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VOL. 123 | NO. 231 | Tuesday, November 25, 2008

Commercial Real Estate Sales Bleak in October

By Eric Smith

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ISLAND OF FORTUNE: The PennMarc Centre off Poplar Avenue, which sold for $14.5 million last month, provided a significant boost for an otherwise bleak commercial real estate sales environment. -- PHOTO BY ERIC SMITH

Commercial real estate’s downward spiral continued in October, with sales falling by a third compared to the same month a year ago.

Just 64 commercial deals occurred in Shelby County last month, a 33.3 percent decline from 96 in October 2007, according to the latest data from real estate information company Chandler Reports, www.chandlerreports.com.

Take away a pair of lucrative transactions – one for $14.5 million and one for $6.6 million, which contributed more than half the month’s dollar total – and the month was especially bleak.

The total commercial sales volume in October was $39.9 million, a 76.4 percent drop from $169.1 million in October 2007. Sales averaged just $622,844 in October, a 64.6 percent drop from the $1.8 million average in October 2007.

Darrell Cobbins, owner of the real estate firm Universal Commercial LLC, noted that the commercial market lags the residential market in terms of economic indicators by about six months to a year. Since housing is well into its demise, it’s not surprising the commercial slump is getting worse.

Also, last month brought some disastrous news on the economic front that has translated into fewer commercial deals.

“October was around the time the financial crisis and the bailouts all hit, and that just created an environment of uncertainty and concern across all industries,” Cobbins said. “When you see that type of what I would call ‘decision-making paralysis,’ then there’s no prospect of deals getting done.”

Circulation deficit

The top sale for Shelby County in October was the PennMarc Centre office building at 6401 Poplar Ave., which Union Realty Co. LP sold for $14.5 million to Highwoods Realty LP, an entity related to Raleigh, N.C.-based Highwoods Properties Inc.

Next, Lamar South LLC, the company that developed the Lamar Crossing shopping center at 2926 Lamar Ave., sold that property to a pair of tenant-in-common buyers for a combined $6.6 million.

Third, Commerce Center LP, an entity related to Memphis-based Loeb Properties, sold industrial buildings at 3665 and 3715 S. Perkins Road to Clinton, Tenn.-based The Hollingsworth Cos. for $1.9 million.

Rounding out the top five, Carlyle Rock Ridge LLC sold the Hickory Ridge Mall to World Overcomers Outreach Ministries Church Inc. for $1.4 million, and Machining Technology Group LLC sold a warehouse at 11450 Gulf Stream Drive in Arlington to Wright Medical Technology for $1.1 million.

Those sales didn’t do much to bolster 2008’s numbers. Year to date (through Oct. 31), Shelby County has notched 731 commercial sales, down 25.9 percent from 986 during the same period of 2007.

This year’s average sales price of $962,725 is off 52 percent from the 2008 average of $2 million, and this year’s total sales volume in terms of dollar amount is $703.8 million, a 64.4 percent decline from the 2007 total of $1.98 billion.

Safe in multifamily numbers

The top property type for commercial sales last month was vacant land over 1 acre. There were 11 such transactions in October, averaging $240,162 per sale.

Next was multifamily, with seven sales averaging $265,429. Steve Woodyard, president of Woodyard Realty Corp., said multifamily remains one of the most viable assets because everyone needs a place to live, and it’s still a safe investment for buyers and lenders.

“Everyone right now is trying to reduce risk,” Woodyard said. “I think everyone still realizes that real estate is one of the best long-term wealth accumulation vehicles you can get, and they see in multifamily the risk minimized. If you see a tenant move out, you’re still maybe 97 percent occupied. If you’re in other investment vehicles in the real estate world and you have a tenant move out, you may be 50 percent occupied.”

Multifamily was followed by warehouses, five of which sold in October at an average of $799,387. The highest average sales amount last month was office at $5.1 million for three sales. That category was highlighted, of course, by the PennMarc Centre’s $14.5 million price tag.

A real head-scratcher

Dick Faulk, partner at Crump Commercial LLC, said the current market is unlike any downturn he’s ever seen because it doesn’t stem from any single cause but rather a “perfect storm” centered on dropping property values, diminishing credit and waning confidence.

“Usually the downturns are industry-specific, like the S&L (savings and loan crisis) or something like that,” Faulk said. “No one has gone untouched in this deal. It’s hit every industry. I don’t care what you do, whether you’re selling thimbles or selling real estate, everybody is affected by it and everybody is scratching their heads. This is a global problem.”

Faulk said he remains optimistic that the market will turn, but it likely won’t happen this quarter or next.

“We will recover from this, like always,” he said, “but because of the instability, it creates a void as to how long this process is going to take because you’ve got so many parts involved in it.”

Chandler Reports is a division of The Daily News Publishing Co.

RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 75 185 19,299
MORTGAGES 77 202 22,252
FORECLOSURE NOTICES 0 58 2,894
BUILDING PERMITS 156 272 39,588
BANKRUPTCIES 51 149 12,397
BUSINESS LICENSES 28 49 6,315
UTILITY CONNECTIONS 30 71 7,343
MARRIAGE LICENSES 24 59 4,420