Memphis Office Market Continues to Evolve with Strong Leasing, Sales Activity
Memphis is currently undergoing an evolution that has been experienced by many markets in the region: increasing activity among office tenants moving with more confidence. In Memphis, this is manifesting itself in a flight to quality among office-using companies. While East Memphis is considered the most attractive office submarket in the region, the Downtown submarket has experienced significant leasing over the past 24 months and is gaining momentum. This focus on urban office is another trend that is just now hitting the Memphis market.
Memphis’ most significant win in 2018 was Indigo Ag’s announcement that it will relocate its North American headquarters for its commercial operations to downtown Memphis. Indigo Ag, a high-tech agriculture firm whose primary service includes coating seeds with protective microbes, will expand its current downtown Memphis office at Toyota Center.
With the expansion, the firm intends to increase its workforce by 700 corporate employees and invest $6.6 million over the next three years. Upon its completion, Indigo Ag will occupy 103,500 square feet in the eight-story Toyota Center, which will be renamed “Indigo Plaza.”
The move represents the most recent and significant corporate investment in the Downtown submarket, following the relocation of ServiceMaster and its 1,200 employees to the nearby Peabody Place and B. Riley & Co.’s relocation to 28,000 square feet in One Commerce Square early last year.
Other notable lease transactions in 2018 included ABB’s relocation from 8155 T&B Blvd. in Southwind to the approximately 155,000-square-foot 860 Ridge Lake Blvd. in the East submarket, as well as Sedgwick’s subsequent 215,000-square-foot lease of 8155 T&B Blvd. for consolidation of its Memphis operations. Sedgwick plans to relocate its operations in the second quarter.
Lastly, Pfizer has leased approximately 70,000 square feet in Boyle Investment’s 949 S. Shady Grove in East Memphis, with planned occupancy this year.
Memphis ended 2018 with an overall vacancy rate of 14.8 percent, unchanged from year-end 2017. However, in 2018, developers brought more than 540,000 square feet of new office space to the market. This follows two very active years with approximately 1.2 million square feet and 800,000 square feet being delivered in 2016 and 2017, respectively.
Since 2016, 2.1 million square feet, or 84 percent of the new deliveries, has been absorbed, with 401,805 square feet being absorbed in 2018. Class A rental rates for the new deliveries in East Memphis exceed $32 per square foot, a new high-water mark for Memphis. Class A rates for the entire Memphis market are now $21.50 per square foot, 50 cents higher than 2017 rates.
Class B vacancy remains around 18 percent, but rising rental rates are enabling well-capitalized owners of Class B properties in strong locations to upgrade their properties with Class A finishes to attract new tenants.
The most significant 2018 deliveries were ServiceMaster’s 315,000-square-foot headquarters at Peabody Place in the Downtown submarket and the 145,000-square-foot TraVure office building in the East Memphis submarket. TraVure is anchored by Mid-America Apartment Communities, which occupies approximately 80,000 square feet in the Class A office building. In addition to the office building, the TraVure development will ultimately include retail, restaurants and hospitality.
The evolution of the Memphis office market is not lost on investors, which are increasingly exploring opportunities to place capital in the market. The Memphis office market has seen more investment sales in the past three years than the prior five years combined, and it is anticipated that 2019 will be another very active year.
Memphis has become a target of private capital as other Southeastern markets such as Nashville have become very competitive.
One of the most notable 2018 transactions was the sale of One Commerce Square. Group RMC purchased the iconic office property, a 400,000-square-foot, 29-story office tower and 63,000-square-foot annex building located in the heart of the Memphis central business district.
Also noteworthy were the sales of two office properties located in the East Memphis submarket: Clark Centre for $11 million to a local investment group and Primacy III for $13.9 million to Priam Capital. The Primacy III acquisition was Nashville-based Priam Capital’s fifth acquisition in the Memphis market in less than 24 months.
Overall, the Memphis office market is seeing increased leasing activity, absorption and investment volumes. The market is still among the most affordable in the region. Given the growing level of interest in the market, asking rates are expected to rise, especially after downtown continues its evolution toward being a great place to live, work and play.
— By Terry Radford, first vice president, and Patrick Reilly, vice president of CBRE. This article originally appeared in the March issue of Southeast Real Estate Business.