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VOL. 124 | NO. 119 | Friday, June 19, 2009

Numbers Show Industrial Real Estate Taking Plenty Of ‘Licks’

By Eric Smith

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AVAILABLE: Industrial real estate is Memphis’ bread and butter, but “For Lease” and “For Sale” signs are everywhere in the city as the economy takes a toll on that sector. Industrial sales slipped during the past year with a 40 percent decline from the previous year, according to real estate information company Chandler Reports. -- PHOTO BY ERIC SMITH

A healthy industrial real estate market is imperative for Memphis to live up to its longtime moniker of “America’s Distribution Center” or its new one of “America’s Aerotropolis.”

In other words, a viable warehouse sector – which bolsters the city’s ability to store goods before they’re distributed and supports the city’s robust transportation assets – is mission critical no matter how the city’s marketing is phrased.

Like everything else related to real estate, however, the industrial side has fallen on hard times, even in Memphis. A dearth of transactions, especially high-dollar deals, has shed light on how much industrial real estate has slowed in the past year.

Shelby County has seen drastic reductions in the volume and value of industrial sales. Just 84 industrial sales occurred from May 2008 through April, a 40 percent decline from 140 sales for the May 2007-April 2008 period and a 52.8 percent decline from 178 sales for the May 2006-April 2007 period, according to the latest from real estate information company Chandler Reports, www.chandlerreports.com.

Sales for the 12-month period ending this April averaged $772,539, down 54 percent from $1.7 million for the period ending April 2008 and down 72.9 percent from $2.9 million for the period ending April 2007. (For this report, industrial sales mean any transaction involving a warehouse, office showroom, sales and service center, truck terminal, aircraft hangar or airport.)

Dan Wilkinson, a broker at Colliers Wilkinson Snowden, said the slowdown can be attributed to one simple factor.

“The investment sale business has virtually vanished because of the lack of financing, suitable financing,” Wilkinson said. “From the sales standpoint, the very few sales you’re seeing are users who have golden credit and who are interested in buying a facility … that is exactly what they want at a very attractive price, and therefore they’re willing to buy the property.”

On the sideline

Not surprisingly, the smaller number and lower price of industrial deals shrank the overall dollar amount in the sector. Industrial deals for the 12-month period ending April 2009 totaled $64.9 million, marking a 72.2 percent decrease from $234.2 million for the period ending April 2008 and an 87.2 percent decrease from $507.7 million for the period ending April 2007.

The Oakhaven/Parkway Village area, which contains the bulk of Memphis’ industrial space based on its proximity to the airport, ran away with the title for top ZIP code for industrial activity.

During the 12-month period ending April 2009, the area notched 24 industrial sales that totaled $39 million. It was followed by four ZIP codes with five sales apiece. The Bartlett/Brunswick ZIP of 38133 and the Bartlett ZIP of 38134 totaled $2.8 million each; the Jackson/Farmville ZIP of 38108 totaled $2.4 million; and the West Person/Elvis Presley Boulevard ZIP of 38106 totaled $868,400.

Unlike past years, the top sales for the most recent 12-month period lack the wow factor, with nary a deal reaching double digits in terms of millions of dollars.

Shelby County’s top industrial sale for the period ending April 2009 was the 361,398-square-foot warehouse at 5321 E. Shelby Drive. Shelby Road Memphis LP and JES Shelby Road Memphis LLC – each affiliated with Chicago-based HSA Commercial Real Estate (see sidebar) – in August bought the property from Harriet Crews Partnership for $9.1 million.

That deal was followed by the 342,860-square-foot warehouse at 4219 Air Trans Road. Memphis Air Trans LP – also affiliated with HSA Commercial – in November bought the property from TC Air-T Industrial LLC for 8.4 million.

Third was the 211,903-square-foot warehouse at 3755 Knight Arnold Road. Cabot II-TN1B01 LLC – affiliated with Boston-based Cabot Properties Inc. – in May 2008 bought the property from Catherine’s Inc. for $5.3 million.

Frank Quinn, senior vice president at CB Richard Ellis, noted the lack of big deals reflected the overall financial climate. It’s placed potential buyers on the sideline as they wait for economic conditions to improve.

“The lack of activity has caused everybody to get fairly conservative,” Quinn said. “There’s a significant unrest on the financial market, and that’s where a lot of this lies, so when you really peel the layers back until the debt gets more stable and more aggressive, buyers will still be protecting themselves, which results in lower pricing and/or higher cap rates.”

Darkened doors

Dick Faulk, a broker at Crump Commercial LLC, said there have been a handful of “decent size deals floating around in the half-a-million-square-foot range,” but agreed that otherwise the market has been “extremely weak.”

As Faulk noted, the number of plant closures, whether it’s local, regional or national, is having a drastic effect on the industrial market. As long as companies keep hunkering down or, worse, shuttering, there won’t be much activity in the industrial market.

Faulk receives about 10 e-mails each day from other brokers around the country advertising space for lease. Sometimes, the properties being marketed are huge warehouses with darkened doors as a result of the tepid economy.

“Here locally, we’re no different,” Faulk said. “Even though we’re a distribution hub, we’re not immune to the economy and we’re going to continue to take our licks. We are seeing some decent-sized deals in the market right now. Most of the ones I know about are expansions, so this will be a good thing.”

Memphis’ industrial real estate remains attractive to outside capital, Faulk noted, but the recession could have an impact on the sector’s dynamics.

“We will become stronger once we emerge from this, but the question is, based on discussions I’ve had with a couple of developers, ‘What is going to be the new distribution model once the economy really starts to recover?’” he said. “Will companies go back to centralized distribution centers like we have now, or will it be a decentralization of distribution centers and make them smaller but more prevalent in more parts of the country?”

Memphis, obviously, benefits from the former model, based on the city’s reliance on FedEx to draw companies and their large distribution centers to the area. But, Faulk added, even though this is the major hub for FedEx, it’s not the only one, as the company has developed other prominent sorting facilities around the country, perhaps allowing for that decentralized model. Which scenario prevails remains to be seen, and it’s just another one of the questions lingering around the industrial market.

One for the South

The situation wasn’t much better on the industrial leasing side. The past year saw its first quarter of negative absorption since late 2007, as Q1 2009 notched a loss of 521,677 square feet, according to quarterly data compiled by the Memphis office of CBRE.

The number was skewed heavily by one company, Hewlett-Packard Co., which vacated 1.4 million square feet of warehouse space here and will vacate another 700,000 later this year.

Jim Mercer, executive vice president for industrial services at CBRE, said the current trend has seen tenants approaching landlords for good deals, and landlords approaching tenants to keep them in place. Each side has been trying to get the best deal amid these unsteady times.

“On the corporate side, it’s more of a wait-and-see attitude of sitting on the fence, holding onto cash and companies not taking down space unless they absolutely have to,” Mercer said. “What we’re seeing is a lot of early renewals, landlords wanting to keep tenants.”

Andy Cates, vice president of brokerage services for Colliers Wilkinson Snowden, said lease deals are getting done, but they’re being “done a lot differently,” with shorter terms, lower rates and a closer look at lessees’ credit.

“What’s interesting is that when you look at long-term leases, most companies now are trying to be as flexible as possible because of the unknown,” Cates said. “That makes the value of deals smaller from the lease standpoint.”

Wilkinson said the leasing volume has slowed, although there is some activity. Though he wouldn’t label the city’s industrial sector market “healthy,” he did say that Memphis, like other southern cities such as Atlanta, Nashville and Dallas, have performed better than the market average.

“If you were in the north, you wouldn’t see any activity in the Northeast or Midwest – Chicago being the exception,” he said.

How long indeed

Where the industrial real estate sector goes from here is anyone’s guess, although most experts see the city, despite suffering a serious slowdown in investment sales and, to a lesser degree, leasing, as having weathered the economic storm.

As they point out, Memphis’ assets – from its location to its weather to its healthy transportation network to its relatively low pricing – make the city more durable in a slump.

“The intrinsic reasons that people need to distribute out of Memphis haven’t changed. It’s just the market has slowed,” Mercer said. “I think everybody is cautiously optimistic that when it does turn, there’s going to be some pent-up demand that’s going to come out of the gate quickly. Memphis will fare well, it’s just how long will that be before it happens?”

Chandler Reports is a division of The Daily News Publishing Co.

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