July 21, 2015

Office Market in East Memphis Heating Up Again

By:  Sara K. Clarke
Commercial Appeal

An office space shortage in the sought-after East Memphis market has tenants looking elsewhere and developers considering building again for the first time in years.

Boyle Investment Co., which owns land near Shady Grove and Briarcrest, is likely to be one of the first out of the gate. The company is hoping to break ground on a new building by the end of the year.

"The inventory has certainly tightened up, especially on the higher end of the market," said Mark Halperin, chief operating officer for Boyle. "We are talking to a few great candidates to anchor that building and let us kick it off."

Most agree a project won’t happen unless Boyle can line up at least some tenants in advance. Purely speculative buildings are seen as too much of a risk, and developers want to be assured that at least some of their space is spoken for.

The office corridor near Poplar and Ridgeway is widely considered to be Shelby County’s central business district. A hub of finance, insurance and commerce, it’s a key segment for Memphis’ economy.

The last time the East Memphis area saw a new built-to-lease office building was in 2010, when Highwoods Properties put up Triad Center III at 6070 Poplar. A new tower is being built for International Paper at 6430 Poplar, but the Memphis-based packaging company plans to fill the building itself.

Boyle’s building, if it happens, likely won’t open until 2017. In the meantime, that leaves a market in which the vacancy rate in the best buildings in East Memphis is as low as 1.5 percent, according to a report from Cushman & Wakefield Commercial Advisors. Overall, vacancy for Class A buildings in East Memphis fell from 10 percent at the end of 2013 to 7.1 percent at the end of last year.

Tightening vacancies in the area have forced users to look to less expensive Class B buildings or to other areas to meet their needs.

That trend is helping drive interest to the nearby Tennessee Highway 385 corridor, where tenants — even big ones — can still secure a prime building, said Ron Kastner, senior vice president with CB Richard Ellis.

His firm signed a 25,3000-square-foot lease in December for Trinity Industries, which acquired the assets of Meyer Steel Structures, a division of Memphis-based Thomas & Betts Corp.

Trinity-Meyer took space at Lenox Park, a 7-building office park with 700,000-square-feet of Class A space about 3.5 miles from the Poplar-Ridgeway business district.

With the construction of the Interstate 269 loop promising to make the Lenox Park area more accessible, and the pressure in the Poplar market, interest is growing in Lenox Park, Kastner said. Tenants there including WM Barr, Verso Paper and Metro PCS already have absorbed more than 65,000 square feet of space, he said.

Tennessee 385 is "being revisited as a growth corridor again," he said. "It’s kind of a comeback story for the whole submarket."

The problem of finding space in the Poplar corridor is especially acute for bigger tenants, with brokers saying there are few prime spaces that could fit a business that needs more than 10,000 square feet.

"I think there has to be spillover," said Frazier Baker, vice president of office services for Colliers International. "If a certain size tenant wants to be at Poplar-Ridgeway and that space is not available, they’re going to have to look elsewhere."

In addition to spreading geographically, tenants are looking at buildings in the Poplar corridor that were once considered second tier.

New ownership and a multi-million dollar upgrade helped the Primacy II building near St. Francis Hospital land 40,000 square feet of new tenants in the past year, Kastner said. And Baker represented a tenant who had the means to expand in an "A" building, but had difficulty finding space.

"Some of these Class B owners could take advantage of that opportunity by taking this time to improve their buildings," said Baker.

Eventually, whether the market sees new construction comes down to demand — and rents.

The $28-a-square-foot rent commanded by top buildings in East Memphis is lower than what builders need to justify new construction, said Steve Guinn, whose company Highwoods Properties is eyeing the East Memphis market for development.

"What you need to have happen is the $28 needs to go closer to $30," he said. "That range needs to narrow."