The only trend for industrial development in Memphis, Tennessee, is a significant reduction in industrial construction. “Due to an ongoing contraction in occupied space, rising vacancy levels and falling rents, speculative construction should be almost nonexistent through the first half of 2003,” says Joseph Steffner, partner with Colliers Wilkinson & Snowden in Memphis. “As of the end of third quarter 2002, we had experienced three straight quarters of negative net absorption and subsequent increases in vacancy. Based on the effects of the national recession and subsequent decline in manufacturing, any surge in demand for warehouse space is unlikely.”

The majority of new development in the area is taking place in Mississippi due to the abundance of land and the unsettled ad valorem tax issue in Memphis. Probably the most significant recent industrial development has been IDI’s Airport Distribution Center in Southhaven, Mississippi, just south of Memphis. It was the first true speculative development south of the Memphis border, in a market that had previously been reserved for build-to-suits. IDI’s success led to speculative development by Patillo Properties (400,000 square feet expandable to 1 million square feet) in Olive Branch Distribution Center and the pending construction start by Hillwood at Desoto Trade Center in Southhaven, Mississippi (950,000 square feet).

The huge warehouses being constructed by national developers IDI, Panattoni, Hillwood, Patillo and ProLogis are looking for third-party logistics providers, retail and e-fulfillment distribution operations that need to be close to FedEx and UPS, as well as Fortune 500 regional distribution centers.

Rental rates for bulk warehouse facilities range from $2.80 to $2.95, triple net for new bulk warehouse space. Vacancy rates climbed in all product classes during the first three quarters of 2002. In Class A bulk warehouse space the vacancy rates rose from 10.2 percent in the first quarter of 2002 to 12.4 percent in the second quarter to 15.3 percent in the third quarter. With the development “spigot” off for now, those rates should begin declining during this quarter.

Always the dominant submarket in Memphis, the southeast submarket is the one to keep an eye on. It is being annexed into the city which will essentially double the tax base. This annexation, combined with declining tax incentive programs by the city and county, could drive future tenants into North Mississippi.

“2003 should be a pivotal year for the Memphis distribution market as we await a turn in the economy to rekindle demand,” says Steffner, “and as the city’s taxation policy regarding annexation and tax incentives becomes clearer.”

Joseph L. Steffner is a partner with Colliers Wilkinson & Snowden.


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