CITY HIGHLIGHT, JUNE 2010

MEMPHIS CITY HIGHLIGHTS
Trent Macdonald & Danny Buring

Memphis Industrial Market

Industrial activity in Memphis has picked up with greater leasing velocity and a couple of significant build-to-suit projects announced. The Memphis area industrial market ended the first quarter with a vacancy rate of 14 percent, which was down from 15 percent at year-end 2009, due to positive net absorption during the quarter of 394,000 square feet. By comparison, absorption was negative 900,000 square feet for all of 2009.

A major part of the rebound was Technicolor’s lease of former Hewlett Packard space at Summit I & II, totaling 1.36 million square feet. The deal came with good news for Memphis’ economy, as the company plans to create approximately 150 new jobs.

Other first quarter deals included GE Capital Aviation, which added 225,000 square feet at Memphis Oaks III; Ozburn Hessey expanded by 238,185 square feet at Summit Distribution Center III and Solae, a world leader in soy technologies, added 472,000 square feet at Deltapoint. All three of these transactions were in the southeast submarket of Memphis.

In DeSoto County, Mississippi, which has a vacancy rate of approximately 15 percent, Siemens expanded by 619,000 square feet at Airways Distribution Center B. Also, McKesson Corp., a healthcare products and services provider, has announced it will build a new, 1 million-square-foot logistics and supply chain headquarters in Olive Branch, Mississippi. That new project is estimated to employ 500 people and could cost more than $135 million to build. Additionally, ASICS is planning to open a 520,000-square-foot distribution center for its footwear products on 38 acres in Marshall County, Mississippi, by April 2011.

Awesome Products, Inc. has announced it will expand to 700,000 square feet and add 200 more jobs across the Mississippi River in West Memphis, Arkansas.

The only new construction is Riviana Foods’ 400,000-square-foot, build-to-suit project in Memphis’ southwest market at 615 E. Bodley Avenue. It is unlikely that any speculative development will occur until the market experiences positive rent growth and some of the excessive inventory, particularly between 50,000 and 200,000 square feet, is absorbed.

The flex building market recorded a net absorption of negative 97,400 square feet in the first quarter of 2010. Flex buildings have 30 percent or greater of dedicated office space with clear height of less than 20 feet.

Vacant sublease space market decreased to 1.9 million square feet, however, because 338,000 square feet of space moved from sublease status to direct lease.

Served by five Class 1 railroads, Memphis is uniquely positioned for intermodal transportation.  Four of these railroads have announced or recently completed more than $629 million in yard upgrades and expansions to challenge Chicago for rail traffic in the center of the United States. Canadian National has the second largest classification yard in the U.S. and Burlington Northern now has drop offs and pickups faster than any other intermodal facility.

Memphis expects continued positive absorption through the first half of 2010 with seven reported prospects looking for an estimated 3.1 million square feet of industrial requirements.

— Trent Macdonald, SIOR, CCIM, is a partner of Crump Commercial LLC/CORFAC International, based in Memphis.

Memphis Retail Market

Although, like Elvis, retail development is no longer found among the streets of Memphis, the city’s conservative expansion has sheltered the market from the full force of the recent retail storm. With the emergence of three super-regional trade areas, coupled with long-term, rational growth, the retail landscape here is poised for recovery despite the absence of development.

Historically, Wolfchase has served as the primary retail hub with mini-trade areas scattered throughout the Memphis MSA. This created a challenge for those retailers looking to penetrate the market with multiple locations and achieve critical economies of scale.

However, during the past decade, Memphis has grown and evolved into a market with three separate and distinct, regional trade areas. With the emergence of Southaven, Missississippi (south of Memphis) as well as Collierville, Tennesse (southeast of Memphis), the overall region is now equipped to adequately support super-regional destinations as well as peripheral retail. With historic growth rates at twice that of the MSA, these markets are now home to CBL & Associates Properties’ Southaven Towne Center and Cousins Properties’ The Avenue Carriage Crossing in Collierville. Despite recent economic challenges, limited vacancy exists within these markets, validating the communities’ basic need for retail. In addition, the trade areas of East Memphis, Germantown and Midtown offer ideal intown opportunities though good development and redevelopment sites are limited.

With +/-77 million square feet of retail space, a vacancy rate of less than 10 percent and a moderate but steady population growth rate, the marketplace is better positioned than many other markets of similar size. Most of the well-located boxes that became available last year due to bankruptcies and/or consolidations were quickly absorbed. This, along with the completion of a few, well located retail developments, has created opportunities for market entry as well as expansion. hh gregg, Bed Bath & Beyond and JoAnn Fabrics recently opened new locations at Southaven Towne Center. Ashley Furniture Homestore opened another store in a former Sportsman’s Warehouse in southeast Memphis while The Avenue Carriage Crossing added Bed Bath & Beyond to its retail line-up.

The market’s last remaining big box spaces are expected to be filled by year-end. The first Toys ‘R Us/Babies ‘R Us combination store in Tennessee is set to open its doors this fall at Centennial Commons, a 300,000-square foot power center developed by local developer Michael Lightman. Situated along Winchester Road in the southeast region of Memphis, the center also features JC Penney, Dick’s Sporting Goods, JoAnn Fabrics and Office Depot. Weingarten Realty is developing Ridgeway Trace along Poplar Avenue, one of the busiest surface streets in Memphis. Anchored by Target, this power center will also feature Best Buy, PetSmart and The Sports Authority, all expected to open this summer.

The Memphis retail market is witnessing the close of the recession and a recovery under way. As vacancy rates continue to decline with little to no new development planned, lease rates will inevitably start to rise, effectively closing the gap between what landlords are seeking in rent and what merchants are willing to pay.

The legacy of the recent retail downturn will be less severe in Memphis than in cities of similar size. Moderate growth coupled with rational and logical development will enable the city to restore itself to pre-2007 levels within a reasonable period of time.

— Danny Buring is a partner with The Shopping Center Group’s Memphis office.

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