Original Post: Knoxville News Sentinal | Brenna McDermott | September 12, 2018
Across Tennessee, Knoxville is still the most affordable metro area for office space, and it has the least amount of vacant space. Of Tennessee’s three largest metros, Knoxville had the lowest office vacancy rate at 7.5 percent, according to a first quarter report from Marcus & Millichap. Nashville clocked in at 10.2 percent vacancy and Memphis at 15.5 percent. Knoxville’s average asking rent in the first quarter was $14.93 per square foot, compared to Memphis’ $17.80 and Nashville’s $26.18. Vacancy rates in Knoxville and Nashville are well below the national average, while Memphis vacancy rates top U.S. rates.
There’s about 34 million square feet of office space in the Knoxville market, according to Jay Cobble, principal broker for Providence Commercial Real Estate. “In the last 10 years, looking back, there has not been much new space,” he said. About 100,000 square feet of office space is under construction in Knoxville right now. Phillips & Jordan, the heavy civil and infrastructure company, is building a new headquarters in West Knoxville at Parkside Drive. Site prep began in late 2017, and construction started in May. Vice president of strategic communications Emily Torgerson said the anticipated move-in date will be by the end of second quarter 2019. The building is five floors and about 76,500 square feet. Phillips & Jordan will utilize three of the five floors to house estimating, project management departments, as well as corporate leadership and administration. There will be about 25,000 square feet for lease in the new building through NAI Koella RM Moore. There will be about 90 offices for about 80 employees, a training room for 200 people and an on-site gym. The Phillips & Jordan building will be the first in Knox County to install View Dynamic Windows, Torgerson said. These windows automatically transition from clear and variable tint, which allows control over the amount of heat and light entering the building. Construction of the three-story, mixed-use office and retail building at Western Plaza has caused some controversy. Work began on the project one year ago and is ongoing. Several businesses in the Western Plaza have closed or relocated; Blackhorse Pub and Brewery relocated its pub to Gay Street and is moving its brewing operation to Alcoa. The Biltmore Group purchased the plaza in 2013. Construction is shutting down for the holiday season and will resume in early 2019.
The Marcus & Millichap study estimated office-using job growth in 2018 is expected to grow .6 percent in Knoxville as compared to the U.S. average of 2.2 percent. Manufacturing, construction, leisure and hospitality industries all hired more than 1,800 employees during the past 12 months ending in March, according to the study. Though companies have rebounded from market lows in 2013 “their use of office space has kind of changed, it appears for the long term,” Cobble said. Businesses are committing to open space layouts, Cobble said, which require less square footage, and more employees are working from home. Square feet per worker in the metro area clocks in at 234, higher than the U.S. average of 213, according to the study. In Knoxville, the average office square footage is 22 percent urban and 78 percent suburban, as compared to the U.S. average of 32 percent urban and 68 percent suburban. “The most desirable spaces are really hard to come by right now, but there still is softness to the market and a lot of square footage available,” Cobble said.
The first quarter average asking rent in Knoxville was $14.93 per square foot, a 1.1 percent year-over-year decrease. In submarkets, rent prices increased downtown by almost 1 percent and Blount County rents increased by 5.3 percent. Businesses are eager to move downtown for the interactions and to attract young workers with amenities, Cobble said. He has a client off of Pellissippi Parkway that wants to move back downtown. He had another client recently relocate from Cedar Bluff back downtown. Even so, right now the Bearden-Papermill area is the hottest spot for office space, Cobble said, with Brookview Town Centre and Landmark Center in highest demand. The Bearden-Papermill-West Town submarket had a 14.1 percent vacancy rate in first quarter (the second highest of all the submarkets), according to the study, and the area’s asking rents were the highest in the study at $21.03 per square foot, a 6.9 percent increase year-over-year. Blount County registered the lowest vacancy rates in the first quarter with 3.3 percent and had the lowest average asking rent at $11.11, a 5.3 percent year-over-year increase. Campbell Station-Farragut registered the highest vacancy rates of submarkets at 17.4 percent and the second highest average asking rent in the study at $19.21. The year-over-year change in average asking rents dropped by 7 percent. The North-Broadway area saw the largest year-over-year gains in average rent prices, gaining 11.1 percent to $14.86 and a vacancy rate of 11.5 percent.