While the 2004 outlook for Memphis, Tennessee’s overall commercial real estate market is positive, 2005 is the year when most of the markets are expected to be back on top. Employment growth is key in Memphis — as it is in most cities. Conditions are already improving this year, setting the stage for a full recovery in 2005.

Office

The Memphis office market appears to have stabilized during 2003. Overall occupancy levels bottomed out in the first quarter of the year at 84.2 percent and reached 84.7 percent by the end of the year, only one-tenth of a percentage point higher than occupancy at year-end 2002. Furthermore, overall absorption remained positive though low, and rental rates held steady at $17.60 per square foot.

These factors, however, indicate that the Memphis market is beginning to move toward recovery. No new product was delivered in the second half of 2003 or is expected to be delivered in the first half of 2004. The current excess inventory hovering over the market is in the form of second-generation space, and it will take a number of quarters for absorption to drive these vacancies to lower levels and encourage developers to begin building again.

The East submarket remains the leading area for development and leasing activity. While smaller deals dominated the market in 2003, many 20,000- to 30,000-square-foot transactions took place in buildings such as Thousand Oaks Business Center, Renaissance Center and Crescent Center — all in the East submarket. This submarket boasted the highest absorption for the year and for fourth quarter 2003, as well as the highest asking lease rate in the city, $19.02 per rentable square foot.

While there are positive market conditions in most of the submarkets, a notable upturn in the market will not be recognized until after 2004. According to Torto Wheaton Research, a subsidiary of CB Richard Ellis, recovery of the office market will come only “when job growth has been sufficient enough to absorb a significant portion of excess stock.” The unemployment rate in Shelby County registered at 5.9 percent in December 2003, down from the November 2003 adjusted rate of 6.7 percent. As more jobs are formed, excess office space will begin to be filled. It is expected that leasing activity will be considerable in 2005, the year in which the office market is expected to be in full recovery.

— Kelly Truitt, executive vice president, CB Richard Ellis Memphis

Industrial

In terms of absorption, the Memphis industrial market ended 2003 much better than it ended 2002. Compared to the negative 562,454 square feet absorbed in 2002, approximately 1.73 million square feet of space was absorbed during 2003. This is mostly due to vacancies filled in Class A bulk warehouse properties in the two most active areas, the Southeast and DeSoto County, Mississippi, submarkets. This class boasts the lowest vacancy in the market (9.6 percent); however, more than 2.1 million square feet of sublease space — all of which is in the Southeast submarket — is currently available in these buildings. Class A bulk warehouse properties have an availability rate of 16.2 percent including vacant and sublease space. The overall market availability rate at fourth quarter 2003 was 23.9 percent, up from the 22.7 percent availability rate recorded at fourth quarter 2002.

Nevertheless, total available sublease space (approximately 3.3 million square feet) is the lowest it has been over the past five quarters. The overall availability rate has increased because of the amount of new product that has been delivered to the market. This combination of vacant space and sublease space has had a negative impact on rental rates market-wide. More than 3.5 million square feet of new product has been added to total inventory since the end of 2002, of which approximately 50 percent was pre-leased. One-third of this new product was Panattoni’s delivery of Thomson Multimedia’s 270,000-square-foot addition and the 806,000-square-foot Phase II expansion at Memphis Oaks in the Southeast submarket. South of the state line in DeSoto County, three Class A bulk warehouse buildings were completed in 2003, and IDI has purchased 150 acres for a second industrial park in this submarket. The largest speculative completion market-wide was experienced during the fourth quarter of 2003 with the delivery of Hillwood’s DeSoto Trade Center I (846,500 square feet), where Emerson Motors has already leased 365,500 square feet. IDI also delivered 602,500 square feet to this submarket with its Airways Distribution Center Building E. The increasing availability of big box warehouse space of more than 500,000 square feet and a low stable tax rate continues to make DeSoto County a very attractive alternative to Shelby County for large companies entering the market.

It is expected that 2004 will be a better year for the Memphis industrial market, with increased leasing activity and investor interest. While signs of a recovery phase might appear towards the end of 2004, the market most likely will not experience a full recovery until mid-2005.

— Jim Mercer, executive vice president, CB Richard Ellis Memphis

Retail

Memphis has struggled in recent years with minimal population growth and negative net migration, but the city remains a thriving regional shopping destination and retailers are optimistic about 2004.

The Home Depot will open a new store in Midtown this year and will take the rare position of landlord at Center City Shopping Center. The home improvement retailer acquired the strip shopping center and 11 acres at the southeast corner of Poplar and Avalon in December 2002 for $8.2 million. The 81,000-square-foot former Seesel’s building will be demolished. The Home Depot has also acquired 17 acres in Olive Branch, where it will build a store and sell outparcels.

A church will be razed at Poplar Avenue and Massey Road to make way for a $12 million shopping center that will include a Walgreens. The 6.5-acre site will also include several restaurants and a bank. The new retail space will provide relief to an area with little available land and 100 percent retail occupancy. In White Haven, a new Wal-Mart Supercenter is being built on Elvis Presley Boulevard.

The Mall of Memphis officially closed on Christmas Eve and ice skaters no longer have access to the mall’s Ice Chalet skating rink. However, the DeSoto Civic Center is considering a temporary or permanent ice rink to draw area ice skating enthusiasts. The Mall of Memphis is currently being marketed as a redevelopment opportunity to capitalize on its strategic location at the intersection of Interstate 240 and Perkins Road. The mall was closed as part of the redevelopment strategy.

Collierville’s population has grown 17 percent since 2000. This fast-track growth is being supported by three major retailers opening there in 2004 — Kohl’s, Target and Schnucks. Kohl’s will be added to the Gallina Centro shopping center in west Collierville. Two additional Kohl’s stores are under construction in Cordova and Southaven. Schnucks and Target will be built on the west side of New Byhalia Road north of Poplar. Both retailers are expected to open in early summer and a freestanding Walgreens is planned just south of Schnucks and Target. Also planned for Collierville is the Avenue Carriage Crossing, a lifestyle center expected to break ground this year. Cousins Properties is actively soliciting tenants for this project, but has not yet committed to development and construction. Zoning is pending near the proposed lifestyle center on land intended for high-density residential development.

Significant transactions include Southland Mall, sold in January by Whichard Real Estate for $8 million to Memphis Joint Venture, a partnership between Southland Mall LLC and B.V. Belk. The 565,000-square-foot mall, anchored by Goldsmith’s-Macy’s and Sears, was 80 percent occupied at the time of sale. The new owners plan to spend more than $1 million on interior and exterior improvements.

Hickory Ridge Mall sold in March 2003 for $13.5 million. Wells Fargo, which foreclosed on the property last year, sold the regional mall to Carlyle Rock Ridge LLC. Anchors Sears, Goldsmith’s and Dillard’s were not part of the transaction. Carlyle plans to stabilize and then increase sales with improved marketing and merchandising.

— Lynn Leonard, vice president of marketing, NewBridge Retail Advisors

Multifamily

The Memphis market has recently experienced major redevelopment in downtown core areas. The area features a new $250 million arena for the city’s NBA franchise and local leaders plan to brand the city as a hub for biotech research. As a result, the Memphis multifamily market has seen continued, steady growth in rental rates and occupancy, primarily through a decline in new starts and steady absorption of the existing supply. Absorption has outpaced completions the last 2 years by an average of 24 percent, giving owners an opportunity to lower concessions and increase total revenue. 2004 is expected to see a slight increase in new construction, as approximately 1,480 units are planned; however, this is still lower than the market’s average historical absorption of 1,800 units per year.

The market has seen consistent growth in street rents each quarter, and occupancy has shown steady improvements since the low of 2001, with a slight decline the last two quarters. The current overall weighted average rent for apartments in Memphis is $644, or $0.67 per square foot, an increase of 0.8 percent over year-end 2002. The current overall occupancy rate is 90.5 percent.

Although some of the projects are quite small, the sheer number of development and redevelopment projects in downtown makes this a submarket to watch for the future. Aside from the new NBA arena and projects such as the $92 million expansion of Memphis Cook Convention Center, residential redevelopment is taking place in staggering numbers. Some notable projects include 310 apartment units and 100 condominiums developed in the South Main Arts District; 375 apartment units and 440 parking spaces on New Main, a redevelopment demonstration block; renovation of three historic downtown buildings into 76 apartment units, plus office and retail space, by CGI & Partners Court Square Center LLC; 60 condos in South Main developed by Faxon Gillis; 68 condominiums created by the conversion of the Memphis Import Building downtown; and 435 market-rate, tax-credit and public housing units, developed mainly from dilapidated public housing by The Uptown Partnership.

— Blake Pera, CCIM, CB Richard Ellis Memphis Multifamily

BELZ REVITALIZES DOWNTOWN MEMPHIS Memphis-based Belz Enterprises is working on several projects and adding tenants to existing developments in Memphis, Tennessee. Peabody Place Tower At Peabody Place Tower, Swig Martini Bar opened in December. Located on the first floor of 100 Peabody Place Tower office building, Swig Martini Bar joins downtown Memphis as the newest venue serving an elaborate range of cocktails, food and entertainment. Peabody Place Tower is part of Belz’s Peabody Place Entertainment and Retail Center. Uptown Memphis   The Uptown Partnership is the master developer for the Uptown Memphis Revitalization. Joining many other cities around the country that are revitalizing their historic neighborhoods, Memphis’ latest downtown development, Uptown Memphis, is set to revitalize the historic north end. The Uptown Memphis Revitalization project will bring more than 1,400 new homes and apartments to the north of downtown. The master developer for the Uptown Memphis Revitalization is The Uptown Partnership, a Belz-Turley Community Development Company. Having collaborated on many downtown revitalization projects, the partnership is now turning its attention and expertise toward this new intimate neighborhood community with diverse ranges of housing that encompass the area’s rich history. Uptown Square, formerly Lauderdale Courts, is an apartment community offering 347 apartments with 30 different floor plans and a unique oasis of gardens and courtyards. The final phases of this rehabilitation project are scheduled to be complete by April. A few blocks away is Greenlaw Place, a new development of 88 townhouses and apartments with six different floor plans. Greenlaw Place is located across the street from a local community center and neighborhood park and is a quiet retreat within blocks of downtown. A demonstration block featuring the first of several hundred new single-family homes is scheduled to begin construction later this year and will be the initial step in the Uptown Partnership neighborhood homes project. Construction of all planned homes is expected to be completed in 2006. The former Hurt Village site will also be developed with single-family homes, zero-lot townhouses and apartments. In addition, a neighborhood repair and beautification program is underway that will include new streetlights, sidewalks, alleys and green space throughout Uptown.

©2004 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.