SOUTHEAST SNAPSHOT, JUNE 2007

Memphis, Tennessee Industrial Market

While the Memphis industrial market ended 2006 on a positive note following 3 quarters of positive absorption, the negative absorption during first quarter of 2007 suggests a cautious outlook is in order. A significant amount of sublease space was taken up by direct leases during first quarter 2007, which is encouraging. However, the overall vacancy rate remained unchanged at 15.8 percent. While Memphis’ industrial employment growth is outpacing the United States as a whole, industrial inventory has been growing at an even faster pace. Thus, careful optimism is the mood of the day.

Another positive trend is that industrial rents are finally on the rise. Industrial property rents range from approximately $2.53 per square foot for warehouse space to as high as $8.35 per square foot for flex space. Some industry observers expect them to rise further in 2007, but the 3 million square feet of new product coming online this year may keep rates from showing much upward movement.

Warehouse vacancy had decreased to less than 16 percent at the close of first quarter 2007, after hovering around 20 percent in recent years. The improvement is the result of steady leasing activity and no delivery of new bulk distribution product in fourth quarter 2006. Flex space continues to be soft, with negative absorption in first quarter 2007 and vacancies in excess of 20 percent, but this product type constitutes only about 5 percent of the total industrial market. All major industrial submarkets experienced positive absorption in fourth quarter 2006, with DeSoto County leading the way with more than 700,000 square feet of absorption.

With approximately 155 million square feet of industrial space (depending upon the methodology used for counting), the greater Memphis market continues to thrive as one of the major transportation hubs in the United States. Memphis has the largest concentration of shipping facilities of any city in the greater Southeast, including the world’s largest cargo airport, five intermodal railyards, the resurgence of rail and container transportation, an active river port and an expanding interstate network.

The market continues to benefit from being the hometown of several major corporations that help generate demand for industrial facilities. FedEx/Kinko’s is arguably Memphis’ most well-known corporate resident, but AutoZone Inc. and International Paper also are Fortune 500 companies with headquarters in Memphis. In addition, the Memphis suburb of Blytheville is the second-largest steel-producing center and the largest structural steel manufacturing area in the United States.

In recent years, fierce competition among developers contributed to the stagnant rents, as industrial space users faced plentiful space options and landlords willing to deal. In keeping with national trends, cap rates for Memphis industrial properties reached historic lows in recent years, further motivating landlords to focus on occupancy and investment sales rather than on rent growth.

In one of the largest industrial transactions of fourth quarter 2006, HSA Commercial acquired 17 industrial properties – a mix of warehouse, distribution and flex office space – totaling more than 1.9 million square feet of space located in two business parks near Memphis International Airport. The properties are more than 85 percent leased with a diverse mix of tenants, including International Paper Company and FedEx/Kinko’s. 

The Memphis industrial market continues to expand its boundaries as tenants seek cheaper spaces and tax incentives on the Mississippi side of the greater Memphis market. Of the largest industrial leases of 2006, the largest two were in DeSoto County, Mississippi. One was Iron Mountain’s lease of 572,000 square feet and the other was Imation’s lease of 563,000 square feet. At press time, the largest industrial lease of 2007 so far also was in DeSoto County, with Stylecraft Lamps Inc.’s lease of 251,000 square feet.

For new development, DeSoto County is where the vacant land is -- and the action, which started several years ago. Nearly every major industrial developer is at work in the area, and five of the eight largest industrial developments under construction in Memphis are in the county. Institutional property investors have now accepted DeSoto County as a desirable area of Memphis, and the availability of capital for new development reflects this view.

ProLogis is constructing a 1.1 million-square-foot distribution center in DeSoto County for delivery in late 2007, while IDI has several properties in play. IDI’s new Stateline Business Park, in Southaven, has attracted a stream of new tenants for buildings ranging in size from 242,000 square feet to nearly 1 million square feet. Hillwood recently completed two notable build-to-suit properties, a 1.2 million-square-foot facility for Helen of Troy and an 867,000-square-foot distribution center for Kuehne and Nagel, as well as two speculative buildings totaling approximately 853,000 square feet combined. In 2006, Panattoni signed major leases totaling 1.2 million square feet with Iron Mountain, Jacobson Warehouse and Sharp Electronics Corporation in three different DeSoto County properties.

 While the greater Memphis industrial market has its bright spots, it also has its weaknesses. If rents are to rise further, developers must carefully balance tenants’ demand for up-to-date facilities with the risks of creating an oversupply. The market has enough momentum to be considered solid, but not enough to be considered strong, especially in the flex space segment.

— Eric Ogden is senior vice president of acquisition and development for HSA Commercial Real Estate.


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