February 18, 2019

Healthy East Memphis Office District Can Absorb Some Loss to Downtown

The Daily Memphian

By Tom Bailey

There’s a bit of “robbing Peter to pay Paul’’ in FedEx Logistics’ decision to consolidate its headquarters operations from scattered East Memphis sites to Downtown Memphis.

But the good news for Memphis is that Peter, also known as the East Memphis office submarket, is pretty wealthy and can absorb the loss.

Even better news is that of the initial 680 jobs FedEx Logistics is moving to its Downtown headquarters, 350 are coming from outside Memphis.

Still, the shuffle involves some Memphis subtraction. FedEx Logistics will vacate 25,000 square feet in the Crescent Center, and about 65,000 square feet total in the Primacy I and Primacy II office buildings near St. Francis Hospital.

The Crescent Center is the curved, nine-story building of polished granite and tinted glass on Poplar at Ridgeway.

The Crescent Center is one of the highest-quality office buildings in Memphis and has “very little’’ vacancy now, said Steve Guinn, vice president in Memphis for Highwoods Properties, the owner of Crescent Center.

“Twenty-five thousand feet coming back is not insurmountable,” he said. “It’s not a blow.”

In the language of commercial real estate, Crescent Center space is “Class A.”

The building is so high-end that one of the restaurants built at the foot of it, Capital Grille, doesn’t just offer salmon for lunch but “seared salmon with avocado, mango and tomato salad with champagne vinaigrette.” The menu lists not just a cheeseburger but one that’s a “blend of short rib, chuck and brisket by Pat LaFrieda.”

For many years now, companies with the means have wanted to be in East Memphis far more than anywhere else in the city. That’s why the average asking price there of nearly $27 a square foot for a Class A lease is substantially more expensive than any other submarket, according to the latest stats assembled by CBRE.

By comparison, the average asking lease rate for Class A space is $17.93 in Downtown, $19.13 in the Tenn. 385 Corridor, $19.50 in Midtown, and $19.37 in Northeast Memphis.

The low vacancy rate for East Memphis Class A space, just 7.4 percent, reflects the demand there. The average Class A vacancy rate for all Memphis office districts is 10 percent, and is 15 percent in Downtown Memphis.

FedEx Logistics is not even the largest tenant in the Crescent Center, which is like Alabama football. Crescent Center doesn’t rebuild after the stars move on, it reloads.

And reinvests. Highwoods recently started a “several million-dollar” construction project renovating the “hardscape’’ area on the grounds of the Crescent Center.

“We are redoing the courtyard in the rear of the building,” Guinn said. “And doing the entry areas. All the hardscape around the building is being redone. We’ll have tenant-amenity areas in the back, in the courtyard, with big shade structures, benches.”

The Crescent Center’s occupancy rate is about 95 percent. And among all Highwood Properties’ Class A buildings in Memphis, totaling 1.7 million square feet, the occupancy rate is 92 percent, Guinn said.

There’s no need to shed a tear for East Memphis in the wake of the FedEx Logistics announcement.

“With Class A vacancy along Poplar being 4 percent, don’t worry about it,” said Ron Kastner, senior vice president for the commercial real estate firm CBRE in Memphis.

East Memphis accounts for 40 percent of the city’s 24 million square feet of Class A and Class B office space, Kastner said. That’s double the next largest submarket, the 18 percent of Class A and B space in the Tenn. 385 Corridor. Downtown has 14 percent of the space.

Often when companies consolidate office space they achieve efficiencies and wind up with a smaller footprint than the sum of the previous locations.

That is not the case with the FedEx Logistics consolidation and move into Downtown’s Gibson Guitar Factory. The renovation will expand the Gibson building from 154,000 square feet to 200,000 square feet.

The move also is triggering the mixed-use development next door to the Gibson Factory of The Clipper, which will cost $250 million and entail a 200,000-square-foot office tower, 250-room hotel and 50,000 square feet of retail.

“The buzz of Downtown and excitement of Downtown is like none other,” Kastner said. “I don’t think any of the other (office submarkets) have the offering of providing an exciting workplace for employers to house their employees.”

The key to maintaining and improving occupancy rates in all Memphis office districts is recruiting new, white-collar jobs from out of town, not moving them from one part of the city to another, said Mark Halperin.

He’s executive vice president and chief operating officer for Boyle Investment Co. The venerable company’s portfolio of Memphis office buildings is anchored in East Memphis.

“It’s not been as profitable as you might guess,” Halperin said of being a landlord of East Memphis office space. “The real estate taxes are extremely high. We’ve not gained a lot of ground.

“We’ve had good occupancy. But we need growth. We need more people coming from out of town, not just musical chairs.”

With new technology, businesses are more productive with fewer people and less space. “We have to have growth, beyond organic growth,” Halperin said.

One episode of musical chairs within Memphis involving ServiceMaster, Thomas & Betts and Sedgwick has left Boyle with about 200,000 square feet to fill.

So even out East, Halperin said, “there’s a good bit of space available … There’s good space in the community that’s not Downtown. We need all of it occupied.”

FedEx Logistics’ new headquarters Downtown is good for Memphis, he said, adding that Memphis would be a different place were it not for FedEx and its widespread community involvement.

“FedEx, in my view, is the economic engine that drives the whole community,” Halperin said.

Developers have recently announced plans for three or four big office buildings for Downtown.

In addition to The Clipper, a 200,000- to 400,000-square-foot office tower for One Beale is to be built by Highwoods Properties once an anchor tenant is found.

And Union Row developer Kevin Adams plans to build two office buildings at Union and Fourth. One is to be speculative and the other build-to-suit for a yet-to-be-named tenant. Those buildings, part of the $950 million mixed-use Union Row development, would total about 350,000 square feet.

“I don’t know if you can build all that space speculatively without tenants,” Halperin said. “I don’t know if the capital markets and equity markets will support that or not without anchor tenants.”

Still, all the activity is good for Memphis, he said.

“If the playing field is level, I don’t have much concern” about negative effects on the East Memphis office market. “But if there are tons of incentives to move people out of the suburbs to Downtown, at some point I don’t know if it’s sustainable.”

The suburbs pay a lot of taxes, which the entire community needs, he said.

So far, the FedEx Logistics project Downtown is to receive  $34.5 million in tax breaks and grants.

Halperin said he supports Downtown but at some point, giving incentives to companies to move from one part of Memphis to another becomes counter-productive.

“I’m a big fan of our leadership in the community,” he said. “We’ve got good leadership and I want to be supportive of that.”

Some Downtown officials have said there’s a lack of Class A speculative office space Downtown, indicating that inventory needs to be built to attract new businesses.

“Inventory costs a lot of money to carry – taxes and insurance and maintenance cost,” Halperin said. “Empty buildings are expensive for people who own them.”