CITY HIGHLIGHT, MARCH 2005
MEMPHIS GROWTH INSPIRES POSITIVE MARKET TRENDS
While the Memphis, Tennessee, real estate market has struggled in recent years, 2004 proved positive for most Memphis submarkets. Increased interest in residential developments has led directly to positive trends in other submarkets. Retail markets have been growing in the suburbs, as the population growth is flourishing further away from the city despite the fact that the downtown area has become a popular hotspot for redevelopment in the multifamily market. Stretching all the way to North Mississippi, trends in the industrial market are not yet ideal, but they are certainly improving, and the office market saw a breakout year in 2004 by reversing negative trends. With its real estate market on the rise, Memphis looks to grow in 2005 and beyond.
Retail
The retail real estate market in Memphis continued to be strong in 2004, due to a great deal of new development, primarily in the outlying areas of the Memphis metropolitan statistical area such as Southaven and Cordova.
Yet, how long can this trend of unbridled growth continue? Many developers have enjoyed the benefits of low interest rates and reasonable land prices in the outskirts of Memphis, but as more developments come out of the ground and the perception grows that low interest rates may not last much longer, the rate of new retail space coming into the market may decline. This recession would likely occur after the current crop of large new developments slated for a 2005 or 2006 delivery are completed, including The Avenue at Carriage Crossing in Collierville and Southaven Towne Center and Desoto Pointe in Southaven.
Several retailers are finally making plans for new stores in Memphis. Memphis often attracts large retailers later than markets such as Atlanta, Dallas and Nashville. While national retailers typically will expand to the largest metropolitan areas first, as projected sales for stores in those markets will generally be higher, new retailers including Sportsman’s Warehouse, Ashley Furniture, Parisian, McRae’s and Prairie Life Fitness Center are in the process of making a splash in Memphis. While most development has occurred in the suburbs, two notable retail redevelopments were established in Memphis during the fourth quarter of 2004. The Home Depot opened a store in Midtown, and Wal-Mart opened a 200,000-square-foot Supercenter in Whitehaven. Yet, these types of developments can be very expensive and difficult; therefore, it appears that the number of such developments will be limited in the future.
Continued focus on the high growth areas of Memphis is likely ahead for 2005 and 2006. To the northeast, Lakeland and Arlington may see increased attention from commercial developers as the population grows in these markets. Residents here increasingly will desire goods and services near their homes. Desoto County will likely also show more retail growth as the populations of Southaven and Olive Branch continue to explode and the two cities grow into one another.
— Scott Barton, vice president – retail brokerage services, CB Richard Ellis
Office
Three notable changes were revealed in the latest CoStar year-end numbers for the Memphis office market: positive net absorption for the last quarter of the year, a significant decline in the availability of sublease space, and a substantial increase in quoted rates for Class A office space, as well as the overall quoted office rates. These changes inspire hope for a positive future in the local office market. If this continues, expect to see developers resume progress on construction that had been put on hold.
After five consecutive quarters of negative net absorption, the fourth quarter of 2004 posted a positive net absorption number for the Memphis office market, which is comprised of 28.16 million square feet in 617 buildings. Fourth quarter numbers showed positive net absorption in the three largest sub-markets, which are Downtown, East Memphis and the 385 Corridor. Demand for Class A property remained strong, posting its 14th consecutive quarter of positive net absorption, and Class B properties also posted positive net absorption numbers in each quarter of 2004.
Another notable change at the end of 2004, compared to end of year 2003, was the substantial decline in the availability of sublease space. More than 40 percent of sublease space that was on the market at the end of 2003 was absorbed during 2004. This should enable landlords to hold rates at levels that are closer to their quoted rates.
While both the Class A quoted rates and the overall quoted rates showed year-on-year losses at the end of 2002 and 2003, it appears as though 2004 has bucked the trend. Class A properties quoted rates posting a healthy increase of $.86 per square foot, and the rates quoted for overall office space posted an increase of $.36 per square foot.
Some of the more significant office leases in 2004 included 72,080 square feet at 1980 Nonconnah Corporate Center by Smith & Nephew, Inc.; 33,866 square feet leased by Accredo Health, Inc. at Century Center; and the 28,792-square-foot deal by Bass Berry & Sims, PLC in The Tower at Peabody Place. The two most noteworthy sublease deals signed in 2004 were both located in Building E at Lenox Park, one with United Way of the Mid-South for 25,600 square feet and the other with the Pickering Firm, Inc. for another 25,600 square feet.
— Greg de Witt, CCIM, Colliers Wilkinson Snowden
Multifamily
The most significant trend in Memphis’ multifamily market today is the redevelopment of the downtown core area. Redevelopment efforts stretch from Uptown, where single-family residential, retail developments, community centers and three apartment complexes now occupy the area north of downtown, which had all but been abandoned, to South Main, the industrial area south of downtown that experienced a rebirth as an Arts District, complete with retail, dining, numerous condominium projects, and four new or nearly new apartment complexes.
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Greenlaw Place is one of the new apartment projects in the Uptown section of Downtown.
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A once blighted block on Main Street was recently dubbed the “New Main Demonstration Block.” This spot on the trolley line is experiencing phenomenal transformations in the form of historic buildings being turned into office and/or retail establishments, plus numerous small groups of condominium projects that are usually under contract even before they are built. New Main is also home to The Vue at South Main, a $40 million, 28-story tower with 286 apartment units, a 441-space parking garage and ground-floor retail.
The Cordova/Germantown apartment submarket, the easternmost submarket in Memphis and, incidentally, the furthest from Downtown, is expected to see the largest number of multifamily units delivered this year, totaling nearly 900. The garden-style product that will be delivered to this suburban area is far different from the eclectic, funky mix of developments that will be seen Downtown, but both products have their niche. Memphis still has young families who want the proverbial suburban lifestyle, raising their kids in quiet communities and sending them to neighborhood schools. Memphis also has enough of the philosophical genre that thrives on ultra urbanism, for which housing Downtown cannot be brought on line fast enough.
The current overall weighted average rent for apartments in Memphis is $655, or $0.674 per square foot, an increase of 1.2 percent over year-end 2003. The current overall occupancy rate is 90 percent.
Downtown is still the area to watch. Infrastructure improvements, the redevelopment of the South Forum District (the area south of FedEx Forum), and projects like the demolition of the old Baptist Hospital and Memphis Bio Works Foundation’s plans to reinvent the space, are all still in infancy and will be the large boundaries of Downtown that shape the inner city.
— Blake Pera, CCIM, CB Richard Ellis Memphis Multifamily
Industrial
With nearly 121 million square feet of warehouse product, the Memphis market (including North Mississippi) produced a slight reduction in vacancy in 2004 from year-end 2003, ending the year at approximately 18 percent overall, with a positive net absorption of 2.48 million square feet. The dominant submarket continues to be the Southeast, which comprises nearly 60 percent of the total market size, and produced absorption of 1.25 million square feet with a year-end vacancy of 16.7 percent. North Mississippi is the other significant submarket. While currently comprising only 9 percent of the total market, it has produced substantial growth in the past year and is poised to add significantly to its product base in 2005 and subsequent years. This submarket posted a 13.9 percent vacancy and positive net absorption of 456,475 square feet at year-end.
Analyzing the dynamics of the different product classes in the market help to understand the Memphis market better. The market has added more than 41 million square feet of leasable Class A product (generally known as product 10 years or less in age, clear heights greater than 26 feet and stronger sprinkler densities) over the past 10 years. This has created a distinct separation between Class A and B/C product. While Class A product has continued to fare well during the economic downturn, Class B/C product has struggled with high vacancy and less than desirable leasing activity.
With no new big boxes available and demand on the rise, developers have commenced speculative construction in both the Southeast submarket and North Mississippi. In the Southeast submarket, Principal Development Investors is nearing completion of 789,291 square feet at Summit Distribution. In addition, ProLogis is nearing completion on a 600,000-square-foot building (expandable to 1.1 million square feet) at ProLogis Park Stateline and Panattoni Development has begun construction on 500,000 square feet (expandable to 1 million square feet) at Memphis Oaks. In North Mississippi, IDI is under construction on 257,000 square feet at its newest development, Stateline Business Park, as well as 556,000 square feet at Airways Distribution, and Panattoni Development has commenced construction on 740,000 square feet at its newest development, Southaven Distribution Center.
The fourth quarter of 2004 produced a significant increase in suspect activity leading to cautious optimism for 2005. While some of the Class A big box activity is from existing companies looking to consolidate or expand, the Memphis area is continuing its trend of attracting outside companies looking to consolidate operations, while taking advantage of Memphis’ central location and FedEx and UPS hubs. This year, anticipate continued success in Class A product when the North Mississippi region expects to provide significant competition to the Southeast submarket for Class A deals. Although Class B/C product is not expected to make a dramatic recovery in 2005, there are encouraging signs in that suspect activity, primarily from 3PL’s chasing contracts, with several deals expected to close in early 2005.
— Brad Kornegay, vice president, Colliers Wilkinson Snowden, and president, Colliers Management Services, LLC
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