Memphis, Tennessee, famous for being the home of Elvis Presley and the blues, is also known as a hot spot for commercial development. The city continues to thrive on its position as a major transportation hub, and national businesses are attracted to the area because of its location and infrastructure.

Industrial

Although the Memphis industrial market faces the same obstacles as other national markets -- high vacancy rates, negative absorption and declining demand -- it held its own against a slowing economy throughout 2001. The vacancy rate of 16.3 percent remained unchanged from fourth quarter 2000, and year-end absorption totaled 3.2 million square feet. Sublease inventory dramatically affected the Memphis industrial market in 2001 and has continued its impact into 2002. The amount of available sublease space increased by approximately 54 percent from year-end 2000 to year-end 2001.

Sublease space acts as uncontrollable new supply to the market and counters the disciplined development strategy characteristic of the Memphis industrial development community. Net absorption in 2002 should be somewhat lower than 2001 while the effects of the national recession play out in Memphis, according to CB Richard Ellis. However, demand in the industrial market should remain strong due to Memphis' geographic and distribution amenities and its position as a national distribution center.

Memphis has always been an attractive option for developers and owners due to its location and infrastructure as well as its role as a major transportation hub. Ford Motor Company, for example, consolidated several operations in Memphis last year by leasing warehouse space totaling nearly 1 million square feet. A number of U.S. companies have continued the trend of reducing expenses and increasing efficiency through the consolidation of warehouses into one or two central locations.

Farnsworth Investment Company is adding another attractive option for businesses with Distriplex Farms, a 275-acre business and distribution park. The company currently has three speculative buildings underway and is pursuing prospects for two build-to-suits of 300,000 square feet each. Over the years Farnsworth has sold land in Distriplex Farms to companies such as ProLogis Trust, which puchased 25 acres on which it plans to build approximately 500,000 square feet when the market is favorable. Farnsworth's first sale was to Morgan Stanley Dean Witter, which built a 90,000-square-foot Southeast processing center for Discover Cards.

"Industries tend to cluster, and new distribution and logistics companies are coming to this area because similar companies are already here, and also because of available land," says Michael Mullis of Farnsworth. Additionally, Distriplex Farms has a mixture of various-sized buildings, so smaller tenants do not feel overwhelmed. Tenants at the park include Ozburn-Hessey, Toshiba, Forward Logistics and Metabolife International.

In the fourth quarter of 2001, Dallas-based Hillwood Investment Properties purchased and optioned a total of 218 acres of land south of Interstate 55 and Church Road near Highway 51. The company plans to develop six buildings totaling 3.9 million square feet at the site. New supply accounted for 3.97 million square feet of space being delivered to the Memphis market in 2001, over half of which was pre-leased.

Office

Three negative economic conditions converged in 2001 to dramatically impact the Memphis office market. The national recession that began in early 2001, combined with the terrorist attacks of September 11, slowed business activity and, subsequently, office space absorption. At the same time, the national office market experienced the end of a mini-building boom, started by developers in "pre-recession" 2000, that resulted in the aggressive addition of new product. Further affecting office markets, record amounts of sublease space were offered. With the economic slowdown, landlords were forced to compete more often with tenants, who needed to unload excess space leased in the late 1990s and early 2000. The increase of sublease space was especially hard-hitting in U.S. markets that experienced what Torto Wheaton Research, a subsidiary of CB Richard Ellis, calls the "tech factor."

The robust economy Memphis experienced in 1999 and 2000 encouraged construction starts that were just ending in the fourth quarter of 2001 and the first quarter of 2002. New supply in 2001 totaled 768,549 square feet, of which only 50 percent was pre-leased. During the third and fourth quarters, a decline in demand was compounded by large amounts of sublease space being returned to the market. For comparison, approximately 189,000 square feet of sublease space was reported in the Memphis market at year-end 1999, while over 450,000 square feet of sublease space was reported at year-end 2001 -- a 72 percent increase in sublease inventory.

Year-end 2001 absorption for the Memphis office market totaled negative 128,095 square feet, down from 535,354 square feet absorbed in 2000. Tenant move-outs in the Downtown and East submarkets not only supported the negative net absorption, but also caused a decrease in the overall occupancy level, which fell from 88.2 percent at the year-end 2000 to 83.9 percent. When available sublease space is added to the vacancy figures, year-end 2001 occupancy declines to 81.4 percent.

Absorption statistics for 2002 will rally with the completion of the fully leased EagleCrest II, a 194,000-square-foot building by Boyle Investment Company, and Tower III at International Place, a 213,000-square-foot development by Highwoods Properties. As would be expected, developers are responding to the current market by putting new developments on hold. This controlled supply will allow the market to "catch its breath" and, contingent on the resurgence of demand, will allow occupancy to return to more normal conditions in 2003.

Crews Investment Properties is currently preparing the land and zoning for a 66-acre office or corporate campus site overlooking Shelby Farms, the largest urban park in the U.S. "We see this area as the next nucleus of office development," says Mike Slattery of Crews Investment Properties.

Retail

In the midst of a slowing economy, the Memphis retail market remained relatively healthy throughout 2001. Sales declined slightly from year-end 2000, but not to the level of some larger markets. Several first-time retailers opened in Memphis this year, including Apple Computer, MARS Music, O'Reilly Automotive, Jillian's and Factory U-2. Overall year-end absorption for Memphis, 1.44 million square feet, was slightly higher than the year before due to the delivery of over 2 million square feet to the market in 2001.

The Downtown/Midtown submarket experienced a marked increase in retail development in 2001 with the addition of Belz Enterprises' Peabody Place Retail and Entertainment Center. This complex boosted the appeal of downtown Memphis, and the completion and renovation of apartments during the past year have also brought more people to this submarket. Furthermore, the Center City Commission's plan to redevelop the strip on Main Street between Gayoso Street and Union Avenue, as well as the construction of the new NBA arena, is expected to produce more retail growth in this area in the coming year.

While tourist-trade areas felt the effects of a slowing economy, neighborhood centers -- usually grocery-anchored developments with necessity-oriented tenants -- remain at the core of retail stability. Investors and developers have recognized this and should continue to see opportunity in the Memphis market. While necessity-oriented tenants can be characterized as the "backbone" of the retail market, entertainment retailers have taken the lead role in downtown Memphis. The potential for entertainment-oriented retailers in the downtown area has caused investors to take a new look at this market.

DeSoto County, characterized as the next retail hot spot, continued to thrive in 2001 as well. Residential growth in this area increased more than 20 percent over the past 5 years, strengthening the demand for retail expansion. Over 335,000 square feet of new product, of which 83.7 percent was pre-leased, was added to DeSoto County during the past year. Developers are closely watching the intersections along the Goodman Road east/west artery, on which retail opportunities in North Mississippi are plentiful.

Because of the economic downturn and subsequent decline in consumer spending, the Memphis retail market can expect less speculative development this year. However, this will enable the market to absorb any excess space already available, maintaining the current healthy market conditions.


©2002 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.