Known as “America’s Distribution Center” due to its one-day drive time to 42 percent of the country, Memphis, Tennessee, offers a preferred quality of life and stable office market for business. As the regional capital of commerce, including financial and medical services, Memphis serves not only Tennessee but also parts of Missouri, Kentucky, Arkansas and Mississippi.

In addition to being the home of Federal Express, Memphis houses the corporate headquarters of AutoZone, Concord EFS, Guardsmark, Thomas & Betts, Mueller Industries, Perkins Restaurants, Orgill Brothers, Conwood, Morgan Keegan & Company, First Tennessee Bank, National Commerce Financial Corporation and Union Planters Bank. The bulk of International Paper and ServiceMaster’s office functions are also in Memphis.

The local economy is not dependent on any single industry, according to Kelly Truitt, executive vice president of CB Richard Ellis Memphis. “The market has been somewhat insulated from various cycle swings, including the tech bubble burst of 2001 and subsequent telecom fallout,” he says.

The office market consists of 18.8 million square feet of Class A and B space in seven submarkets. Current market-wide occupancy as of second quarter 2002 is 84 percent with an average and modest rental rate of slightly less than $17 per square foot, per year. This rate is less than the area’s peer cities, including Atlanta; Charlotte, North Carolina; Nashville, Tennessee; St. Louis and Dallas, according to the National Real Estate Index. The Memphis market experienced positive absorption during the first two quarters of 2002. The three dominant submarkets are the central business district’s (CBD) Downtown submarket, the suburban East and 385 Corridor submarkets.

“Overall, the residential population base, growing medical community and retail developments are providing a quality labor force and support service for downtown office businesses,” Truitt notes.
The Downtown submarket has seen a resurgence of residential and entertainment retail development. Approximately 10,000 people now live in the CBD in both single-family and multifamily housing environments. The Memphis downtown population base is larger than that of downtown Houston, Denver or Dallas. Approximately 23,500 people live in the immediate vicinity of the Memphis CBD. Housing prices per foot downtown are the highest compared to any other part of the city.

Peabody Place Retail and Entertainment Center opened last year and includes 315,000 square feet of retail space. In addition, St. Jude Children’s Research Hospital is in the middle of a $1.5 billion expansion. The recent relocation of the Vancouver Grizzlies to Memphis has prompted the construction of a new NBA arena, slated for play in the fall of 2004. Additionally, local leadership has made a substantial commitment to the biotech medical industry that includes the development of a state-of-the-art R&D facility.

The East and 385 Corridor suburban submarkets enjoy the highest occupancy levels and rental rates in the city. At the end of second quarter 2002, Class A rental rates in the East submarket were quoted at $20.04 per rentable square foot, per year, with a 90 percent occupancy rate. The 385 Corridor submarket recorded a rental rate of $19.41 per rentable square foot, per year, for Class A space, with an 87 percent occupancy level. Suburban submarkets, located in the center of the population base and residential development, have a first-rate transportation infrastructure including improvements for Interstate 40, Interstate 240, Highway 385 and Paul Barrett Parkway, all of which offer excellent access to any part of Memphis. The average drive time commute in Memphis is a brief 24 minutes. Numerous sites, many of which are already served by all utilities, are still available for future development — especially in the 385 Corridor submarket. With some areas having more than 50 percent growth in population since 1990, the suburban submarkets will continue to lead office development, occupancy and rents.

Recent major lease transactions include International Paper (213,000 square feet) at International Place, Perkins headquarters (53,000 square feet) at the Crescent Center, Regional Adjustment Bureau (40,000 square feet) at Goodlett Farms, Pfizer (62,000 square feet) at Lenox Park and Varsity Spirit (51,000 square feet) at Lenox Park. Although developers have curtailed the supply of speculative product, significant build-to-suit activity is underway, including Concord EFS’s new 286,000-square-foot headquarters facility in northeast Memphis. This project will be one of the most structurally and technologically advanced office facilities in the Mid-South.

“Memphis does face some challenges,” says Truitt. “Although developers did monitor supply and limited development, a large amount of sublease space has become available over the past year.” Over 96,000 square feet was made available by International Paper due to its preference for another location in Memphis, and Sara Lee Corporation vacated 52,000 square feet of office space due to a corporate consolidation in Cincinnati. However, this has created opportunities for space users, and many tenants are taking advantage of the temporary softness to consider early renewals or expansion opportunities. While personal taxes are low because residents of Tennessee are not burdened with a state income tax, business taxes have increased. Additionally, recent real property tax increases, although moderate by national standards, have falsely inflated rent and occupancy costs.

Memphis has grown from a quiet southern town to the Mid-South’s business center. Memphis is recognized as a valued location for many business users due to its amenities, location, inexpensive and available utilities, central time zone and mild climate. The cost of living in Memphis is one of the lowest in the United States. With 100 being the national average (based on second quarter 2002 numbers), Memphis ranks at 89.9 compared to peer cities such as Atlanta (99.6), St. Louis (102.6), Denver (104.7) and Dallas (97.8).

“Overall, the office market remains attractive to businesses with its reasonable rental rates, product and workforce availability,” Truitt concludes. “It is expected that 2003 and 2004 will be important and favorable years for the area office market.”

Kelly Truitt is executive vice president of CB Richard Ellis Memphis.


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