August 04, 2015

Memphis Office Real Estate Market

February 15, 2012
Memphis (population 650,000) is the largest city in the state of Tennessee and is known as “North America’s Logistics Center” due to its central location.    Being a distribution center also makes Memphis commercial real estate a great choice. Memphis has the world’s busiest cargo airport that serves as the primary hub for FedEx shipping, and has the third largest rail center and fourth largest inland port in the U.S.    Memphis commercial real estate, therefore, provides space for a growing number of nationally and internationally known corporations including corporate headquarters for FedEx, Autozone, International Paper, Thomas & Betts, and Helena Chemical Company. Memphis also is a major medical center with hospitals such as St. Jude Children’s Research Hospital, University of Tennessee Health Science Center, Baptist Memorial Health Care and Methodist LeBonheur.
Like many cities across the U.S., Memphis has been affected by the economic downturn.  According to Bill Fox, Director of the Center for Business and Economic Research at the University of Tennessee, the state lost 220,000 jobs, of which 60,000 were in Memphis. While the state has recovered about one-fourth of its lost jobs, Memphis has recovered about one-sixth. While the unemployment rate for the city of Memphis was down to 9.5 percent in December 2011 (from 10.1 percent in November 2011), it is still higher than the national average.   Memphis has experienced a growth rate of 1.5 percent during 2011 but needs to experience 2 to 3 percent in order to lower the unemployment rate. 
Despite the downturn, a number of manufacturers recently selected Memphis as the site for new plants, which could have a spillover effect on the office real estate market. Due to the efforts of Memphis Mayor AC Wharton and Shelby County Mayor Mark Luttrell, who have made economic development a priority, Electrolux announced it will build a $230 million plant employing 1,240 people and Mitsubishi Electric will build a $207 million plant employing 281 workers. The mayors also have changed local government’s structure for economic development by consolidating seven different entities into one board called EDGE (Economic Development Growth Engine). EDGE is streamlining the process for economic development prospects so they only have to deal with one entity.      
While new manufacturing jobs are being created, there has been a minimal addition of office jobs.  Subsequently there has been no new development of office space in Memphis since 2008, when Boyle Investment Company developed its 999 Shady Grove building (155,000 S.F.) and Highwoods developed Triad III (148,810 S.F.), both of which are Class A buildings located in the East submarket in the Poplar corridor.  The current trends in office development in Memphis are focused on potential build-to-suit opportunities with no speculative development in the foreseeable future. Tenant demand remains moderate. This is driven by the general economic conditions outlined above.  2012 is likely to be another year in which businesses take a “wait and see” attitude before deciding to move or expand. Most office users continue to exercise caution and are focused on reducing expenses and decreasing space per employee. Any activity likely will take place in the East and 385 submarkets, which are adjacent to the residences of many decision makers.
According to the Urban Land Institute, inflation adjusted rental rates show no growth in any major U.S. market over the last three decades and many markets register zero nominal rent growth over the past 15 years. This is the case for Memphis. For example, in 2005 the average rent rate for Class A office space in the Memphis MSA was approximately $20.00 per square foot andin the fourth quarter of 2011 it was $21.68 per square foot.  Although the Memphis office market posted negative absorption during the 4th quarter, year-to-date absorption remained positive at 225,767 S.F. The vacancy rate for the office market for Class A space is 10.2 percent and 21.9 percent for Class B space; the total office market vacancy rate is 17.9 percent.
In 2011, the largest absorption by building in the Memphis area was: 
        Triad III (Class A) in the East Submarket with 53,277 S.F.; 
        Goodlett Farms Business Center (Class A) in the Northeast Submarket with 45,943 S.F.;
        Marsh Center (Class A) in the East Submarket with 33,425 S.F.;
        Thousand Oaks (Class B) in the East Submarket with 25,889 S.F.;
        Lenox Park Building D (Class A) in the 385 Submarket with 24,581 S.F.; 
        One Commerce Square (Class A) in the Downtown Submarket with 19,795 S.F. 
Education Realty Trust signed the largest lease of the 4th quarter, leasing 26,981 S.F. at Boyle’s 999 Shady Grove building.  The largest transaction in office leasing in 2011 was the decision by Pinnacle Airlines to move to One Commerce Square in downtown Memphis.
        Mark Halperin is executive vice president of Memphis-based Boyle Investment Company. (901) 767-0100,