The Memphis office market continues to defy national post-pandemic office trends, fueled by persistent occupier demand and limited amounts of vacancy within primary submarkets. Although, the market closed out the 2023 year with 34,430 square feet of occupancy losses caused by two large tenant vacancies, the first quarter of 2024 reversed the trend as net absorption swung positive, recording 140,788 square feet of occupancy gains.
The Memphis unemployment rate remained low at 3.5 percent in May, just above the Tennessee unemployment rate of 3.0 percent and below the national average of 4.0 percent, according to data from the U.S. Bureau of Labor Statistics.
Ford Motor Company’s Blue Oval City began its hiring in 2023, with most of its hiring to occur in the second half of this year, which could begin to further compress the unemployment rate, as approximately 5,600 direct jobs are estimated to be created in West Tennessee. The company leased 42,910 square feet of office space on the edge of the Memphis office market. The auto giant plans to use the new space as a training facility.
Additionally, the Elon Musk-led xAI company announced Memphis as being the new home for its “Gigafactory of Compute,” claiming to be the world’s largest supercomputer, which will be housed in a nearly 800,000-square-foot repurposed facility near downtown Memphis. This deal represents the city’s largest capital investment by a new-to-market company in Memphis history. It is unknown how these newly added jobs will affect the Memphis office market, but both projects continue to showcase Memphis as an emerging city for technology and innovation.
East Memphis/CBD
The East Memphis submarket has continued to lead the Memphis market in terms of highest occupancy and lease rates. The submarket has the lowest vacancy rate in the Memphis market at 12.9 percent, 300 basis points lower than the market average of 15.9 percent. In particular, Class A properties in the submarket have continued to experience higher occupancy levels, with this set of properties averaging 90 percent.
There are only five Class A properties with greater than 10,000 square feet of availability in East Memphis, leaving tenants that are looking for highly amenitized properties with few options in a more competitive submarket. The low availability rate has helped keep the average asking rental rate elevated and the highest in the metro area. Additional sublease availabilities could provide additional options for tenants searching for quality space in a tight submarket throughout 2024.
Since 2022, the East submarket has led the Memphis market for occupancy gains with 155,151 square feet of positive absorption as tenants have adjusted to new working trends. The submarket has emerged as the favorite for tenants searching for space due to its central location within the Memphis metropolitan area and the amenities offered as employers seek to provide a better workplace experience to help with recruiting and maintaining talent.
Macroeconomic difficulties, new era office trends, increasing cost of capital and construction have all weighed on the construction pipeline. Even though inflation has continued to slow, it has proven to be stickier than the Federal Reserve expected, which has caused the central bank to delay further interest rate cutting thus far this year. Some of the proposed projects in high-demand areas are expected to break ground in the second half of the year and beyond as additional clarity returns to the market.
Downtown Memphis
The Downtown submarket has experienced a shift following post-pandemic needs. There were multiple office building owners that announced the intent to convert their properties to their highest and best use. The trend, in the scope of the Downtown office market, has been largely positive. With tenants being relocated to other existing assets throughout the market, particularly Downtown, occupancy rates have continued to be elevated. For example, One Memphis Place, a 200,000-square-foot office tower, currently has a 98 percent occupancy rate, which is uncommon for multi-tenant Downtown buildings throughout the country.
However, the cost of conversion, limited parking and building designs unsuitable for conversion have left a few projects in limbo. Moreover, owners have begun re-evaluating their plans due to rent softness in the Downtown multifamily market.
Most large tenant vacancies have occurred outside of the Memphis Central Business District. With a few large tenant vacancies occurring in the Northeast and 385 Corridor submarkets, net absorption should remain moderate through the end of the year with an increasing vacancy rate in each of those submarkets.
Outlook
As with most Southern cities where employee commute times are minimal, we expect to see the “return to office” trend continue to boost daily foot traffic and office space utilization. It is clear that the demand for premium office space is strong, and vacancy is becoming scarce in certain submarkets. However, the adaptability or conversion potential of periphery office properties to alternative purposes may be limited.
— By Ron Kastner, senior vice president, and Josh Seaton, senior research analyst, CBRE. This article was originally published in the July 2024 issue of Southeast Real Estate Business.