1. 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 confdent in the Knoxville
economy and in how the national economy is running.
Businessesaretakingadvantageofwhattheyseeinstock
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. Tey
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
fnd an ideal location in a class A building with some
incentives in place, he adds.
In Knoxville, landlords remain aggressive in both the
CBDandmajorsuburbansubmarkets.Tenantsarelook-
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 signifcant 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. “Tis 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 “flight 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 significantly. “Without much
speculative development, there is a scarcity for premium space,” says Brent Roberts, CCIM, a first 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 significantly 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 flat 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 office, 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 office
space,” says Dean.