CITY HIGHLIGHT, MARCH 2009

MEMPHIS CITY HIGHLIGHTS
Scott Barton, Steven L. Guinn, Andy Cates

Memphis Retail Market

There was much concern entering the New Year about the state of the retail market in Memphis. Rumors floated around about retailers who would not survive far into 2009 after a dismal holiday season. Vacancy was increasing already even before the announced closings of four Circuit City stores and three Cost Plus World Market locations in the area. Fourth quarter data began to show the effects of retail failures as sublease space dominated the absorption numbers. Sublease space alone accounted for more than enough negative absorption to offset all the direct leasing during the quarter.

The 2009 storyline appears to be a tale of new faces in old places. Discount-oriented retailers are able to move into trade areas that they couldn’t previously afford. Malls and even lifestyle centers are leasing to local operators at lower rents as those landlords simply must keep occupancy rates high or face the wrath of their lenders. There will likely be more space coming to market as more retailers struggle to stay afloat following the most dismal holiday shopping season in most of our lifetimes.

Not all is doom and gloom, however. In addition to tenants moving around or trading up in quality of space, there are new retailers and restaurants coming to the market. CVS/pharmacy has made its way north to DeSoto County, Mississippi, and now has a handful of sites under contract in Memphis. Panera Bread has also made a splash in Memphis, and its first store opening was one of its best ever.

Like many cities its size, Memphis is looking at little to no new large retail development in the near term. Weingarten Realty Investors will finish its Ridgeway Trace development, but very little else will likely be built from the ground up in the next year to 18 months. This is necessary and will speed the recovery locally. There is certainly some pain yet to come in 2009. Many older, slow-to-adapt retailers will struggle to make it to the end of the year, including some stores we have shopped in for many years. The good news in all of this is that at the end of the cycle we will likely see more small, local, nimble and less expensive retailers who are simply better able to put the products we want on the shelves.

— Scott Barton is the senior vice president of retail brokerage services in CB Richard Ellis’ Memphis office.

Memphis Office Market

As 2008 came to a close, the Memphis office market weathered the economic storm better than many other higher-profile office markets. This was primarily because of limited construction starts during the year, a small amount of speculative space being added to the market, and less than 1 percent of inventory available as sub-lease space. Overall vacancy rates ended the year at 15 percent, and the average asking rental rates for the 21 million-square-foot inventory was $18 per square foot. As the economic storm continues into 2009, Memphis’ diversified economy, stable tenant base, excellent national location and low cost of living should keep it from falling to the depths of other markets and will help it rebound sooner than most.

In recent years, the East and 385 submarkets have been the most active submarkets in terms of absorption, rental rate growth and quality. Comprising approximately 62 percent of the total inventory, these two submarkets are expected to lead the office market for years to come. Class A rental rates in the East submarket remained stable and led all markets with an average rate of $26.65 per square foot. All of the recent deliveries of office space in the past 3 years have been in these two submarkets, with the delivery of Legacy Center, Comcast, 999 Shady Grove and Building I at FedEx’s global headquarters leading the way. Of these projects, only 999 Shady Grove has space available, with 63,000 square feet out of 151,000 square feet available. 

Entering 2009, Highwoods Properties has the only office project under construction. When delivered in the fourth quarter of 2009, the 148,000-square-foot Triad Centre III will be Memphis’ first planned LEED-certified building. The development includes a new 825-car, three-level parking garage, which will serve Triad Centre III as well as the existing Triad Centre I and II buildings. Triad Centre III is 17 percent preleased, and the law firm Apperson Crump is its lead tenant.

The Airport submarket continues to perform poorly with the continued migration of FedEx to the eastern submarkets. The Airport submarket contains approximately 7 percent of Memphis’ total office inventory, yet has 25 percent of its total vacancy. Another submarket to watch in 2009 will be downtown. While the CBD has experienced growth and redevelopment in condominiums, hotel rooms and entertainment, the office market has not fared as well, with anemic absorption and rental-rate growth. Of particular note for the CBD in 2009 will be SunTrust moving the bulk of its operations, vacating 170,000 square feet downtown and moving to Boyle Investment Co.’s 999 Shady Grove building in the East submarket, leasing 50,000 square feet.

With the capital markets in disarray during the latter half of 2008, investment sales activity in the office market has been lackluster. The only significant office buildings that sold were both on the Poplar corridor: the 160,000-square-foot 5350 Poplar Building and the 136,000-square-foot PennMarc Center. Both are well-located Class B buildings that were approximately 90 percent leased at closing and were purchased for an average of $120 per square foot.

— Steven L. Guinn, SIOR,CCIM, LEED AP, is vice president of Memphis-based Highwoods Properties.

Memphis Industrial Market

The Memphis industrial market, comprised of 176 million square feet of warehouse space and 7.7 million square feet of flex space, reached a total of just more than 184 million square feet at the end of 2008. Deliveries during that time included just more than 2.8 million square feet in nine new buildings, including the 1.1 million-square-foot Nike Footwear Distribution Center in the Northwest submarket. In the DeSoto County, Mississippi, submarket the 800,000-square-foot Building F in the Crossroads Distribution Center and the 600,000-square-foot Building 3 in the Olive Branch Distribution Center were added as well. Annual deliveries have been in steady decline since hitting a 5-year peak of 6.9 million square feet in 2005. 

More than 1 million square feet of industrial space is currently under construction in the market, and more than half of the space is pre leased. Virtually all speculative building deliveries in the market have been occurring in DeSoto County, where the business environment is friendly and tax incentives are healthy. During the second quarter of 2008, 16 buildings were delivered in DeSoto County, driving the vacancy rate in the submarket to a high of 23.4 percent, as of the end of the quarter. Three straight quarters of solid, positive absorption brought the vacancy rate down to 19.6 percent, as of year-end 2008. DeSoto County has been the beneficiary of local consolidations, such as Diamond Comics, which relocated from Memphis and enlarged its operations in September in a 600,000-square-foot building in Olive Branch.

Overall vacancy rates hit a low of 13.1 percent at the end of the third quarter of last year. Vacancy rates closed the year at 13.6 percent as short-term leases resulting from tornadoes that hit in February ended. Hewlett-Packard also began its planned reduction of 2.2 million square feet. The year-end 2008 vacancy rate of 13.6 percent is down from the year-end 2007 rate of 14.3 percent and is the lowest year-end rate since 2002. Absorption for the year was positive at 3.4 million square feet, down from 2007’s absorption of 3.8 million square feet. Some of the largest leases in 2008 went to third-party logistics firms — including New Breed, DSC and Mallory Alexander International Logistics — in response to an apparent trend toward outsourcing product storage and distribution.

Most Memphis-area business and economic leaders agree that the market’s diverse economic base, strategic location and transportation infrastructure shield it somewhat from the heavy hits other cities are feeling in the economic downturn. As a relatively small market that hasn’t overdeveloped, the area is also expected to recover more quickly than larger cities. Overall asking rental rates in the Memphis area market stand at $2.93, as of year-end 2008. These rates are a bargain compared to the national average rate of just more than $6.

As companies seek to consolidate operations and potentially consider relocation, the Memphis market is an ideal target for distribution centers. While attractive rates — sure to become even more attractive because vacancy rates are anticipated to edge during the first quarter of ’09 — are an initial attraction, several additional factors should put Memphis front and center for consolidations. Known as America’s distribution center, Memphis is the home of the FedEx World Hub, UPS’ third largest U.S. facility and the world’s busiest cargo airport. The market is accessed by seven U.S. highways, has the fourth largest inland port and is the third largest rail center in the country. Availability of the right kind of space is critical to companies seeking to consolidate major distribution centers. Of all the cities in CoStar’s National Industrial Report, Memphis has the largest average industrial building at more than 85,000 square feet. 

According to Cliff Lynch, executive vice president of Continental Traffic Service, “because of its transportation assets, its base of other logistics service providers and its location, Memphis is one of the two or three best cities in the country in which to consolidate distribution facilities.”

— Andy Cates is  an industrial specialist with Memphis-based Colliers Wilkinson Snowden.

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