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VOL. 123 | NO. 121 | Friday, June 20, 2008

Tattered Cushion

Outlook not as rosy for industrial real estate

By Eric Smith

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Industrial real estate in Shelby County borrowed a chapter from the residential market’s tale of woe by turning in a lackluster 12-month period.

Like what’s happening with home sales, myriad factors ranging from tightened credit to frightened buyers have blended during the past year to drag down the industrial numbers, which long have been the county’s bread and butter.

From June 2007 to May 2008, industrial real estate recorded just $205.9 million in sales, a 59.7 percent decline from $511.3 million the previous year, according to the latest data from real estate information company Chandler Reports, www.chandlerreports.com.

Also, only 135 industrial properties sold in the past year at an average sales price of $1.5 million, down from the 176 industrial properties sold in the previous year at an average sales price of $2.9 million.

Age of Aquarius

Most real estate brokers agreed a combination of reasons can be blamed for the dropoff, such as difficult lending guidelines, weary investors and institutional capital looking to other markets.

But to understand fully the disparity between this year and last, it’s necessary to go back a few years and consider the long, scorching run that industrial sales have enjoyed of late, including the 179 sales totaling $342.5 million in 2005-2006.

Joe Steffner, president of the Memphis office of Grubb & Ellis Co., said conditions during the mid-2000s and prior to last summer were ideal for the market, leading to rampant high-dollar, high-profile deals.

“It was just a matter of the stars aligning over the past several years with low cap rates and low interest rates,” Steffner said. “Buyers could make aggressive decisions because of low interest rates and sellers could make aggressive decisions because of low cap rates. You’ve got a combination there that makes everybody happy.”

That happiness drove up activity, prompting owners to test the real estate waters and see what kind of price they could get for their properties. They found the answer in the rush of outside capital that arrived in droves.

“Memphis was a good market for sales, and there are a lot of people who decided that they wanted to sell their portfolios, and they made those decisions over the past three to five years,” Steffner said. “There’s been a tremendous amount of transactions.”

Slow going

The transactions slowed with a vengeance after July 2007. Three of Shelby County’s top industrial sales in terms of dollar amount occurred before the end of July – before the impending credit crunch.

COULD BE A METAPHOR: The old ScanSource Inc. distribution center at 4100 Quest Way ranked as the fifth most lucrative industrial sale over the past 12 months by fetching $6.3 million from Kansas City Life Insurance Co. But the empty facility now mirrors the industrial sales market, which has been quiet of late after a few healthy years. -- PHOTO BY ERIC SMITH

Top sales from June 2007 to May 2008 were the Delta Point Business Park at 5605 Holmescrest Lane for $25.9 million (sold June 1, 2007); a distribution center at 5015 Citation Drive for $19.3 million (June 14, 2007); the Meritex Enterprises Inc. logistics facility at 4836 Hickory Hill Road for $16.1 million (Dec. 21); a light industrial warehouse at 6125 E. Shelby Drive for $13.5 million (July 20) and the old ScanSource Inc. facility at 4100 Quest Way for $6.3 million (Feb. 15).

The first two sales were in Parkway Village’s 38118 ZIP code, which dominated Shelby County in industrial activity with 33 sales averaging $2.7 million (down from its previous marks of 51 sales averaging $5.2 million).

And it was downhill from there. The Elvis Presley Boulevard ZIP of 38106 came in second with 12 sales averaging $439,083 and the Defense Depot ZIP of 38114 came in third with 10 sales averaging $311,339.

Dick Faulk, a partner at Crump Commercial LLC, said the slowdown indicates the larger economic problems facing the country and Memphis. That sent ripple effects into such sectors as logistics, distribution, transportation – and real estate.

“I don’t see anything grandiose going to happen in the market until there’s a stabilization of the oil situation, the housing situation and the financial situation,” Faulk said. “There’s too much instability that’s going to create any kind of calm for any type of consumer confidence. Until consumer confidence comes back, the economy is just going to continue to chug along.”

‘One big advantage’

As lenders weigh their guidelines and investors weigh their decisions, the industrial activity in Memphis might continue to putter along.

“What you have right now is a lot of retrenching and people trying to decide what kind of product they want and where they want to be,” Steffner said. “There’s a lot of evaluation going on in capital markets as well as investment markets and also for developers. They have to decide where they want to put their capital. It’s a big transition going on.”

With the price of oil at record highs, Memphis’ distribution, logistics and industrial real estate sectors will continue to be negatively affected during this transition. But the city’s central location again could be its savior.

“We have the ability to recover quicker than a lot of cities mainly because of who we are and in particular because of where we’re located,” Faulk said. “The one thing we do have because of our centralized location is the ability to get to parts of the country fairly rapidly. As fuel goes up, the distance becomes shorter shipping out of Memphis. That is one big advantage we have.”

Bayard Snowden, broker at Colliers, Wilkinson & Snowden and immediate-past president of the Memphis Area Association of Realtors (MAAR) Commercial Council, noted that despite all the negativity swirling in industrial real estate circles, plenty of good deals exist for companies willing and able to swing a deal.

And that brings another residential parallel to the industrial story, one whose ending is not yet scripted.

“On commercial property sales for the users of a property like individual distributors in Memphis, as long as their business is solid, it is a good time to buy,” Snowden said. “Just like the residential brokers are saying, this is a good time to be a buyer.”

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PROPERTY SALES 78 78 13,921
MORTGAGES 93 93 16,098
BUILDING PERMITS 242 242 28,995
BANKRUPTCIES 59 59 8,985

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