COVER STORY, AUGUST 2012

MEMPHIS, TENNESSEE OFFICE MARKET

We’ve all said time and again that the key to recovery in office real estate is continued and significant increase in employment rates. Like much of the rest of the country, we’ve begun to see an uptick in employment in the professional and business sector in the Memphis area. In fact, in the Memphis MSA, employment in this all-important sector for office real estate jumped from 73,400 to 87,100 jobs during 2011, approaching pre-recession highs of 88,800 jobs.

Additionally, the Bureau of Labor Statistics reported on May 3 that productivity (output per hour) in the U.S. fell at an annual rate of 0.5 percent for the first three months of 2012, after steady growth during 2011. This is the first sign that corporations have achieved the efficiency they desired and needed to weather the latest economic storm. As demand increases, corporations will be forced to hire to fill the gap between demand and capacity. So the good news for the market is that employment rates, the most fundamental drivers of office real estate, should continue to improve.

In Memphis, there are a couple of black swan events, however, the outcomes of which will shape the immediate future of the local office market, specifically in the Central Business District (CBD). The first is Pinnacle Airlines’ recent bankruptcy filing. In 2011, Pinnacle leased 170,000 square feet to move its corporate headquarters to One Commerce Square in a transaction that included major incentives from the city of Memphis. As a part of its bankruptcy reorganization, Pinnacle recently announced a restructuring process that includes cuts in ground operations and other areas. This will undoubtedly result in a smaller corporate footprint at the very least, or in another possible scenario, the company being purchased by Delta and relocated to Atlanta.

Additional fallout in the CBD is likely to occur as a result of the recent Raymond James acquisition of longtime Memphis financial firm Morgan Keegan, which creates one of the largest full-service wealth management and capital markets firms not located on Wall Street. Morgan Keegan currently occupies 275,000 square feet in what had been the company’s headquarters building. The company has already trimmed some redundant positions, which cut dozens of jobs in Memphis. The full impact of the merger is yet to be determined.

In the near term, we expect continuing volatility in the market as we are burdened by the uncertainty associated with two major leases that account for nearly 7 percent of the office space in the CBD and more than 1 percent of the entire market. Uncertainty is tough to deal with and tends to overshadow the good news of a steadily improving economy. We’re likely to be riding this roller coaster in the CBD for much of the rest of the year but anticipate that other submarkets, like Memphis’ popular East and 385 Corridor, will experience steady declines in vacancy rates in response to the more fundamental drivers of the office real estate market.

— Ron Riley is senior vice president of the office division for Colliers International in Memphis.

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