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VOL. 123 | NO. 16 | Thursday, January 24, 2008

Breaking the Mold

'07 commercial real estate sales up despite larger economic woes

By Eric Smith

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STANDING TALL: Bolstered by some big transactions, including the $45 million sale of the Hilton Memphis last May, Shelby County's commercial real estate registered positive gains in 2007. -- Photo By Brad Johnson

Large transactions involving apartment complexes and hotels dominated Shelby County's commercial real estate landscape in 2007, a year that saw increased sales amid an overwhelming economic slowdown.

There were 1,162 commercial properties that sold during 2007, a 4.1 percent increase from the 1,116 commercial properties that sold in 2006, according to the latest data from real estate information company Chandler Reports, www.chandlerreports.com.

Moreover, the average sales price, total sales volume, average square footage and average price per square foot on commercial transactions all rose in 2007 from the previous year.

The average sales price increased from $1.4 million to $1.8 million; total sales volume increased from $1.56 billion to $2.12 billion; average square footage increased from 32,583 square feet to 42,192 square feet; and average price per square foot increased from $47.12 a foot to $49.80 a foot.

John Snyder, principal with CresaPartners LLC and president of the Memphis Area Association of Realtors, said these improvements signal an overall healthy commercial real estate market for 2007 in light of a slumping economy.

"Even with the downturn in interest rates, there's always someone who's going to be interested to buy at the high side or the low side," Snyder said. "There's still money out there that's looking to buy quality product, and there's also money out there that's looking to take advantage of property that's got some problems with it."

The big bucks

Of the myriad storylines that played out in 2007, perhaps the most intriguing was the continued trend of high-dollar and high-profile multifamily sales.

One highlight was the sale of Watergrove Townhomes, a 1,002-unit Class B apartment complex in the Hickory Hill area, from Fogelman Realty Group LLC to Philadelphia-based BPG Properties Ltd., for $46 million.

That set a record price for the apartment industry - and marked the highest sales price for any one commercial transaction during the year.

"Memphis did have a great year, and I would probably add that we've had a great two or three years, obviously capped off with big sales like Watergrove ..." said Blake Pera, vice president of CB Richard Ellis Memphis' multifamily division.

Watergrove, since renamed Madison at Cypress Lakes, wasn't the only apartment property to rank high. Legacy Farms Apartments in Collierville sold in June for $36.5 million to rank third among commercial sales, and Dogwood Creek Apartments, also in Collierville, sold in May for $24.2 million to rank ninth.

Fogelman bought Legacy Farms outright and Dogwood Creek jointly with a New York firm to help reposition Fogelman's portfolio with newer properties.

Otherwise, the top multifamily purchases were all made by out-of-town entities who found plenty of value in Memphis. That trend should continue into 2008.

"There's a lot of capital looking for properties to acquire," Pera said. "Memphis has been a pretty stable market for investors over the years. We're continuing to see not a lot of new construction delivered, good job numbers in the market - there's just a lot of good news coming out of Memphis, and that continues to grab a national investor base and brings them here."

Big gains

Multifamily wasn't the only property type that had a strong year. Sales for the motel/hotel sector increased 5 percent, from 20 transactions in 2006 to 21 transactions in 2007, but the average sales price increased 45 percent, from $2.9 million in 2006 to $3.7 million in 2007.

The figure was bolstered by two notable sales that each ranked in the top five for commercial deals in 2007.

The 405-room Hilton Memphis at 939 Ridge Lake Blvd. sold for $45 million in May to Davidson Hotel Co. operating in a joint venture as RDB Memphis LLC, to finish second overall in commercial sales for the year.

After Memphis-based Davidson bought the 27-story landmark tower, it began extensive renovations on the property.

And the Doubletree Hotel Downtown, at 185 Union Ave., sold in September for $28.3 million to New York-based W.P. Carey & Co. LLC and Lake Forest, Ill.-based Watermark Capital Partners LLC in a joint acquisition. The Doubletree's price tag earned it fifth place for the year.

Things change

As for the other sectors, warehouse performed well with 142 sales averaging 102,656 square feet and $2.9 million per sale, enough to finish second among commercial property types.

And office finished third with 80 sales averaging 32,406 square feet and $2.4 million per sale, highlighted by the $30.6 million sale of Nonconnah Corporate Center to a company based in Brooklyn, N.Y.

But office sales slumped as the year wore on, a result of the housing crisis and subsequent credit crunch that tightened lending nationwide, said Joe Steffner, president of Grubb & Ellis Memphis.

"2006 carried over nicely into 2007, however; when the credit crunch hit in June, almost everything that was thinking about being sold was taken off the table," he said.

For all that happened with the credit markets and slowing economy, the fact that Shelby County's commercial real estate registered positive gains was good news for the industry.

While much of it can be attributed to the region's central location, diversified economy and undervalued properties, anther factor was something as simple as investors using the Internet to seek out good deals - and continually winding up with Memphis in their sights.

"The technology is making it a lot easier," Snyder said. "The ability to communicate and the ability to transfer information really shrinks the world as far as real estate investment is concerned."

PROPERTY SALES 92 480 7,835
MORTGAGES 115 551 8,785
BUILDING PERMITS 325 1,167 17,068
BANKRUPTCIES 39 311 5,159