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VOL. 120 | NO. 238 | Tuesday, November 29, 2005

Area Retail Market Sees Momentary Slowdown

By Tracy Adams

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LEASE RATES: Community center lease rates fell from $9.07 to $8.75 per square foot in the third quarter, while neighborhood center rates declined from $12.68 to $12.65 per square foot. -- The Daily News File Photo

Not since the first quarter of 2004 has the Memphis retail real estate market shown such unimpressive numbers - vacancies are up while lease rates, construction and quarterly absorption are down from last year.

The numbers, however, aren't low enough to get market analysts down.

"I don't think its anything indicative of the market getting soft," said Danny Buring, managing partner with The Shopping Center Group Inc. "The market is still quite strong, but a few big events can sway the statistics."

Big-box closings. During the third quarter, the overall vacancy rate rose from 8.9 percent to 9.2 percent, according to CB Richard Ellis' Third Quarter Retail MarketView.

That rise can be directly attributed to several local store closings by national retailer Kmart, Buring said.

Scott Barton, vice president of retail services for CB Richard Ellis, agreed.

"The three Super Kmarts that closed in September fell in the third quarter, and that's also 500,000 square feet," Barton said. "There is nothing else that happened during that quarter that would be considered a significant contributor to vacancy."

Third Quarter Stats

For the first time since first quarter 2004, overall absorption was negative, down 23,630 square feet.

Due to a decline in community center lease rates, the overall lease rate declined from $10.87 to $10.57 per square foot.

While the overall vacancy rate rose from 8.9 percent to 9.2 percent, it is slightly lower than the 9.3 percent rate recorded one year ago.

Sears Holding Corp., parent company of Kmart, closed three Super Kmart centers in the Memphis retail market as part of its plan to cut costs. The centers, located at 7060 Winchester Road in Hickory Hill, 1245 N. Germantown Parkway in Cordova and 550 State Line Road in Southaven, contributed to about 15 percent of third quarter vacancies.

Lease rates. The closings not only affected vacancy rates, but also negatively impacted lease rates. The overall asking lease rate was $10.57 per square foot in the quarter, lower than the $10.87 rate in the second quarter and the $11.92 rate in third quarter 2004, according to CB Richard Ellis.

Community center lease rates fell from $9.07 to $8.75 per square foot in the quarter, while neighborhood center rates declined only slightly from $12.68 to $12.65 per square foot. In third quarter 2004, neighborhood center properties experienced a lease rate of $13.58 per square foot.

"Every submarket experienced either a decline in lease rates or remained unchanged from last quarter," Barton said.

New centers. Just as the increase in vacancies could be directly attributed to three big-box retail closings, absorption rates were positively affected by the opening of three new neighborhood centers.

The three centers delivered in the last quarter include Belvedere Commons in the South submarket; Church Plaza in the Southaven/Horn Lake submarket and The Shoppes at Olive Branch in the Olive Branch submarket, as designated by CB Richard Ellis.

Belvedere Commons marked the largest completion with 19,200 square feet, which made up 41 percent of the total 46,800 square feet of newly opened space. About 25 percent of that new inventory was pre-leased.

New product is expected to have a positive effect on the fourth quarter, as well, with over 1.6 million square feet scheduled for completion, Barton said.

Large-scale development. The Avenue Carriage Crossing, a 719,771-square-foot lifestyle center in Collierville, and Southaven Towne Center, a 568,000-square-foot center in Southaven - both of which opened in October - represent the current quarter's two largest deliveries, he said.

"The completion of the 100 percent-leased lifestyle centers will bring positive absorption to the market by year-end," Barton said.

In addition to the two lifestyle centers, 10 neighborhood centers will be added to overall inventory, giving Barton and other market analysts reason to expect the overall market to finish strong.

"I would expect noticeable decline in vacancy and a jump in absorption," he said.

Fourth-quarter spending. The third quarter saw some job growth - the Shelby County unemployment rate was 5.7 percent at the end of September, down from 6.6 percent in August. The increase might mean greater consumer spending in the fourth quarter, leading Buring to predict a strong first quarter in 2006.

"If the holiday season goes well for existing retailers, especially in those areas with newly added retail, I would expect some vacancies to be filled in the first quarter," he said. "Overall, we've had a good year, and I do believe it will carry over into 2006."

PROPERTY SALES 23 23 1,365
MORTGAGES 21 21 1,068
BUILDING PERMITS 117 117 3,173