CITY HIGHLIGHT, MARCH 2012

MEMPHIS CITY HIGHLIGHTS
Mark Halperin, Andy Cates, Curtis Braden and Robert Sloan

Memphis Office Market

Education Realty Trust signed a 26,981-square-foot lease at Boyle’s 155,000-square-foot 999 Shady Grove, a Class A office building located in Memphis’ East Submarket.

Memphis, population 650,000, is the largest city in the state of Tennessee and is known as “North America’s Logistics Center” due to its central location. Memphis has the world’s busiest cargo airport, which serves as the primary hub for FedEx shipping, and has the third largest rail center and fourth largest inland port in the U.S. Memphis commercial real estate, therefore, provides space for a growing number of nationally and internationally known corporations, including corporate headquarters for FedEx, AutoZone, International Paper, Thomas & Betts and Helena Chemical Co. Memphis is also a major medical center with hospitals such as St. Jude Children’s Research Hospital, University of Tennessee Health Science Center, Baptist Memorial Health Care and Methodist Le Bonheur.

Like many cities across the U.S., Memphis has been affected by the economic downturn. According to Bill Fox, director of the center for business and economic research at the University of Tennessee, the state lost 220,000 jobs, of which 60,000 were in Memphis. While the state has recovered about one-fourth of its lost jobs, Memphis has recovered about one-sixth. While the unemployment rate for the City of Memphis was down to 9.5 percent in December 2011 (from 10.1 percent in November 2011), it is still higher than the national average. Memphis has experienced a growth rate of 1.5 percent during 2011, but needs to experience 2 to 3 percent growth in order to lower the unemployment rate.

Despite the downturn, a number of manufacturers recently selected Memphis as the site for new plants, which could have a spillover effect on the office real estate market. Due to the efforts of Memphis Mayor A C Wharton and Shelby County Mayor Mark Luttrell, who have made economic development a priority, Electrolux selected Memphis for a $230 million plant employing 1,240 people and Mitsubishi Electric has also chosen to build a $207 million plant employing 281 workers in Memphis. In addition, the mayors have changed local government’s structure for economic development by consolidating seven different entities into one board called EDGE (Economic Development Growth Engine). EDGE is streamlining the process for economic development prospects so they only have to deal with one entity.

While new manufacturing jobs are being created, there has been a minimal addition of office jobs. Subsequently there has been no new development of office space in Memphis since 2008, when Boyle Investment Company developed its 999 Shady Grove building (155,000 square feet) and Highwoods developed Triad III (148,810 square feet), both of which are Class A buildings located in the East submarket in the Poplar corridor. The current trends in office development in Memphis are focused on potential build-to-suit opportunities with no speculative development in the foreseeable future.

Tenant demand remains moderate. This is driven by the general economic conditions outlined above. 2012 is likely to be another year in which businesses take a wait-and-see attitude before deciding to move or expand. Most office users continue to exercise caution and are focused on reducing expenses and decreasing space per employee. Any activity will likely take place in the East and 385 submarkets, which are adjacent to the residences of many decision makers.

According to the Urban Land Institute, inflation-adjusted rental rates show no growth in any major U.S. market during the last three decades and many markets register zero nominal rent growth during the past 15 years. For example, in 2005 the average rent rate for Class A office space in the Memphis MSA was approximately $20 per square foot and in the fourth quarter of 2011 it was $21.68 per square foot.

Although the Memphis office market posted negative absorption during the fourth quarter of 2011, absorption for the year remained positive at 225,767 square feet. The vacancy rate for the office market for Class A space is 10.2 percent and 21.9 percent for Class B space; the total office market vacancy rate is 17.9 percent.

In 2011, the largest absorption by building in the Memphis area was: Triad III (Class A) in the East Submarket with 53,277 square feet; Goodlett Farms Business Center (Class A) in the Northeast Submarket with 45,943 square feet; Marsh Center (Class A) in the East Submarket with 33,425 square feet; Thousand Oaks (Class B) in the East Submarket with 25,889 square feet; Lenox Park Building D (Class A) in the 385 Submarket with 24,581 square feet; and One Commerce Square (Class A) in the Downtown Submarket with 19,795 square feet.

Education Realty Trust signed the largest lease of the fourth quarter of 2011, leasing 26,981 square feet at Boyle’s 999 Shady Grove building. The largest transaction in office leasing in 2011 was the decision by Pinnacle Airlines to move to One Commerce Square in downtown Memphis.

— Mark Halperin is executive vice president of Memphis-based Boyle Investment Company.

Memphis Industrial Market

The Memphis metro is an interesting industrial market. Like many other markets, we’ve begun to see positive signs in the numbers. 2011 ended with positive absorption of more than 1.6 million square feet. Because nearly all of the space added in 2011 was build-to-suit, vacancy rates have begun to decline a bit. IDI has just announced plans to build two buildings totaling 1.1 million square feet in Olive Branch, Mississippi, which will be the first new speculative development since 2008.

But it’s hard to look strictly at the numbers and really get a sense of our market. That’s because, when compared to behemoths like Chicago and Dallas, we are a relatively small industrial market, with approximately 210 million square feet, depending on how you count the space. This creates significant volatility in the numbers when a major lease is won or lost. So it is the fundamentals that paint a better and more realistic picture of the Memphis market. Though relatively small in size, we’re a giant in terms of the infrastructure that makes us attractive to major players. The last 12 months illustrated this with a few significant leases: Trane’s 626,00-square-foot lease, California-based online retailer Newegg Inc.’s lease of 414,000 square feet and Kimberly Clark’s lease of 556,000 square feet.

Memphis has long been known as “America’s Distribution Center.” More recently, we’ve been recognized as one of only a few cities identified as an Aerotropolis, which is city whose layout, infrastructure and economy are centered on an airport, offering its businesses speedy connectivity to suppliers, customers and enterprise partners worldwide.

Memphis is home to FedEx and therefore, North America’s busiest cargo airport. But that’s just the start. We have the second largest inland port on the Mississippi handling 11 million tons of cargo per year. We are served by five Class-1 railroad systems, and more than 200 fixed-route, regularly scheduled common carriers with access to Interstate 40, the nation’s third busiest trucking corridor, and Interstate 55, America’s primary north/south corridor for the Midwest.

In addition to great multi-modal transportation options, we have relatively low labor costs — and a high percentage of workers trained specifically in distribution and transportation. Then you can factor in competitive rental rates, which have been hovering around $2.75 triple net — though likely to be inching up as vacancy rates can drop pretty quickly in a market of our size especially when it isn’t that unusual to see leases of over half a million square feet.

Finally, there’s nothing more fundamental to real estate value than location. Nearly 75 percent of the U.S. population can be reached within 48 hours from the Memphis metro. The recent Newegg transaction highlights a trend that we anticipate will further solidify the fundamental soundness of the Memphis industrial market. The explosion in e-commerce means that more companies will look for centrally located cities that can offer cost-effective shipping options.

Like everyone else, we experienced a downturn during the recession. But we see nothing but growth ahead for an industrial market that is as fundamentally sound as it gets.

— Andy Cates, SIOR, is executive vice president of brokerage services at Colliers International’s Memphis office.

Memphis Multifamily Market

Memphis, home of the Blues and Elvis Presley’s “Graceland,” is the largest city in the state of Tennessee. Tourists are drawn to the downtown Memphis entertainment district, anchored by the world famous Beale Street, NBA basketball with the Memphis Grizzlies and AAA baseball’s finest ballpark, home of the Memphis Redbirds, the St. Louis Cardinals’ farm team. Coming soon is Bass Pro Shop’s gaming retail store and museum, which will attract outdoor enthusiasts.

With more than 50,000 people working in the medical industry, Memphis is internationally recognized for its contribution to the medical field. Located in the Medical District is St. Jude Children’s Hospital, ranked the No. 3 children’s cancer hospital in the country by U.S. News & World Report; Le Bonheur Children’s Hospital, nationally ranked in many different specialties; the Regional Medical Center of Memphis, one of the top trauma centers in the country; and the University of Tennessee Center for Health Science. With its centralized location in the middle of the country, Memphis is the home of many distribution facilities and hubs, most notably FedEx as well as other Fortune 500 companies. The Memphis Chamber of Commerce expects the area will add more than 7,000 new jobs in 2012.

Apartment market development ended 2011 on a positive note with a total of 580 units being delivered to the market, well above 2010, but still short of average historical numbers. There are 1,812 units in planning stages for 2012, according to Reis. The majority of all planned units are located in Class A areas such as Germantown, Collierville and downtown Memphis.

Class A submarkets continue to see improved occupancy levels along with modest rent increases. Class B and C assets have not seen a significant recovery from economic downturn, and still show signs of stress for higher occupancy levels in the metro area. The low-income housing market has dominated development with significant assistance through the Hope VI and Section 42 programs, with the goal of improving the affordable housing options in the city. The most recent and significant change that will affect multifamily development is the surrender of Memphis City School’s charter, causing the merger of the city and county school systems. This will allow smaller, suburban municipalities to commence the implementation of their own school systems and create demand for housing in preferred school districts.

The recession and changes in banking and financing slowed down the market rate development in all sectors, including multifamily, in 2011. New government rules, along with lower interest rates should open more development opportunity and help developers turn some of those planned projects into multifamily assets. Memphis has also seen a large number of out-of-town investors start to find value in redeveloping B and C assets with success.

Low acquisition costs, bulk purchasing materials, low-cost construction labor and an experienced management firm opens the door to value-add opportunities with low-income, non-performing distressed assets. Memphis multifamily development and growth should see strong improving numbers at the end of 2012.

— Curtis Braden is a senior associate in Marcus & Millichap’s Memphis office.

Memphis Retail Market

It’s 2012 and still no sign of Elvis walking the streets of Memphis. Yet there are signs of the Memphis retail market stabilizing and even recovering from the recent recession.

The region’s conservative retail expansion when other major markets were overbuilding is proving to be the key to its recovery. The super-regional trade areas of Wolfchase, Southeast Memphis/Collierville and Southaven, Mississippi, continue to perform well. There is little retail space available, creating competition among retailers and enabling landlords to secure leases at higher rental rates and better terms.

According to CBRE’s “Market View Memphis Retail,” the retail vacancy rate is 15.3 percent with a direct lease rate of $9.51 per square foot. This vacancy rate combines Class A, B and C retail — much of which may never be re-leased as retail. If the study considered only viable retail space, a more accurate estimated vacancy rate for Class A and B retail would be much lower.

The entry of new retail and restaurant players, particularly in the big-box, fast casual and casual dining sectors, along with the expansion of some of the market’s most recognizable brands, is driving market activity. Ross Dress For Less, Michaels and T.J. Maxx are opening locations in Olive Brand, Mississippi. Staples opened its first two Memphis locations in Weingarten’s Ridgeway Trace in East Memphis and on Germantown Parkway in Wolfchase.

HomeGoods is also setting up shop in Wolfchase with another store planned for Collierville at Gallina Centro, a 350,000-square-foot infill development completed by Ryan Commercial Properties. Michaels is also joining the Gallina Centro lineup, which includes Kohl’s, Kroger and Stein Mart. Mattress Firm and Vision Works also continue to expand throughout the Memphis region.

More fast casual concepts are entering the Memphis market. Chipotle Mexican Grill and Five Guys Burgers and Fries opened their first Memphis locations in 2011. Cheddar’s Casual Café is set to open its first Memphis location at Centennial Commons, a 300,000-square-foot power center developed by Michael Lightman. Cheddar’s also plans to open a second location in Wolfchase in 2012, while Dunkin’ Donuts continues to expand its market footprint.

Kroger’s acquisition of eight Schnucks was one of the most significant retail events in Memphis during the past 12 months, fueling the region’s ongoing grocery competition. The acquisition not only eliminated Schnucks as a competitor, but also enabled Kroger to reposition some of its existing stores in a market where the company has invested more than $70 million since 2007. This event also created prime, big-box vacancies allowing grocery competitors opportunities to enter the market. Memphis-based SuperLo Foods leased the former Schnucks on Goodman Road in Southhaven, Mississippi, and one additional grocery box remains in Collierville.

Several Memphis markets present strong retail opportunities. Southeast Memphis/Collierville continues to grow with big-box retailers and restaurants showing interest in the submarkets of Hacks Cross, Winchester and Poplar. High-profile retailers are taking note of Midtown Memphis’ dense population and high household income. The redevelopment of Overton Square by Loeb Properties appears to be creating further interest in Midtown investment.

Indications are that Memphis is reaching a point of stabilization and a semblance of growth is occurring.

— Robert Sloan is an associate in The Shopping Center Group’s Memphis office.

©2012 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.