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VOL. 121 | NO. 162 | Monday, August 21, 2006

'Cautious Optimism' Permeates Industrial Market

Observers say sector's development potential still ticking upward

By Stacey Wiedower

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After a few dark years followed by a tentative climb, the Memphis-area industrial development market is creeping further into the light.

With net absorption reaching about 5 million square feet in 2005 and on track for similar growth in 2006, developers are holding out hope that last year's market turnaround could have staying power, said Jim Mercer, executive vice president of CB Richard Ellis Memphis.

"You can see the pendulum is swinging back," Mercer said. "Everybody is cautiously optimistic."

Can you say PILOT?

Thriving industrial development in DeSoto County is one source of optimism for the region, and its impact is being felt across state lines.

However, in Memphis and Shelby County, one issue appears to be a major factor behind a noticeable lag in new industrial development. Pending changes - which have been slow in coming - to the city-county payment-in-lieu-of-taxes or PILOT program, have placed the development community and the city's recruitment efforts in limbo.

"The one word impacting industrial development in Memphis right now is 'PILOT,'" Mercer said. "Until they get that straightened out, you're not going to have any new speculative development in Memphis."

Nonetheless, there's not a shortage of available space in the Memphis market, said Bayard Snowden, industrial broker with Colliers, Wilkinson & Snowden in Memphis.

"Memphis is such a strong spec building market," Snowden said. "There's always spec building going on. Unless a tenant needs a highly specialized, very expensive space, there's usually a spec building waiting for them."

And space is filling up more rapidly than it did as recently as two years ago, he added.

"We're on the same pace and the market is getting better in the sense that there is less vacant space than in '05 and '04," Snowden said.

Right on track

So far this year, the market has seen net absorption of about 2 million square feet, Mercer said. That compares to about 5 million square feet of absorption in all of 2005.

"We're starting to see activity that will bring the year end on par with last year," he said. "We're still tracking for a pretty good year."

In the second quarter, net absorption came in at 887,275 square feet, compared to negative 17,463 square feet in the first quarter, according to CB Richard Ellis' second quarter Memphis industrial MarketView. The vacancy rate for industrial properties was at 19.1 percent, compared with 18.9 percent in the first quarter, according to the report.

Prior to 2001, the Memphis industrial market averaged 5 million to 6 million square feet in net absorption annually, Mercer said. Then in 2001, the market hit a low point, ending with 3.5 million square feet in absorption.

"Unlike the rest of the country, '02 and '03 were relatively flat," Mercer added. "Not much happened. In '04, we started coming back at about a million and a half."

Speculative building, however, isn't hitting levels seen in recent years, due at least in part to hesitation related to the PILOT program's future effect on the market.

"Speculative development right now - pretty much what is left in Memphis is stuff that's been sitting there or that was just started a year or so ago," Mercer said.

The picture looks rosier south of the border.

"In '05 and the first half of '06, absorption was 80 percent in DeSoto County and only 20 percent in Memphis," Mercer said. "We see that continuing, unfortunately, unless the PILOT program issue gets resolved.

"When you have 80 percent absorption in DeSoto County and no new speculative development in Shelby County, that's a big issue."

Poplar/240 appeal

Meanwhile, in another segment of the commercial real estate market, the picture is improving. The office real estate market appears to be on the upswing, said Mark Halperin, senior vice president of office properties for Boyle Investment Co.

"The market seems to be in a good place right now," Halperin said. "Class A space has a very low vacancy rate."

And development is beginning to occur. Boyle recently announced plans to start a new building on Shady Grove Road north of Poplar Avenue in the Poplar/Interstate 240 submarket.

"We've ordered steel and we've started," Halperin said. "We're negotiating with an anchor (tenant). These buildings have gotten too expensive to do without a lease in place."

He added that he believes the Poplar/I -240 area continues to be the "bedrock submarket."

"I don't see rents that are being generated in the Poplar corridor being duplicated in any other submarket until that market is completely maxed out," he said.

Another area that is gaining steam, though, is Collierville. Boyle recently completed a facility in the town's Schilling Farms development for Helena Chemical Co.

"I think (Collierville) is the future," Halperin said. "I think it's going to be terrific. Helena Chemical is a great example of that."

Overall in the office real estate market, build-to-suit development is limited, almost nonexistent, he said. Most building is occurring with a lease anchor in place.

In the second quarter, office net absorption was at 23,565 square feet, a drop from the same period last year but an increase from negative 147,367 square feet in the first quarter, according to CB Richard Ellis' second quarter Memphis office MarketView.

The vacancy rate of 16.1 percent in the second quarter remained flat from the same period in 2005 and dipped slightly from the 16.4 percent rate in the first quarter, according to the report.

PROPERTY SALES 73 147 18,012
MORTGAGES 89 184 20,749
BUILDING PERMITS 117 258 37,094
BANKRUPTCIES 55 114 11,540