Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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30 March | April | 2015 Commercial Investment Real Estate Leasing in the Knoxville market started to pick up in 2013 and that activity ramped up over the last half of 2014. "People are a lot more conf dent in the Knoxville economy and in how the national economy is running. Businesses are taking advantage of what they see in stock markets and employment and trying to really position themselves for the next decade," Cazana says. Some ten- ants are making a move because of market timing. T ey believe now may be, potentially, their last opportunity to take advantage of a sof market. Several submarkets in Knoxville are still overbuilt, which allows tenants to f nd an ideal location in a class A building with some incentives in place, he adds. In Knoxville, landlords remain aggressive in both the CBD and major suburban submarkets. Tenants are look- ing for leases with turnkey construction and in many cases they are getting it, especially for spaces that are 15,000 sf or bigger, Cazana says. Although rent bumps will be signif cant over the long term, initial rents are still low and six months of free rent is not uncommon. "It is still a tenant-friendly market, but that is starting to change," he says. "T is absorption is starting to really get a lot of traction and it won't be long before landlords will start getting a little more leverage in negotiations." Beth Mattson-Teig is a writer based in Minneapolis. BACKFILLING "B" SPACE Some markets are seeing a "fl ight to quality" with tenants exhibiting a greater appetite for newer class A space, while older class B space remains a tough sell. Case in point is Kansas City, Mo., where the class A-plus market has improved signifi cantly. "Without much speculative development, there is a scarcity for premium space," says Brent Roberts, CCIM, a fi rst vice president at CBRE Group in Kansas City, Mo. "If you're a 20,000-square-foot tenant you don't have any choices in that product type right now." In contrast, the class B market has seen little movement in the vacancy rate or increase in lease rates, Roberts adds. "We have some larger chunks of B space in our market that have been vacant for many years," he says. Even though that space may be signifi cantly cheaper than doing a build-to-suit, some B owners just have a hard time attracting the right tenants, he adds. Typically, class A space tends to lead the market recovery. But that is not necessarily true of the current cycle. "Even class A property has not had much of a recovery up until this point," says Ryan Severino, senior economist and director of research at Reis Inc. That slow rebound in the class A market will likely mean an even longer road to recovery for older class B and class C properties that often struggle to compete with the features, infrastructure, and amenities of newer class A buildings. According to Reis, class A vacancies have declined from a high of 16.8 percent in 2010 to hover at 15.4 percent for much of 2014. In contrast, class B/C vacancies have remained relatively fl at for the last few years. At the begin- ning of fourth quarter 2014, class B/C vacancies were at 18.3 percent — a slight 20 basis point improvement over 2010. By national standards, Huntsville, Ala., has a modest vacancy rate at 12.1 percent. However, that still translates to 2.3 million sf of empty space, which is a heavy load for the MSA of 450,000 people. Landlords, particularly among the B and C buildings, are reducing rents and offering incentives such as more tenant improvement dollars to attract tenants, notes Terri Dean, CCIM, a broker/senior director and vice president of operations at Sperry Van Ness Avat Realty in Huntsville, Ala. Some owners are choosing alternative ways to recycle that empty space with conversions to other uses such as condos or apartments. For example, Huntsville-based Intergraph built a new 250,000-sf headquarters on its existing 300-acre campus that was completed last fall. The company has decided to redevelop much of the older space it vacated into a larger mixed-use project that will include offi ce, retail, entertainment, and residential space. "They saw that with as much space as they had, there was no way they were going to be able to reuse that as offi ce space," says Dean.