Despite vacancies, Downtown office market trending up
Downtown Memphis offices are 20 to 23 percent vacant, depending on who’s measuring and what’s being measured.
So why are office space brokers so bullish about Downtown as an up-andcoming office center?
It’s because of momentum from a series of wins, big and small, that have brought hundreds of new workers Downtown in the past year.
While occupancy numbers are relatively stagnant compared to East Memphis, representatives of CBRE Memphis and Cushman & Wakefield/Commercial Advisors believe Downtown is gaining
traction, especially among younger workers.
On March 26, home services provider ServiceMaster finishes moving 1,200 workers from East Memphis to the former Peabody Place mall, a relocation motivated by a desire to retain and recruit tech-savvy talent.
Investment firms Wunderlich Securities and Southern Sun Asset Management moved smaller workforces Downtown; First Tennessee Bank has nearly filled its building by bringing in another 200 workers from a Downtown operations center; and Hnedak Bobo Group architects also stayed within Downtown by relocating to One Commerce Square.
Actively leasing office buildings in the core of Downtown have enough vacant space to house the equivalent of at least another 2,500 workers.
But key vacancies are dispersed. Buildings have vacant whole floors or multiple floors that once housed single tenants. The upshot is nowhere Downtown is there move-in ready space for another game-changer like a ServiceMaster.
That could be remedied by construction of new office space, as contemplated by developers of One Beale and 100 North Main.
New space wouldn’t move the needle on the vacancy rate, but it could attract major new tenants that wouldn’t consider Downtown otherwise, brokers say.
The Downtown Memphis Commission is focused on improving Downtown’s public spaces, cleaning up blight and litter, bringing in new activity and otherwise enhancing the experience when office workers step outside. The commission has sparked office development with incentives, such as grants and property tax abatement, on a caseby-case basis.
President Jennifer Oswalt said encouraging signs include “a resurgence of corporate flags being planted in Downtown: ServiceMaster, Southern Sun Asset Management, Wunderlich and Orion; as well as a shift to owning rather than renting in the CBID (central business improvement district): DCA, LEO, Allworld Project Management and Oden. We see those flags and groundbreakings as strong indicators that Downtown office is moving in the right direction.”
The Downtown of decades ago was a regional employment center with thriving, iconic but now-empty skyscrapers such as the Sterick Building and 100 North Main. As recently as 25 years ago, it was Downtown’s biggest office market, a distinction now held by the East submarkets.
Downtown and the Medical District areas still claim about 66,000 daily workers, including health care.
With Sterick, 100 North Main and others removed from active status, Downtown’s office market has shrunk to about 12 percent of the citywide total, said Ron Kastner, senior vice president of CBRE Memphis.
“I think it’s going to take new structures,” Kastner said. “Not that we’ve wrung the towel on the existing set of properties, but when you’re down to your last 20 percent, spaces can be picked over.”
Kastner and said Bentley Pembroke, vice president with Cushman & Wakefield/Commercial Advisors, are upbeat about Downtown’s current prospects.
Even in its diminished state, the area can easily accommodate multiple small to medium-sized companies at prime addresses including One Commerce Square and Toyota Center.
Problem is the average new tenant wants 2,500 to 4,000 square feet, while empty floors are much larger, making it more expensive to get spaces tenantready. So owners of buildings like Toyota Center, nearly 49 percent vacant, and One Commerce Square, about 27 percent vacant, bide their time and wait for a bigger tenant that can gobble up entire floors.
“When compared to East Memphis the Downtown submarket may appear stagnant, but actually it’s stronger than it’s been in over 10 years,” said Pembroke, whose company represents One Commerce Square and One Memphis Place (200 Jefferson), among others.
“Year over year vacancy numbers are not an accurate reflection of the recent activity that has occurred in the submarket,” Pembroke said. Not included in the numbers are buildings that are being repurposed, such as Peabody Place, the Hickman or Medical Arts Building, 240 Madison, and the Wonder Bread bakery, future home of Orion Federal Credit Union.
Pembroke’s firm pegged Downtown’s nearly 2.8 million square feet of office space at 23 percent vacant in the October-December quarter of 2017, down from 24.4 percent a year earlier. The firm reported East Memphis had a 14.4 percent overall vacancy, up slightly from 13.3 a year earlier.
“A large part of that (Downtown) vacancy is represented by full floor vacancies which can vary from 14,000 – 21,000 square feet,” Pembroke said. “With tenants averaging in size from 2,500 to 3,500 square feet in the submarket, it makes it difficult subdivide these full floor vacancies to accommodate smaller space needs.”
CBRE Memphis listed a Downtown vacancy rate of 21.7 percent in the fourth quarter 2017, up slightly from 20.3 percent a year earlier, compared to an East Memphis rate of 11 percent, down from 11.9 percent.
The brokers said the national trend of younger people coming back to urban cores bodes well for the Downtown market.
“I see people picking buildings that have a cool DNA or history or legacy to it,” said Kastner. “Crosstown Concourse is a good example of that. Downtown has a rich supply of those opportunities, whether they’re architecturally interesting spaces or have a unique history to them.”
The Cotton Exchange Building at 65 Union and First Tennessee’s tower at 165 Madison stand out as Downtown office buildings that are virtually full.
The historic Cotton Exchange is a hotbed of creative workers, anchored by advertising and public relations agency Archer Malmo, with a history going back more than 30 years.
Agency chief executive officer Russ Williams said, “A few attributes that make the building a great atmosphere include the small floor plate and large windows that bring a lot of natural light into the work spaces. Additionally, the excellent river views and vibrant tenant base make for a stimulating work environment.”
Kastner said one of CBRE’s newest leases at Toyota Center is Launch Pad, a firm that provides co-working space that gives members access to an office environment with WiFi, copy machines, conference rooms and amenities such as coffee and beer.
It leased half a floor in the renovated, historic former William R. Moore dry goods building that overlooks AutoZone Park. Renovation is under way, and the space should be open in June or July.
It will be the fourth Launch Pad since the company opened in New Orleans in 2009, followed by Newark and Nashville.
Chris Schultz, co-founder and chief executive officer, said Launch Pad was drawn to Toyota Center by a relationship with building owner Hertz Group in New Orleans.
“We feel very much that young people are interested in moving back to downtowns, working downtown, and so I think the Toyota Center in Memphis very much plays into that. Downtown Memphis is becoming a center of commerce, and where people are working,” Schultz said.
Reach reporter Wayne Risher at (901) 529-2874 or wayne.risher@commercialappeal.com.