Knoxville’s downtown office market faces new opportunities and challenges

In Perspectives by Joe Sullivanleave a COMMENT

Editor’s note: TVA announced on Wednesday, June 7, that the agency will remain in its downtown headquarters and consolidate West Knoxville operations into the towers. Read the full announcement

Downtown Knoxville’s 21st century renaissance as a place to live, dine, and partake of entertainment has been a marvel to behold. The one sphere in which it hasn’t made much progress is as a place to work. But that’s about to change.

Regal Cinemas is due to open its new headquarters on the South Waterfront in September, relocating more than 300 employees from suburban Halls. The city’s largest ad agency, Tombras, is close behind with the relocation of another 200 to the sleekly renovated former KUB building on Gay Street that had long been vacant.

When the 165-room Hyatt Place Hotel opens in November, it will create 85 jobs in what still deserves to be remembered as the Farragut, also long vacant. At the same time, a long-in-the-works renovation of what may be Gay Street’s last remaining vacant building (nee Kress) is reportedly nearing completion and is due to yield 16,000 square feet of office space in the upper two of its three floors.

Already, the Metropolitan Planning Commission has reported that the vacancy rate in downtown’s total of 4.7 million square feet of rentable office space dropped to 8.3 percent in 2016 from 10.6 percent in 2015 and as high as 14 percent in 2013. Doing a little math, that equates to close to 270,000 more square feet occupied, easily enough to take in upwards of 1,000 workers.

Almost overshadowing all of the above is the prospect that TVA will soon sell its two office towers that hover over Market Square and relocate its headquarters to a much smaller new building for which it would contract with a developer. When the towers were built in the 1970s with combined space of 750,000 square feet, they housed more than 3,000 TVA employees. Now, with its headquarters workforce down to about 800, either one of them is more than is needed. Yet the two towers were built akin to Siamese twins with shared infrastructure that makes them almost inseparable. Hence, the recommendation of a lengthy study concluded a year ago that TVA should sell them as a unit. The study also recommended the sale and demolition of the older, smaller TVA-owned complex known as Summer Place nearby to make way for the new headquarters.

At that time, a TVA announcement foresaw a board decision to proceed by last fall. But none has been forthcoming. When asked why it’s taking longer and when one might occur, TVA spokesman Jimmie Ray Hopson responds by email with bureaucratic puffery that, “TVA recognizes that is not a decision that should be rushed and all of the alternatives must be carefully considered. We want to make the best decision for both TVA employees and ratepayers so we are taking the time necessary to complete our due diligence. We hope to be able to provide additional information this summer.”

For more than a decade, TVA has retained Los Angeles-based commercial real estate broker CBRE to scour the nation if not the world for potential tower occupants. And to say the obvious, landing the “big one” would provide a big economic boost not just for downtown but for the city as a whole.

Of late, though, there’s been a lot of speculation that one of the major tenants might be Knox County Schools. At County Mayor Tim Burchett’s urging, KCS has been looking to move its central office out of the county-owned Andrew Johnson Building in order to put it back on the tax rolls. An RFP for the AJ’s sale and repurposing has a July response date, and several proposals are expected for converting  the 18-story building into one of downtown’s largest residential complexes. But the residences can’t go in until KCS moves out.

Meanwhile, the overhang of all that TVA tower space acts as a drag on any other large new downtown office space developments.

“With that much overhang, I don’t see much else happening until it’s been absorbed,” says one of the city’s most astute commercial Realtors, Joe Petre. Another major deterrent: the going rate for Class A office space downtown is around $16 per square foot, whereas Petre reckons it would take rental rates of close to $30 per square foot to make a newly constructed office building viable.

Any assessment of downtown’s prospects as a place to work is also clouded by the fact that no one seems to know how many people work there now. The executive director of the Central Business Improvement District, Michelle Hummel, advises that downtown employment totaled 22,105 in the most recent quarter for which data is available. But the source of this data is reports submitted to the state Department of Employment and Workforce Development for unemployment insurance purposes. For employers headquartered downtown these could lump together all of their employees wherever situated. Such is the case with Knox County Schools. I was able to verify that all of their more than 8,000 employees are being included in the report whereas no more than a few hundred of them work downtown. The state data may be more meaningful when it comes to making comparisons over time. It shows the downtown workforce hovering around 22,000 at least as far back as 2010.

By contrast, the CBID’s measures of downtown residential growth appear more nearly valid. They show the number of people living downtown has more than doubled from 1,100 in 2000 to 2,350 in 2016. And the seemingly insatiable demand for downtown dwellings continues unabated. One constraint could be that the supply of older buildings that have been the developers’ stock in trade is just about exhausted. But new construction is now coming to the fore. Consider:

• Longtime developer Buzz Goss and his partner of late, Dale Smith, are getting ready to follow up on their 255-unit Marble Alley apartments on State Street with 120 adjacent units named Caledonia.

• Tim Hill of Hatcher-Hill Properties is moving ahead with plans for construction of 88 condos in a 10-story building on a vacant lot in the 300 block of Gay Street.

• The ubiquitous Rick Dover of Dover Development and a Nashville-based partner firm have gained selection by the city for an $83 million development on the former State Supreme Court site that includes 240 apartments, a 100+ room hotel, a restaurant, and other retail.

• While not technically within the bounds of the CBID that defines downtown proper, two other developments on its fringe will also add to its vitality. These are the 101-unit condo complex that Petre is spearheading on what’s called Regas Square and the 255 apartments that are going up on the site of the former Baptist Hospital.

It all adds up.

Columnist

Joe Sullivan is the former owner and publisher of Metro Pulse (1992-2003) as well as a longtime columnist covering local politics, education, development, business, and tennis. His new column, Perspectives, covers much of the same terrain.

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