SOUTHEAST SNAPSHOT, SEPTEMBER 2008

Memphis Industrial Market

Memphis is known as America’s Distribution Center, but the city’s industrial base was at the center of a storm in February, when tornado damage displaced some 6 million square feet of distribution tenants in Shelby County and Northern Mississippi. The disaster was not the only challenge the market faced this year, as high oil prices and a weak national economy threatened the health of the distribution hub.

In the face of these challenges, Memphis has shown remarkable resilience. In fact, the tornado damage forced displaced tenants into temporary accommodations, having the short-term effect of higher occupancy rates and net absorption. At 15.1 percent, the overall vacancy rate for the Memphis industrial market is at its lowest level since the second quarter of 2007. Total net absorption of 1.03 million square feet so far this year has continued a trend of positive net absorption for three consecutive quarters and ensured that vacancy rates remain in check.

Falling vacancies and positive absorption aside, Memphis has suffered some setbacks. In June 2009, Hewlett Packard announced plans to vacate approximately 2.2 million square feet of the 2.9 million that it currently occupies in the Southeast submarket. It will terminate leases for a total of 1.4 million square feet at the Chickasaw Distribution Center, buildings E and F, and a further 789,291 square feet at Summit Distribution Center II. However, Hewlett-Packard plans to continue operating from the 708,532-square-foot Summit Distribution Center I.

Last month, Kuehne + Nagel announced that it will seek a subtenant for its 865,120-square-foot facility in Hillwood’s DeSoto Trade Center, bringing a significant amount of space back to the market. Earlier this year, Hallmark announced the closure of its 106,000-square-foot facility in Southaven, delivering another blow to the DeSoto submarket, which has a current vacancy rate of 21 percent. On a more positive note, The  Disney Company has announced plans to reactivate its 647,900-square-foot distribution center in Southpoint. The space, originally developed in 1997 by Panattoni Development Co., will help ease vacancy rates in the Southeast submarket, keeping them at 12 percent.

Owing to its central geographic position, Memphis has long been the nation’s foremost transport and distribution hub. In addition to being the third largest rail center in the United States, Memphis is home to the FedEx World Hub, allowing distribution companies the latest drop-off times in the nation. Offering the lowest industrial rents in the United States, as surveyed by CoStar, Memphis will continue to prosper and be an ideal location for firms to consolidate their warehouse operations. Many of the world’s largest distribution companies are based in Memphis, occupying more than 155 million square feet.

The city continues to be a desirable distribution choice as shown by recent leasing proceedings, an activity that thrives in Memphis compared to other cities across the country. Recent notable deals include the New Breed Logistics’ lease for 468,232 square feet at Prologis Park DeSoto; DSC Logistics’ lease for 450,000 square feet at 3271 Infinity Parkway in Crittendon County; and Cooper Lighting’s lease for 400,000 square feet at Centerpoint in the Southeast submarket.

Average rents have increased slightly from $2.86 per square foot at midyear 2007 to $2.95 per square foot at the same time this year. Rents in the Southeast submarket have reached $2.81 per square foot, while rents in DeSoto come in at $3.18 per square foot. As with many industrial markets around the United States, Memphis is oversupplied. With a significant amount of space on the market, rates will continue to soften until occupancy levels rise.

Despite the surplus space on the market, there is still some development taking place, with 800,000 square feet delivered so far this year and an additional 1.7 million square feet under construction. This is down from previous years, when 4.2 million square feet was delivered in 2006 and 3.5 million square feet was constructed in 2007. The majority of construction is taking place in Northern Mississippi, owing to land availability and generous economic incentives offered by the state and local communities. Previously, DeSoto and Shelby counties were the hotspots for speculative development. Now DeSoto County is experiencing the highest vacancy rates seen in years with mid-year vacancy at 21 percent, down from 23.1 percent in the first quarter. However, occupancy rates are likely to improve as the new construction pipeline continues to slow and tax incentive schemes persuade companies to come to the region.

If the pace of net absorption can be maintained while new construction starts are curtailed, the Memphis distribution market will return to full health in 2009.

— Russ Westlake is a managing director with Jones Lang LaSalle’s office in Nashville, Tennessee.

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