CITY HIGHLIGHT, MARCH 2006

MEMPHIS CITY HIGHLIGHTS
Blake Pera, Shawn Massey, Brad Kornegay, Henry Stratton

Multifamily Market

The Memphis multifamily market enjoyed positive statistics during 2005, with increasing occupancy rates, rental rate gains, absorption that outpaced the delivery of new units and a brisk sales environment. In the unfortunate wake of Hurricane Katrina, Memphis, as well as many other Southeast cities, should continue to see similar trends well into 2006, as many displaced Katrina residents decide to permanently relocate to Memphis.

Year-end occupancy for the Memphis market overall stands at 90.2 percent, up from the 89.7 percent rate experienced at year-end 2004. Occupancy rates for old construction, 1980s construction and new construction are 85.8 percent, 94.6 percent and 92.6 percent, respectively. The largest increase among all categories was in downtown 1980s construction, with an increase of 4.4 percentage points. Cordova/Germantown old construction had the highest actual rate, 97 percent.

The overall average rent per unit as of year-end is $662, an increase of 1.5 percent over year-end 2004. Average rents and rent growth for old construction, 1980s construction and new construction are $545 and 1.4 percent, $691 and 2 percent, and $836 and 1.1 percent, respectively. The largest rent increase among all categories was 7 percent in DeSoto County 1980s construction. The overall trend in revenue is strong as well, as many properties are beginning to decrease specials and rent concessions.

The final 187 units of the 222-unit The Westbury were completed in Memphis in December of last year. Atlanta was the Southeast's first LEED gold-certified office building.

A vast number of multifamily transactions occurred during 2005. Eight Class A properties sold with an average price per unit of $89,068; 10 Class B sales averaged $38,937 per unit; and 13 Class C sales averaged $15,122 per unit. Only sales of properties with more than 100 units were tracked. Many of the Class C properties that closed are currently undergoing renovation and will be returned to the market improved, which should result in higher overall rents and occupancy levels for old construction.

— Blake Pera, CCIM, CB Richard Ellis Memphis.

Retail Market

New developments, favorable market conditions, first-time developers in the market, and retail newcomers helped raise retail real estate to a high water mark along the Mississippi River in 2005.

The trend of low interest rates and low cap rates during recent years continued in 2005 and helped fuel record retail investment sales and the development of more than 1.45 million square feet of retail space in the Memphis MSA. About 450,000 square feet of retail space was still under construction at year's end.

In October, the 497,000-square-foot Southaven Town Center and the 786,000-square-foot The Avenue at Carriage Crossing opened nearly fully leased – a clear sign retailer demand in Memphis is strong. Southaven Town Center, built by Chattanooga, Tennessee-based CBL & Associates, is anchored by Dillard's, JC Penny, Sportsman's Warehouse. The Avenue at Carriage Crossing, developed by Jim Wilson & Associates and Cousin's Properties, is anchored by Parisian and Dillard's.

These developments and the entrance of new retailers into the Memphis area helped contribute to a positive net absorption of 1.27 million square feet for the year. The majority of additional retail development was non-anchored retail strip centers, which experienced steady absorption during the year.

The overall vacancy rate increased almost 0.5 percent over 2004. The bulk of the increase in vacancy can be attributed to the continued consolidation and bankruptcies. Many of these big box vacancies are not reflective of the existing market and should be leased within 24 months.

With the Mississippi river as Memphis' western border, the majority of the growth has historically occurred toward the east. That eastern migration continues to drive both residential and retail growth in the MSA, but residential growth to the north and south are fueling retail development.

In recent years, communities north and south of Memphis have experienced tremendous residential and retail development. Hot spots for growth include Southaven, Olive Branch and Hernando in burgeoning Desoto County, Mississippi, to the south and Millington and Tipton County to the north. These areas are out-pacing other communities in the Memphis MSA.

With many major intersections in the Memphis beltway boasting more than 200,000 people, Memphis has some of the highest 5-mile population densities in Tennessee. Urban core neighborhoods are changing inside Memphis and a renaissance is taking place inside the belt loop. This trend is a catalyst for retail and mixed-use developments.

New Plan Excel and Sears Holdings have announced plans to redevelop the three Kmart centers shuttered in 2005. Grace Development has plans to redevelop a fourth closed Kmart at Summer and White Station. Memphis will see more urban area buildings razed or retrofitted for retail and service-oriented uses.

In 2006, multiple mixed-use developments will be announced in downtown, Germantown and Oxford, Mississippi. These mixed-use projects are attractive to developers because they increase the potential return on expensive land and are often well received by residents.

Memphis-based PM Lifestyle Centers, known for its Saddle Creek lifestyle center concept, has announced The Highlands adjacent to The University of Memphis. The Highlands will include 80,000 square feet of retail and 300 residential units.

The majority of retail centers built 10 years ago were developed and owned by local companies. With Memphis now on the radar nationally, many investors and developers new to the city are scrambling to buy and develop product inside the trade area.

Like much of the United States, Memphis saw an influx of high profile acquisitions by out-of-town investors during 2005, especially by West Coast buyers and REITs purchasing properties in the 6.5 percent to 7.25 percent cap rate range. Seattle-based Boardwalk Properties paid $57.5 million for the 360,000-square-foot Cross Creek Shopping Center. Hawaii-based PMT Partners paid $10.5 million for the Shoppes of Hacks Cross Phase One. American Way Plaza was purchased by Portland, Oregon-based Realnet American Way Acquisition LLC for $6.5 million.

The Growing Submarkets

Desoto County is one of the fastest growing communities in the nation. Retailers, restaurants and service providers are clamoring for space being developed in the trade area. But Desoto County isn't an isolated hot spot for growth. During the next 24 months, housing and population growth is expected to occur at a fast pace along the Highway 385 corridor, which includes southeast Shelby County and Collierville.

The Avenue of Carriage Crossing will anchor the south end of Houston Levee Road, a north-south corridor that will see substantial activity all the way north to Interstate 40. Highway 64 from Houston Levee Road to Fayette County will continue to see strong growth in both its residential and retail sectors.

The Memphis MSA's housing growth attracted national and regional retailers to the market during 2005. Among those, Gordmans and Cost Plus World Market opened three stores; Golf Discount, Sportsman's Warehouse and PetsMart opened two stores and Parisian and Golfsmith each opened one store.

In addition, several catalyst retailers opened or announced expansion plans in the trade area. Target and Best Buy are relocating to Centennial Place near the FedEx World Headquarters.

Development is expected to continue during 2006. CBL & Associates, Jim Wilson & Associates and Cousins Properties will be developing second phases or expanding their projects.

Ryan Commercial, an up-and-coming Memphis developer, is planning retail centers in the Wolfchase, Southaven and Collierville trade areas. Memphis-based Lightman Realty will complete its Centennial Place, anchored by Target, Best Buy and Golfsmith. The firm also has land in the thriving Hacks Cross and Highway 385 for development.

Downtown Memphis is the sleeper retail trade area to keep an eye on during the next 2 years. This trade area is boasting a thriving and sometimes envied urban renewal program. With 3,000 residential units currently under construction, this area is growing ten times faster than the Memphis MSA. Since 1998, the area has seen a 5.1 percent annual growth rate in retail sales compared to 2.2 percent growth for the entire MSA. American Apparel announced in 2005 it is opening a store in the South Main district. This will be a different type of retail draw compared to what is happening in the Memphis-area suburbs. It's more like what Atlanta's downtown and mid-town are experiencing. This trend should be exciting for the entire Memphis region in the years to come.

— Shawn Massey, CCIM, is a broker for The Shopping Center Group, a full service retail real estate firm in Memphis.

Industrial Market

In 2005, with the North Mississippi submarket leading the way, the Memphis market produced its strongest absorption (including subleased space) in history, ending the year with more than 7 million square feet of absorption. The market improved last year and, at year's end, it featured 4 million square feet of current speculative development as activity shifted to the Northern Mississippi submarket from the Southeast submarket.

With prospects for large spaces increasing, developers rushed to acquire land and commence speculative development in the first half of 2005. Unfortunately, prospect activity slowed, leaving several large boxes available at year-end, including Panattoni's 500,000 square feet at Memphis Oaks and 754,000 square feet in Southaven Distribution; Prologis' 600,000 square feet in Prologis Park Stateline and IDI's 786,240 square feet in Stateline Business Park.   Although big box is still king, developers are diversifying their developments to capture multiple user sizes. Current speculative developments in North Mississippi include Hillwood's 552,066 square feet and 301,054 square feet in Desoto Trade Center; IDI's 226,800 square feet and 388,800 square feet in Stateline Business Park; H&M's 427,500 square feet in Olive Branch Distribution Center. In Tennessee, speculative developments include Principal's 458,820 square feet in Summit Distribution and Lauth's 885,000 square feet at Deltapoint Business Park. Developers are continuing to look for additional land, primarily in North Mississippi, for future developments.

The total Memphis warehouse market comprises 134.21 million square feet and posted a 16.2 percent vacancy rate with absorption of approximately 7 million square feet at year-end 2005. This is a 1.9 percent decrease in vacancy from year-end 2004 and an increase in absorption of more than 4.9 million square feet, indicating an improving market. The market had deliveries of 5.95 million square feet with an additional 4 million square feet of speculative product under construction in both Memphis (1.3 million square feet) and North Mississippi (2.7 million square feet).

The most notable submarkets are the Southeast, comprising 55 percent of the total market, and the growing North Mississippi submarket with 12 percent of the total market. The Southeast totaled 74.27 million square feet of warehouse product and ended the year with 2.17 million square feet of absorption and a 14.5 percent vacancy. Success in 2005 was dependent on the product-type with Class A performing well with low vacancy and the bulk of absorption while Class B/C continued to struggle. North Mississippi hit its stride in 2005 with developers acquiring land and developing both speculative buildings and build-to-suits. At year-end 2005, the submarket had a total warehouse size of 17.26 million square feet and vacancy of 15.2 percent, which can be attributed to new speculative buildings. The submarket absorbed 2.9 million square feet, which is 42 percent of absorption for the entire Memphis market while only representing 12 percent of the market size.

In general, with more than 7 million square feet of total absorption, 2005 was a strong rebound from previous years. Prospect activity is on the upswing leading to optimism for 2006. Class A product is expected to continue to lead the way in 2006 with developers continuing to build speculative product and counting on continued prospect activity. Although development is expected on both sides of the state line, North Mississippi is expected to develop the lion's share with developers holding enough land to construct more than 27 million square feet of product.

— Brad Kornegay is president of Colliers Management Services and vice president with Colliers Wilkinson Snowden in Memphis.

Office Market

The Memphis office market comprises 32.08 million square feet in 995 buildings. The most noteworthy items revealed in CoStar's year-end 2005 numbers for the Memphis office market are: 1) positive net absorption in all but the first quarter of the year; 2) a steady increase in quoted rates for Class A and B office space, as well as the overall quoted office rates; 3) decreasing vacancy rates in Class A and B office space; and 4) the lack of any substantial new deliveries/construction, with the exception of medical space. These items, along with the increasing cost of new construction, all point to higher lease rates in 2006 for the local office market.

After 5 consecutive quarters of negative net absorption in 2003 and 2004, the fourth quarter of 2004 posted a positive net absorption number for the Memphis office market. A minor setback was experienced in the first quarter of 2005. After that, we saw 3 consecutive quarters of positive net absorption for 2005, totaling 450,482 square feet. Year-end 2005 numbers showed positive net absorption in each of the four largest submarkets, which include East Memphis, Downtown, the 385 Corridor and the Airport area. Demand for Class A space in the East Memphis submarket remains strong with the vacancy rate at 6.4 percent and the average quoted lease rate at $23.84 per square foot.

Quoted lease rates posted increases, quarter after quarter, throughout 2005. The average quoted rate for available office space, in all classes, was $16.02 at year-end 2005, compared to $15.76 at year-end 2004, which represents an increase of approximately 1.6 percent. This trend is expected to continue, in part, due to price increases in building materials, and consequently, the cost of new construction.

Vacancy rates for Class A, Class B and the overall market trended lower each quarter throughout 2005, in direct contrast to the vacancy rates for Class C office space. Year-end 2005 vacancy rates for Class A space decreased by 1.7 percent. Year-end 2005 vacancy rates for Class B space decreased by 2.2 percent. Year-end 2005 vacancy rates for the overall market decreased by 1.1 percent. The year-end 2005 vacancy rate for Class C space, when compared to that of year-end 2004, increased by 2.1 percent. While it is encouraging to note the improved vacancy rates, keep in mind that, with the exception of Class A office space, vacancy rates remain at higher levels than at year-end 2003.

When considering the items enumerated above, it is difficult to expect much new development in the Memphis office market, other than in the medical arena. Many physicians have opted to move off campus due to restrictions in services imposed upon them by some hospitals.

Two of the more significant office leases entered into in 2005 included 78,000 square feet by ThyssenKrupp Elevator at ThyssenKrupp Headquarters, which was developed by Highwoods Properties and the 33,159 square feet leased by OrthoMemphis PC at the new Briarcrest Professional Building, developed by Weston Companies.

— Henry Stratton, CCIM, is a broker with the Memphis-based Colliers Wilkinson Snowden.


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