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VOL. 121 | NO. 101 | Friday, May 12, 2006

30 BIG ONES

$30 million sale in Memphis Distribution Center Planned Development reflects strong out-of-state interest in Memphis industrial properties

By Andy Meek

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BUILDING BOOM TIMES: The industrial market in Memphis saw a net absorption of 5 million square feet even before 2005 was drawing to a close, a level that - in the view of one high-ranking official with CB Richard Ellis - has not been reached since before 2001. A $30 million transaction in which three warehouses were sold by New York Life Insurance Co. this month is no different. -- Daily News File Photo

The sale this month of three industrial properties in southeast Memphis, whose more than 880,000 square feet were snapped up for $30 million, illustrates a peculiar truth about the local market.

While some Memphis residents are incapable of seeing past suburban sprawl, election drama, taxes, crime statistics, school consolidation or the city's four-term mayor, that's not necessarily true for national real estate investors.

HOT PROPERTIES
WHAT: Three warehouses in the Memphis Distribution Center; sold for $30 million this month by New York Life Insurance Co. to an arm of Colony Capital, an international investment fund.
WHY: "Quality, bulk industrial assets in Memphis gain national attention," says one industrial real estate observer.

A case in point is Buildings B, C and K in the Memphis Distribution Center Planned Development, three one-story warehouse buildings for which CB Richard Ellis helped owner New York Life Insurance Co. negotiate a sale May 1. John Lamberson, a senior vice president at CBRE, said company officials had to choose from a significant number of offers.

And while the Memphis industrial market has begun to slow down in recent months, the sale by New York Life of its three properties to an arm of Colony Capital - an investment fund that also purchased Harrah's Tunica and Bally's Tunica in 2005 in a $1.24 billion deal - seems to reaffirm a singular truth: The Memphis market still is attractive, and investors are active.

"We keep seeing the same thing," Lamberson said. "Quality, bulk industrial assets in Memphis gain national attention."

Buying in bulk

Colony Capital, an international investment fund run by Tom Barrack - a real estate mogul worth more than $1 billion - made its first entrance into the Memphis market with its purchase of the three buildings in the Memphis Distribution Center on Challenge Drive north of Raines Road. And its selection of Memphis should be a heady one for the local real estate establishment.

Barrack, according to a recent story in Private Equity International, has almost 200 employees around the globe who pore over local markets looking for attractive buys. Colony Capital, through a company spokesman, declined to comment on the purchase from New York Life.

But Lamberson, who was involved in the sale, said: "It just keeps happening here - when we go to market with these things, we get multiple offers."

"It just keeps happening here - when we go to market with these things, we get multiple offers."
- John Lamberson
A senior vice president at CBRE who recently helped broker the sale of three local warehouses for $30 million

Memphis may be a second-tier city when it comes to real estate investment, dwarfed by the likes of cities like Los Angeles or Miami, but Tony Argiro, a senior associate in the Staubach Co., said the local market still is on the radar screen of the major players.

This year, Memphis also was on the radar screen of his employer, a real estate advisory firm started in the 1980s by former Dallas Cowboys quarterback Roger Staubach. Agiro and Patrick Burke, both former CBRE employees, were tapped to open a new Staubach office in Memphis.

Land of opportunity

The company has more than 1,200 employees in almost 60 offices nationwide. The Memphis branch is focusing exclusively on industrial and office tenant representation.

"Memphis is attractive to national investors, as far as being a good place to park some money," said Argiro, who was involved in leasing the three buildings New York Life sold when he was with CBRE. "The reason this new office was opened is because of the viability of Memphis. Long story short, we felt like there's plenty of opportunity here for another firm to come in."

The industrial market in Memphis saw a net absorption of 5 million square feet even before 2005 was drawing to a close, a level that - in the view of CBRE executive vice president Jim Mercer - has not been reached since the days before 2001.

That attraction could play a big part in a long-running debate over whether to shake up the way tax incentives are handed out locally. Industrial tenants could be directly affected by who wins in the battle over the merits and flaws of Memphis and Shelby County's payment-in-lieu-of taxes, or PILOT, program.

The DeSoto factor

One force exerting a tremendous pull in the tug-of-war over incentives is DeSoto County, which can offer an aggressive package of deal-sweeteners. The state of Mississippi is able to offer tax breaks on top of local incentives, which means Memphis and Shelby County's PILOT program is up against state and local incentives across the state line.

City leaders in Memphis are considering whether they should have the final say over the way PILOTs are doled out.

"We're the ones who have to adopt the budget," said Memphis City Council member Carol Chumney. "So, yes, I think it's a good idea. There needs to be accountability and oversight, and I don't think we should delegate our authority to another entity.

"I think to just give a group of people who aren't properly elected by the public a blank check makes no sense. It doesn't make good fiscal sense."

Doing that, she said, has another benefit: Average Joes, in a way, would get to have their say in whether, for example, a distribution center opening a new warehouse in Memphis gets a multimillion dollar tax break.

How all those factors influence the industrial market in Memphis - including the interest of national investors locally and the resolution of a debate over tax breaks - remains to be seen. Some of the largest warehouses ever built in the Memphis market were completed last year, and interest in industrial space remains strong, according to CBRE's fourth quarter industrial market report.

"And it's not always a real easy decision as to who to choose to buy these things," Lamberson said. "It's more than just price."

RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 51 328 20,960
MORTGAGES 58 387 24,132
FORECLOSURE NOTICES 6 54 3,101
BUILDING PERMITS 170 842 43,435
BANKRUPTCIES 50 288 13,468
BUSINESS LICENSES 34 90 6,712
UTILITY CONNECTIONS 16 110 7,899
MARRIAGE LICENSES 32 91 4,734