New office buildings are like the raw material necessary for bringing in more high-wage jobs. But the TraVure development in Germantown is likely to be one of the last big offices going up until the COVID-19 era passes
Ever since the TraVure opened last year, the five-story office building has stood like a quiet beacon of elegance on Poplar Avenue.
If you had wanted to put in an equally high-tone store nearby, cater to TraVure’s office workers and their clients, the lease would have approached $20 per square foot of retail space.
At least, that was the going rate in February.
Today, you might negotiate $12 or $13. Maybe press for even less. Why? The coronavirus pandemic.
In normal times, new office buildings are like the raw material necessary for bringing in more high-wage jobs. By this measure, TraVure’s glass walls and premier address are economic building blocks for Memphis. But the $90 million development, located in Germantown near the Memphis city line, is likely to be one of the area’s last new office structures for some time.
The shelter-in-place shutdown, ordered to slow the lethal virus’s spread among people, roiled Memphis’ market for both office and retail buildings.
Not since the Wall Street meltdown triggered the 2008 crash has the real estate market faced such uncertainty. Back then, retail landlords slashed lease rates, then raised rates gradually, taking about a decade to step back to the pre-recession level, said Danny Buring, managing partner of the Shopping Center Group, a real estate broker in Memphis.
“I hope that’s not what we’re going to see over the next year,’’ Buring said.
Even after Shelby County ushers in Phase 3 of the “Back to Business” plan on June 15, allowing gatherings up to 75 people, compared with 50 in Phase 2, it isn’t clear how the real estate market will shape up.
The pandemic cost 65,700 jobs in metropolitan Memphis, pushing the jobless rate to 12.7% after mayors and governors ordered businesses considered nonessential closed in March. Although the hospitality sector is showing signs of recovery, many workers still prefer to stay out of crowded workplaces, at least until a remedy is in hand for the COVID-19 infection caused by the virus.
With worries about the virus common, tens of thousands of employees in hundreds of essential businesses are still performing their jobs at home several weeks after shelter-in-place orders ended.
Part of the uncertainty in the real estate market traces to consumer spending. With work being conducted at home, people are dining out in restaurants less while ordering more products for delivery to their house. This has put a premium on warehouse space but hasn’t translated into strong demand for office or retail space.
Normally, a quick drop in leasing rates acts on retail and office firms like vitamins putting energy into a long-distance runner. Reduced rates free up cash for tenants. But this time around, few firms clamor for inexpensive space. Expansions are on hold.
“I think the vacancy rate will probably be higher in a year,” said commercial real estate investor Ron Belz, chief executive of Memphis-based Belz Enterprises, referring to the overall 15% vacancy rate in the Memphis office market before the shutdown began.
With vacancy rates rising, the incentive to put up a new building all but vanishes. Cash-short companies can’t afford new offices. Some will fail during the recession, which officially began in February. And Belz points to another factor.
Working from home during the pandemic has fueled the idea of letting some employees stay away from the office permanently. What’s likely to emerge out of this is a focus by some firms on smaller work quarters. Others may desire larger social distance spaces for employees and more walls to separate offices from the general mix of workers.
The end result is renovation and remodeling rather than building new structures. Although some predictions call for drastically less demand for office space, Mark Halperin said he doubts the Memphis market for office space will crater.
“That’s not the sentiment we’re hearing from our customers. They want to come back and keep working in their offices,” said Halperin, chief operating officer at Memphis-based Boyle Investment Co., which manages about 7 million square feet of office and retail space in Memphis and Nashville.
While retail lease rates are coming down, Halperin and Belz figure office leases, currently about $30 per square foot, might rise. Pushing up the rate would be requests from tenants for new office walls and more anti-virus measures such as increased sanitizing of office surfaces.
“We might see some drift-up of rents,” Halperin said.
TraVure, a development by Gill Properties, is anchored on its upper floors by the headquarters offices of Mid-America Apartments, the fourth-largest public company based in the region. The ground floor contains the regional office of Nashville-based First Bank, one of the faster-growing banks in the state and Gill’s lead construction lender on the $90 million building.
In between MAA and the bank is the unoccupied second floor. Ray Gill, chief executive of the Memphis development firm, said he thinks the office market isn’t like the retail market. Firms still want and need office space, he said, particularly companies in fields such as the medical sector that have not been hammered as hard during the shutdown.
“COVID-19 hasn’t affected the office market like it has the retail market,” Gill said. “People want to come back to the office. They want to be back with their colleagues. Some may want to be farther apart than they were. They want their own space. This offsets this work-at-home thing.”
Ted Evanoff, business columnist of The Commercial Appeal, can be reached at firstname.lastname@example.org and (901) 529-2292.