SOUTHEAST SNAPSHOT, JUNE 2005

Memphis Office Market

Currently, the Memphis, Tennessee, office market continues to boast positive absorption trends. First quarter 2005 showed a positive number for overall absorption, marking the second consecutive quarter that net absorption has increased in the market. Overall, Class A office space in Memphis continues to turn the corner, upholding its streak of 15 consecutive quarters showing positive net absorption.  

Class A rental rates dipped a little from year-end 2004 to first quarter 2005, as landlords strived to get tenants into their buildings. Overall, rental rates decreased to $19.14 per square foot for the Class A market, but in the 385 Corridor and the eastern sector, landlords remained bullish on their product, continuing to boast the highest rates of any sector at $19.67 per square foot and $22.63 per square foot, respectively. 

In general, developers are continuing to take a “wait and see” attitude with regard to new construction on major office buildings. Currently, there is one large building under construction, a medical office building near the Poplar/Interstate 240 corridor; however, medical office developers generally are continuing to deliver product throughout the area. The eastern edge of the city, in particular, continues to see a demand for high quality, well-located medical offices.

Along the 385 Corridor and in the eastern submarket, development activity continues to be the highest. The largest deals this quarter include International Paper Company’s lease of 41,561 square feet along the 385 Corridor in Lenox Park and Nationwide Insurance’s lease of 27,832 square feet in the Highwood Properties building, Shadow Creek 2, near the PGA Golf course at SouthWind. The other large deal of note was the 38,856-square-foot lease by Third Party Solutions, separated into two phases at Thousand Oaks Office Park, which is located in the eastern submarket. 

The Memphis office market currently is seeing several active developers undertaking a solid portion of construction in the area. Highwoods Properties, a real estate investment trust based in Raleigh, North Carolina, is one of the only prominent out-of-town developers. In addition to them, a handful of locally based firms have taken initiative: Belz Enterprises, Weston, Kemmons Wilson Company, and Clark & Clark. Weston predominantly is developing medical office space, and it is pretty much the only company doing so. Other than that, developers are waiting for large chunks of space to fill before they endeavor upon further actions.

The Bio Tech Center located in the heart of the medical district, 5 minutes from Downtown, continues to be one of the most watched developments in the city. Expressing a desire to continue the synergy created by FedEx and its ability to deliver just-in-time products for bio-mechanical devices, Memphis is attempting to foster and recruit more life science companies. In that department, Memphis’ track record continues to look good as Medtronics and Smith & Nephew continue to grow. Wright Medical, another company in a similar industry, recently contracted to buy a corporate campus that formerly housed Concorde EFS, located in the East submarket. These bio-mechanical-based companies are continuing to use Memphis’ distribution aspects and the city’s work force to do research, development and distribution from the same place. 

In the future, Memphis will continue to see growth along the 385 corridor and in the Eastern submarket. These areas are experiencing the realized bulk of any new development, as companies naturally are gravitating toward these affluent submarkets. In the central business district and downtown, the area seems too small to absorb another office tower, and any additional development most likely would be in the form of a hotel or another project of the like. So other than the 385 Corridor and the Eastern sector, the only other area primed for office development is DeSoto County in northern Mississippi, although construction in that area is much more likely to be an of the office condominium persuasion as opposed to bulk office development.

If current market trends are perpetuated, additional quarters of positive absorption certainly will be a catalyst for new development of spec office building, but until some of the larger chunks of space are taken, Memphis will continue to see little development on a large scale. 

— Greg deWitt CCIM, Colliers Wilkinson Snowden

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