SOUTHEAST SNAPSHOT, JULY 2008

Memphis Multifamily Market

The Memphis apartment market is expected to record mixed performance this year, due to a spike in new inventory and decelerating employment growth. On the demand side, weakness in the housing market is keeping many individuals within the renter pool, boosting retention rates and supporting a modest uptick in tenant demand. Foreclosure activity rose 15 percent in the first quarter, when compared to the same period 1 year earlier, and is expected to continue this year as more adjustable-rate mortgages reset. Subsequently, apartment demand for Class B and Class C properties should pick up this year, causing vacancy for the metro’s affordable rentals to improve. On the supply side, development activity is accelerating after 5 years of below-average additions to stock. By year-end, developers are expected to boost inventory by 1.1 percent, or nearly double the 5-year average, pushing vacancy higher while moderating rent gains.

Builders have brought approximately 175 new apartment units to the Memphis market during the past 12 months, representing a modest 0.2 percent increase in inventory. One year ago, deliveries had totaled approximately 210 units. Development activity is picking up, as builders have roughly 1,100 units under way in the metro area. As for significant developments, investors should be aware of construction in the Whitehaven/Airport submarket. Completion of The Hamilton at Turman Farms will add nearly 500 units at mid-year, increasing the area’s stock by 3.9 percent and pushing vacancy up 100 basis points to 17.3 percent. Rents, however, are expected to remain near current levels. Germantown/Collierville will continue to be one of the most sought-after submarkets in the metro by both tenants and investors. Despite the addition of 132 units, or 1.4 percent, to inventory this year, the market will remain tight, with vacancy staying in the low 5 percent range. Strong tenant demand will allow owners to raise effective rents by more than 3 percent, leading the market in revenue growth.

Developers are expected to bring approximately 900 units to the Memphis market in 2008, the highest total of annual deliveries in 6 years. More than half of the new inventory is slated to come on line during the fourth quarter. Last year, only 175 units came on line.

Single-family permits totaled 3,800 annualized units through the first quarter, down 47 percent from 1 year ago. Multifamily permit issuance also slowed during that time, declining 61 percent to 1,600 annualized units. As of the first quarter, the median price of a single-family home in Memphis was estimated at $141,500, which is down 1.3 percent from 1 year earlier. While prices have only fallen subtly during the past year, rising foreclosure activity could accelerate the rate of decline this year. While housing remains affordable, tighter lending standards and weakness in the market likely will keep more individuals in the renter pool this year. Growing weakness in the housing market is expected to keep more people in local apartments. Foreclosure notices rose 15 percent in the first quarter, and likely will continue to increase throughout the year as subprime adjustable mortgages reset, sending a greater number of former homeowners into rental units.

Employment in Memphis has expanded by 0.9 percent during the past 12 months with the addition of 5,800 new jobs, including nearly 4,300 positions during the last two quarters. Employment growth in the past year has been strongest in the metro’s educational and health services sector. Employers have boosted payrolls in this segment by 3 percent, creating 2,300 positions. Companies continue to relocate and expand in Memphis for its affordable cost of living. Late last year, Nike announced plans to build a new distribution center on 600 acres in north Memphis. A scheduled start date for the facility, which is expected to employ 600 workers, has yet to be set. Employers in Memphis are forecast to expand payrolls by 5,200 positions this year, a 0.8 percent increase. Cooling in the local economy will cause growth to slow from last year’s pace, when 6,600 positions were added.

The outlook for the Memphis investment market remains positive, supported by healthy activity from out-of-state buyers looking to place capital within a market with affordable valuations. Pricing remains more in line with operating fundamentals, with the median currently in the mid-$40,000 per unit range, up about 5 percent year-over-year. Cap rates are averaging in the mid to low 8 percent range for lower-tier assets, while some Class A properties have traded with cap rates in the mid to low 7 percent range, both down slightly during the past 12 months. Looking forward, investor demand will be supported by out-of-market buyers from California, Texas and New York that are targeting primarily underperforming properties with attractive initial yields. Opportunities to add value exist in the repositioning of assets through capital improvements, as the market is poised for long-term economic stability and, as a result, steady apartment demand.

— Matt Fitzgerald is regional manager of the Memphis office of Marcus & Millichap Real Estate Investment Services.

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