Q 2007 Memphis Office MarketView Report,” released this month by the local office of CB Richard Ellis (CBRE).
Though overall vacancy remained the same as Q1, at 14.6 percent, lease rates climbed to a record $17.01 per square foot and absorption increased to a positive 76,053 square feet, all pointing toward stability amidst the turmoil of the national credit crunch and subprime lending fallout.
“The market is healthy, most particularly the East Memphis submarket,” said Kelly Truitt, president of CBRE Memphis. “The vacancy level is extremely low in Class A properties along Poplar Avenue.”
Shot of vitality
How low? Try 2.9 percent in East Memphis Class A properties - newer sites with better amenities, cleaner physical aesthetics and more efficient space - which encompass 2.9 million square feet of rentable space.
That area led the way among submarkets with more than 220,000 square feet, and it also led all submarkets in average lease per square feet at $24.88. The next highest was Class A space along the Tenn. 385 corridor at $21.92.
“We’re talking record prices for the East Memphis A market,” Truitt said. “But that’s just on available space. If you factored in what rates were going at if some of the Class A buildings had available space, they would be in $28- to $29-per-foot range.”
And record prices coupled with high occupancy in East Memphis - the heart of the city’s office sector - means vitality citywide.
“That’s really the bellwether that gives us the indication as to what the office market is like in general,” said Darrell Cobbins, owner, president and CEO of the commercial real estate company Universal Commercial LLC. “As goes that area of town, so goes the office market, primarily.”
Spillover effect
The tightening along Poplar Avenue has been a boon for 385, whose vacancy rate dipped from 8 percent to 7.7 percent. The 385 corridor registered 7.6 percent vacancy for its 2.6 million square feet of Class A property.
It also scored a major coup when Comcast agreed to have a 62,000-square-foot build-to-suit facility constructed in Southwind. That area - as well as some others - could see more gains if East Memphis spills over.
“As East Memphis continues to tighten, that obviously increases activity and demand in 385 as well as the Northeast and, to an extent, Downtown,” Truitt said. “There is more availability in Class A product Downtown, so if someone is looking for A product at a very favorable rental rate and a favorable occupancy cost, Downtown provides some exceptional alternatives.”
Downtown registered a 20 percent vacancy rate among its 1.7 million square feet of Class A space, which only has a $16.41 lease rate. Downtown’s Class B space, meanwhile, has 14.3 percent vacancy for its 1 million square feet with an average lease rate of $13.94.
Head of its class
Memphis office gained 76,053 square feet of positive absorption for Q2, with Downtown’s Class B leading the way at 51,282. While not stellar, it handily beat Q1’s negative 30,966 square feet, and it bodes well as analysts start looking at third and fourth quarters.
“Any positive absorption is good,” Truitt said. “Typically you’ll see most of the absorption toward year-end. Some of the activity is limited because there’s not that much available space.”
That should change soon. After a two-quarter hiatus, construction is ramping up with two high-profile projects set to be delivered in the next couple of years.
Raleigh, N.C.-based Highwoods Properties will bring a 150,000-square-foot office building to Poplar Avenue and Shady Grove Road. And Memphis-based Boyle Investment Co. is developing an office building at Ridgeway Center, near Poplar and I-240.
Both will be welcome additions to an East Memphis submarket that constantly displays a huge appetite for Class A property. They also will be good indicators of what happens with rates and further development in that area.
“If those lease up quickly and you’re right back at a 98 percent occupancy rate down Poplar, then you can expect the rates to go way up, probably two or three times what they have been consistently over the past year or two,” Cobbins said.
Headaches deferred
Though Memphis has forged its own way while the nation grapples with a slowing economy, the city isn’t immune to the swings regarding credit, housing and job rates.
“Office is obviously driven by white-collar employment in the workplace,” Truitt said. “Does it feel the impact of changes? Yes. But with office, because the lease commitments are reasonably long and because the project cycle time takes several years to develop and get an office product online, typically the impact is not felt immediately. So there is some stabilization and some of the peaks and valleys are smoothed out.”
And, as Truitt added, Memphis’ office market has always been relatively stable without depending on any one industry or business line too much.
“We’ve got good diversification,” he said.
That should, perhaps, help the city fare better than other places that are more subject to the volatile movements of Wall Street.
“We’ll never be as high or as low as a New York or an Atlanta or a Dallas and those type markets when it comes to office,” Cobbins said. “But for Memphis’ standards, I would say that we’re stable and definitely not in decline right now.”
With file from memphisdailynews.com
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