Combined average rate drop of 10 cents leaves Metro landlords hoping the bottom has been reached
Downtown’s Central Business District and the Highland Colony submarkets kept metro Jackson from achieving positive net absorption of office space in the third quarter, though more than a quarter million square feet counted in the downtown survey is not being actively marketed.
The quarterly survey by Jackson’s Parkway Properties shows 48,063 square feet of negative absorption and 24.7 percent vacancy. Removing the 162,159-square-foot Regions Bank Building, 200 E. Capitol Street and the 83,392-square-foot Lamar Life Building 317 E. Capitol Street lowers the rate somewhat, said Duckworth Realty’s John Michael Holtmann, leasing agent for the Regions Building and the nearby Regions Plaza.
Neither the Regions Building (16 percent occupancy) nor the Lamar Life Building (10 percent occupancy) are pursuing office tenants, as both are awaiting conversion to other uses. The circa 1925 Lamar is headed for a new life as an apartment building and the Regions Building, built in 1950, is being marketed to potential buyers for hotel or apartment uses.
Removing the two buildings from the survey puts the Central Business District vacancy rate slightly below the national rate of 18 percent, Holtmann said, and noted that nationally office markets have had seven to eight quarters of negative net absorption. With the Central Business District’s movement toward the national average, “Hopefully that’s a sign we’re approaching a bottom.”
Commercial real estate professional Brian Estes said some movement back to downtown is coming from tenants who moved to suburban submarkets or other submarkets. In some instances, the new digs cost the tenants $22 a square foot, $5 to $6 more a square foot than they had been paying. Coupled with the greater distance between themselves and their core clients, the tenants are thinking a return to the Central Business District makes sense, Estes said.
“Some are realizing they bit off a little more than they can chew,” he said.
Market watchers expected downtown’s move into negative net absorption in the quarter. A total of 48,000 square feet of the negative absorption came from relocation of a single tenant in a previous quarter, said John Barton, senior vice president and senior asset manager for Jackson’s Parkway Properties. “These are things that had been signed awhile back and everyone knew about them.”
Jackson submarket I-55/County Line showed the quarter’s biggest space occupancy gains, going from negative net absorption of -13,973 square feet in the second quarter to 32,477 square feet in the third. The Lakeland submarket improved from 9,624 square feet absorption to 18,312 square feet of absorption The I-220/Highland Colony submarket stayed in negative net absorption territory but improved slightly, going from -7,909 square feet to -4,630 square feet.
Occupancy for the combined submarkets dipped slightly from 82.04 percent in the second quarter to 82.02 percent in the third, the Parkway survey showed.
The combined markets lost a dime on lease rates from the second to most recent quarter, going from a square-foot rate of $18.57 to $18.47, according to the survey.
Holtmann said his firm has seen significant strength in the Lakeland market. “On Lakeland Drive we’ve got three units that are 100 percent leased,” he said, noting tenants like its proximity to medical businesses, new residential neighborhoods and the Central Business District.
Growth in the Lakeland and Highland Colony markets has put a dent in Central Business District occupancy, said Parkway’s Barton. “The new development east in Lakeland and north in Highland Colony has created a lot of the vacancy in the CBD.”
And the luring of downtown tenants could intensive, according to Barton. He said this could come from buildings such as Highland Colony’s 200 Renaissance, which opened in 2008 and has about 90,000 square feet of empty space.
While Barton said he is seeing a lot of hesitation on the part of tenants to sign off on transactions, he expects activity to pick up noticeably downtown in the final quarter and on into 2011. “I see good numbers coming out of the CBD in the fourth quarter,” he said, though he added: “I imagine most of the submarkets will be relatively flat.”
“There’s not a lot of deals out there on the market,” Barton said.
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