The local commercial real estate market is a tale of two sectors, with the industrial sector showing signs of improvement while the overall office sector – outside the prized East Memphis submarket – continues to struggle through the first three months of the year, according to recent reports.
The Memphis industrial market started the year on a good note, posting more than 1 million square feet of absorption, according to first quarter reports on the industrial and office sectors from Cushman & Wakefield/Commercial Advisors. That’s compared to 2 million square feet of new empty space through the first three months of 2012. Vacancy rates have dropped to 14.9 percent.
The Southeast submarket saw the most leasing activity in the first quarter, including TJ Maxx taking 414,504 square feet at Building D in Chickasaw Distribution Center and 237,952 square feet leased by Patterson Warehouse at 295 Marathon Way and 194,000 square feet leased by Patterson Warehouse at 601 Expressway.
The average market rental rate rose .06 cents to $2.63 per square foot. Rents are now up 5 percent from the 2011 low of $2.50 per square foot.
While numbers improved through the first three months of the year, there remains cause for caution and concern because of decreased demand. The Commercial Advisors report said industrial users were scouting 6 million square feet of space in the first quarter, down from 15 million square feet in the third quarter of 2012.
Commercial Advisors president and CEO Larry Jensen said a closer look at the numbers showed that industrial and office sectors that usually do well remain to do so, while those with perennial problems continue to struggle, dragging down the numbers for the total Memphis market in each sector.
“I have been a proponent for a long time for more microanalysis in submarkets,” Jensen said.
Jensen pointed to industrial activity in DeSoto County as an example. Through the first quarter, the DeSoto County submarket saw 359,707 square feet of absorption, second behind 508,923 square feet of absorption in the Southwest market.
For 2012, DeSoto County tallied 1 million square feet of absorption. The only other Memphis submarket to post positive absorption numbers last year was the Northwest submarket, with 281,966 square feet.
“The industrial market has been very healthy in North Mississippi because they understand what it takes to get business,” Jensen said. “They are not an enemy. They are a submarket. We need to realize that is a viable, healthy submarket and we need to judge ourselves and say, ‘Are we doing what it takes to be competitive?’”
Outside the stable East Memphis submarket, the Commercial Advisors report found the rest of the office sector still struggling. The overall market gained 57,912 square feet of empty office space in the first quarter, with the vacancy rate rising 0.3 percentage points to 18.9 percent.
The largest vacancy happened when the sublease at 1023 Cherry Road expired when local investor Brad Martin re-bought the property, which was formerly home to Harrah’s Entertainment Inc., Promus and Holiday Inn. The properties there totaled 59,604 square feet.
The report said the East Memphis submarket continues to power along, fueled in particular by six Class A plus buildings east of Poplar Avenue and Interstate 240 in East Memphis. The vacancy rate among those buildings rests at 9.8 percent, far below the 18.9 percent vacancy rate for the overall Memphis market.
“Look at Class A in East Memphis, it’s as healthy of a submarket of anywhere I know of in the Southeast,” Jensen said.