July 22, 2015

Poplar Corridor Offices Scarcer

By Jerome Obermark
– The Commercial Appeal –

Business managers wanting a prestigious Poplar Corridor office address in East Memphis may have to build their own building or look elsewhere this year, local brokers say.

Occupancy levels have reached 95-99 percent in several East Memphis buildings.

In most areas, occupancy levels increased 2 to 3 percent. Effective rents increased by 5 to 10 percent with the disappearance of concessions last year, brokers said.

Despite improvements in rents and occupancy levels, brokers expect only a few office building starts this year. Reasons include alternative space at economical rates and continued corporate concern for cost-cutting, brokers said.

"Corporate America is continuing to focus on cutting costs, right-sizing or downsizing," said Larry Jensen, president of Commercial Tennessee Inc. Some companies are using a "hotline concept," in which the company will reserve a desk on a day or half-day basis once a week, for example, for employees whose primary work is contacting customers in the field, Jensen said.

Another trend is putting more people in less space, a practice found in some local office-showroom buildings used for telemarketing personnel, said Cary Whitehead III, executive vice president of Towermarc Realty Inc.

Few spaces of 10,000 square feet are available in East Memphis except in Clark Tower.

Crescent Center, International Place, Forum, Centrum Building, 6000 Poplar, Lynnfield Office Park and Lakecrest Office buildings have almost no space available now.

Available East Memphis office space "is tighter than I have ever seen it in 13 years," Jensen said. "It may mean some marginal retail buildings in the suburbs will be converted to office use."

East Memphis office vacancy has been shrinking gradually for five years, or since speculative development overbuilt the market in the 1980s.

Ten years ago, some developers could borrow 90 to 100 percent of the costs. Today, they need to risk at least 25 percent of the cost and prelease much of the building, Whitehead said.

A trend that seems to have replaced speculative building of the 1980s is build-to-suit developments for large tenants who prelease most of a planned building before construction begins, Whitehead said.

Sedgwick Center, a 140,000 square foot office building taking shape in Ridgeway Center near Poplar and Interstate 240 is an example of a build-to-suit building. Sedgwick James preleased 100,000 square feet before Boyle Investment co. started the building. It will be completed late this year.

Mark Halperin, senior vice president of Boyle Investment Co., expects that one or possibly two other build-to-suit offices will be started in East Memphis this year or next.

In downtown Memphis, Belz Enterprises has announced plans to start a 15-story office and parking facility with six square feet of office space at the northeast corner of Main and Peabody Place. The location is near the Gayoso House Apartments and AutoZone’s new headquartered office.

Andy Groveman, senior vice president of marketing and administration for Belz Enterprises, would not disclose financing or preleasing details for the 15-story building.

Rent increases took place in all submarkets except Midtown last year, said R. Earl Blankenship, chairman and chief executive officer of Interstate Realty Corp.

Asking rents increased last year by 2.5 to 3.8 percent in local submarkets surveyed by IRC, but asking rents do not reflect removal of individual concessions. When concessions are factored out, effective rents may have risen 5 to 10 percent or more in some buildings, said J. Kevin Adams, president and chief financial officer of IRC.

Effective rents are expected to rise 5 percent this year, said David Peck, president of Weston Companies. Adjusting rents to realistic levels that reflect today’s costs continues to be difficult, he said, because tenants became accustomed to bargain rental rates.

Weston Companies recently terminated an option to buy a 4-acre site near International Place in East Memphis near Poplar and Massey. Peck had planned to build an 89,000 square foot office building on the site. The deal hinged on preleasing at least 60 percent of the space, Peck said.

"We weren’t able to get the leases executed. It was hard to convince people to pay $17.50 (per square foot per year) when they’ve been accustomed to paying $13.50," Peck said.

For some office building owners, rent increases last year just offset tax increases resulting from upward adjustments in property valuations by the Shelby County Appraiser’s Office, said Joe Steffner, senior vice president of Trammell Crow Co.

An Interstate Realty Corp. Office survey as of Dec. 31, 1994, showed:

n Overall office occupancy rose 3.7 percentage points last year to 85 percent in the city’s 19,538,790 square feet of office space surveyed. The increase was attributed to continued expansions by existing tenants, a lack of new construction and Federal Express Corp.’s continued occupancy of Commerce Center/Memphis (former Holiday City property).

n East Memphis overall occupancy level rose 3.3 percentage points to 91.96 percent from 88.66 percent a year ago. East Memphis has 8,827,421 square feet of office space, including more than 5.8 million square feet of Class A space, the best quality. Occupancy in Class A space rose 3.28 percentage points to 95.71 percent. Average asking rents rose 2.6 percent to $15.19 per square foot. Rents in Class A space rose 2.7 percent to $16.26.

n Downtown office occupancy increased 3 percentage points to 78.13 percent. It has a total of 5,553,182 square feet of office space including 1.68 million square feet of Class A space. Occupancy in Class A space was little changed at 86.91 percent. Downtown rents averaged $12.04 vs. $11.78 a year ago. Class A rents averaged $14.93, up 3.5 percent.