CITY HIGHLIGHTS, MARCH 2008

MEMPHIS CITY HIGHLIGHTS
Steve Woodyard, Shwan E. Massey & Brad Kornegay

Memphis Multifamily Market

Memphis, Tennessee-based Poag & McEwen’s Highland Row is a mixed-use development with 95,000 square feet of retail and 200 multifamily units located near the University of Memphis campus.

University of Memphis has been ranked #1 in the nation in basketball this year, and the University of Memphis campus area is #1 in exciting new real estate developments in the MSA. The most prominent is Highland Row, a new mixed-use project featuring 95,000 square feet of high-end retail located below more than 200 units of multifamily housing. The project is well designed, creating a pleasant atmosphere for enjoying the Memphis sunshine in a live-work-play concept. The developer, Poag & McEwen, nationally recognized as the first to develop the “lifestyle center”, will break ground this summer. 

Trammel Crow also is going to college with a new 85-unit luxury mid-rise apartment and retail development  for a new generation of college-bound renters that seem to have parents that can afford it.  Makowsky Ringel Greenberg LLC has begun construction on a long-awaited condominium project.  The Laurels, within one block of the University of Memphis, is a five-story project with 40 single level homes ranging from one- to three-bedrooms.

All of these developments, coupled with the planned expansions at the University of Memphis, will create a new high-end front door for the university.  The projects will provide a much needed rejuvenation to a mature, densely populated and under utilized neighborhood. 

Overall, the Memphis area saw less than 1200 new units delivered last year. Absorption of new construction was more than adequate and demand should be sufficient for the planned construction this year. The supply and demand factors have continued to lean toward increasing occupancy with numerous submarkets reporting rent increases. At year end 2007, the market had an overall occupancy of 91 percent as reported by the Apartment Association of Greater Memphis.  The average rental rate is about $0.72 per square foot with the highest rents in the downtown submarket at just under $1 per square foot, closely followed by the Germantown and Collierville submarkets with rents above $0.90 per square foot. Last year, there was a 5 percent-plus rent growth over 2006 in many of the upper-end submarkets, and, currently, Class A & B property occupancy is 93 percent or more. 

Investors are eagerly eyeing Integra Realty Services’ most recent report indicating the Memphis MSA to be in the early stages of an expansionary period of increasing rents and prices. That report, along with the CNN Money report of Memphis being one of the most affordable spots in the nation for real estate, is causing quite a stir.  The growth cycle’s bell curve, according to Integra Realty Services, suggests that Memphis is slightly more than 25 percent into the expansion section with substantial opportunity for increasing rents, occupancies and prices.   

Many are of the opinion that Memphis has emerged from the recovery phase to the expansion phase. The early position in expansion is a crucial point to enter this market and enjoy the ride of increasing rents and prices. 

Recent years have shown Memphis to be on the edge of growth but that has yet to translate into rising rents and high profits. A quick glance at the existing market dynamics suggests that the area should experience great employment growth with thousands of new jobs announced and fulfillment occurring during the next 10 years.  This will give the market great legs to go the distance.

This data illustrates that job prospects are good indicators that new household formation is just around the corner. The recent sub-prime fall out should send more of the once eager first time homebuyers running back to the apartment rental pool.  Burned by a poor understanding of teaser rates on home loans and the perils of home ownership with taxes, insurance and maintenance upkeep, many will be excited to get back to the easy life of calling the landlord for all of their living needs as they sip their cold beverage and bask in the warm sun by the pool.

Most Memphis property managers are still cautiously optimistic about slight increases in apartment occupancies, along with minor increases in rents. The once popular rental concessions of 1 month’s free rent should be disappearing by 2009 if all goes well.

During the last 5 years, out-of-state investors accustomed to rental markets changing almost overnight came in to the metro area and snapped up properties at prices perceived to be below market based on experiences in other markets. These buyers soon realized that they may have entered the market a few years too early. Some of these investors came in under-capitalized for the long haul and soon saw that pot of gold as a longer term investment than they had anticipated.

Todd Glidewell, MAI, is a partner with C&I Appraisal Services based in Memphis. He and his firm have more than 18 years of experience appraising multifamily properties in all classes and submarkets of the MSA. He had this to say regarding multifamily investment in the Memphis area: 

“We saw a number of outside investors enter the market with 1031 money.  They saw unit pricing at levels far below the price which they sold other assets and expected prices to grow rapidly.  Our rent increases at that time did not allow for the growth in value or pace to which they were accustomed.  Also, they were not experienced in the ownership of properties built prior to 1960, which require more maintenance and upkeep. Purchasers remain in our market, and I believe cap rates will remain at the levels of 2005 to 2007. The changes will be a more realistic underwriting of vacancy and expense, but the changes are coming at a time we should finally see some increases in rents and occupancy along with less concessions.” 

One only has to look back to the late 1980s and early 1990s in the Memphis market to see a very familiar pattern getting ready to repeat itself.  Those years were characterized by the S&L crisis, Freddie Mac foreclosures, increasing real estate taxes, poor demand and featured many more sellers than buyers.  Numerous contrarian investors saw the opportunity and began buying all they could and took advantage of the sky is falling mentality that prevailed at the time. More than 10 years later, these savvy owners began taking major profits.  Many of those same investors are beginning to look into the apartment market again while some investors are getting out. These contrarian investors have plenty of equity to start acquiring the deals and should enjoy the ride up the bell curve of real estate success. 

— Steve Woodyard is the president of Memphis, Tennessee-based Woodyard Realty Corp.

Memphis Retail Market

The Memphis retail market remains healthy, but locals are cautious as heading into 2008. During the past year, Memphis has seen a slight slowing of growth in retail development from its highs in 2005 and 2006. With December 2007 retail sales down for many categories nationwide, there is concern in the Memphis market about being able to lease up within a reasonable time frame and meeting the projected lease rates for both the new projects currently under construction and those new projects planned for 2009.

The previous trend in Memphis development of small un-anchored retail strip shopping centers has gone through the greatest change and declined in the market in favor of larger anchored developments or redevelopment of anchored centers.  The low number of local retailers expanding or opening new concepts is by far the biggest concern for many area developers. In contrast, several national and regional chains are entering or, at least, looking at the market for expansion or initial entry. 

New developments delivering space include  the 300,000-square-foot Centennial Place Shopping Center (Michael Lightman Realty) featuring a JC Penny and Dick’s Sporting Goods in southeast Shelby County; the 250,000-square-foot Wedgewood Commons (Stonecrest Investments) with a Target, Stein Mart and Schnucks Supermarket in Olive Branch; the 59,000-square-foot StoneCreek Center (Stonecrest Investments) in the heart of Germantown; the  220,000-square-foot Market at Carriage Crossing (Jim Wilson & Associates) with a Ross Dress For Less and Sports Authority; and the 160,000-square-foot Countrywood Crossing ( a joint venture of Stonecrest Investments and Ryan Commercial). Also, a major power center on Germantown Parkway in the Wolfchase Trade Area is complete and includes Ross Dress For Less, Gordman’s, Archiver’s and Jared. Weingarten also is completing the renovation of Summer Center, which included the first Ross Dress For Less store in the market.

In 2009, expect delivery  and/or construction starts on several high-end and mixed-use projects including Ridgeway Trace (Weingarten Realty Investors) at Poplar and Interstate 240 in East Memphis; the expansion of the nation’s very first lifestyle center, Saddle Creek in Germantown; and the much anticipated Highland Row development near The University of Memphis. The last two projects are being developed by Memphis-based PM Lifestyle Centers, who were the founders of the original lifestyle concept. The Highland Row development will be their first foray into a mixed-use development.

There is some concern about the future of Peabody Place, as well as downtown retail in general, with Belz’s announcement that they are converting part of the Peabody Place retail center that was occupied by Muvico and other retailers into additional suites for their flagship Peabody Hotel. Although the downtown market hates to see the departure of any retailer from that market, Peabody Place and The Peabody Hotel will continue to be the premier shopping and restaurant destination and focal point for downtown renaissance.   The market sees the addition of first class hotel suites as an indication of the vibrancy of Memphis as a world class tourist destination.

The Memphis area vacancy rate for shopping centers as reported by CoStar has trended upwards from 12.8 percent in early 2007 to 13.2 percent at year’s end.  Quoted rental rates during the same period rose from  $10.79 per square foot to $11.40 per square foot, indicating about a 6 percent increase.  Net annual absorption for this shopping center sector showed an increase of about 167,986 square feet with over 400,000 square feet being absorbed in the last two quarters of 2007. This positive absorption in the second half of last year is a very positive sign going into this year. The two key sub-markets of Germantown/Collierville in Eastern Shelby County and Olive Branch in Desoto County continue to lead the Memphis market with new developments, healthy absorption and increasing rental rates.

— Shawn E. Massey, CCIM, CLS, is an associate with The Shopping Center Group in Memphis, Tennessee.

Memphis Industrial Market

True to form, the fourth quarter saved the day for the Memphis industrial market last year.  After struggling much of the year, the market rebounded significantly to show respectable absorption numbers of 2.8 million square feet — 83 percent of the absorption at year-end. The two predominant submarkets continue to be the Southeast submarket comprising 51 percent of the total market size and the North Mississippi submarket currently comprising 16 percent of the total market, but quickly gaining market share. Vacancy has remained relatively flat and currently stands at approximately 16 percent overall for warehouse product while average asking rental rates have increased slightly. Speculative development has continued on both sides of the line, however, North Mississippi continues to build the lion’s share, a trend that is expected to continue. The investment sales market hit a lull late in the year as several large investment sales fell through due to concerns over rising rates and the economy. Although sales are expected to pick back up this year, many owners/sellers appear to be awaiting direction on market activity and cap rates before moving forward.

North Mississippi continues to lead the way in speculative construction with approximately 2.8 million square feet (3.5 million square feet for the entire Memphis market) last year with another 1.4 million square feet currently under construction. This submarket continues to take market share from the dominant Southeast submarket and is expected to become the second largest submarket within the next 2 years. During the past 3 years, the submarket has averaged 43 percent of the total absorption for the Memphis market, while only comprising of 14 to 16 percent of the total market size.  Developers are expected to continue to build and take advantage of a friendly business environment and tax incentives that are luring tenants to this submarket.

The dominant Southeast market continues to show resiliency with approximately 1.6 million square feet of absorption for the year, or 56 percent of the absorption for the entire market.  Although overall rental rates and vacancy have remained relatively flat during the past year, the highlight for the submarket is the resurgence of second generation, Class B/C product. For the second year in a row, this product type has outperformed Class A product in regard to absorption and has seen its vacancy decrease as much as 5 percent during the past year. This is a welcome sight for a product-type that has struggled significantly during the past 5 years. With more than 525,000 square feet developed on a speculative basis last year, this submarket is not expected to produce any significant amount of development this year.

In summary, with prospect activity on the upswing in late 2007, developers/owners are approaching this year with cautious optimism as several significant leasing transactions are expected to be executed in the first quarter. In addition, due to the devastating tornados that ravaged the Memphis area in early February, the market is expected to produce a 6- to 9-month positive blip in vacancy and absorption as tenants, who were displaced as a result of damage to their buildings, have gobbled up space on a short-term basis. The storms affected more than 6 million square feet of industrial real estate in both the North Mississippi and Southeast submarkets. Having represented approximately 2 million square feet of these buildings, I would like to take this opportunity to commend the resiliency of the tenants in our market who were affected by these storms and their dedication/commitment to keep the trucks rolling.

— Brad Kornegay is vice president, with Memphis, Tennessee-based Colliers Wilkinson Snowden and president/CEO, Colliers Management Services, LLC.

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