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VOL. 125 | NO. 242 | Tuesday, December 14, 2010

Seeking Stability

CRE market strives for recovery after brutal slump

By Sarah Baker

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The commercial real estate market is poised for a comeback in 2011, as investment sales show signs of recovery and occupancy slowly improves to meet supply.

The Crescent Center, left, and the Triad Centre, both owned by Highwoods Properties Inc., form one of the hottest areas in Memphis commercial real estate along the Poplar corridor.  (Photo: Lance Murphey)

Shelby County’s commercial sales during the past 12 months (November 2009 through October 2010) totaled 581, down 6 percent from 620 sales during the previous 12-month period, according to the latest data from real estate information company Chandler Reports, www.chandlerreports.com.

The most recent total also marks a 56.3 percent decline from 908 sales during the 12-month period before that (November 2007 through October 2008), proof of how far things have fallen since the recession took hold.

The average sales price has seen a healthy bump. Commercial sales during the past year have averaged $746,618, a 16 percent increase from $643,379 during the previous 12-month period. For the 12-month period ending October 2010, total commercial sales volume marked $433.8 million – a 9 percent increase from $398.9 million for the previous period.

Investment sales activity has continued to show signs of improvement and will likely increase every quarter, said Wyatt Aiken, chief operating officer and executive vice president of Commercial Advisors LLC.

“Probably within 12 months, we’ll be back to a more stable investment sales market, where buyers and sellers are kind of in sync with each other,” Aiken said. “In 2007, it was ridiculously crazy – everybody was selling everything because capitalization rates were so low and building values were so high.”

This year’s top commercial sale – Raleigh, N.C.-based Highwoods Properties Inc. buying the Class A 336,000-square-foot Crescent Center for $52.6 million in July – also marked Shelby County’s largest commercial real estate deal in five years.

The nine-story property’s 2010 appraised value is $58.5 million, according to the Shelby County Assessor of Property. IPC Crescent Center LLC, an affiliate of Behringer Harvard, paid $63 million for the same building in 2005, which had been the previous high mark for the county.

The availability of commercial space has resulted in reduced price tags, for both leasing and sales, that lessees and investors are starting to hop off the fence.

“There’s so many good deals out there now, tenants are taking advantage of them,” said Andy Cates, vice president of brokerage services at Colliers International. “There’s just way too much supply.”

But a couple more big deals sprinkled in the mix could tighten up the market pretty quick, Cates said. Recent noteworthy deals include 2010’s second-highest sale, where two limited liability companies affiliated with Minnesota-based WelshInvest bought property in Airport Industrial Park from Principal Life Insurance Co. for $20.6 million.

An entity called Exeter 4460 Holmes LLC bought a 449,600-square-foot warehouse at 4460 E. Holmes Road for $11.5 million. Built in 1998, the property sold for 22 percent less than the Assessor of Property’s 2010 appraisal of $14.6 million.

And related entity called Exeter 4495 Citation LLC bought a 366,800-square-foot warehouse at 4495 Citation Drive for $9.1 million. The 2010 appraisal of the 33.4-acre property, built in 1997, is $14.6 million – 23.5 percent less than its purchase price.

WelshInvest’s dual purchase is a prime example of larger deals occurring in Memphis submarkets, especially in the industrial sector.

Over the last 10 to 15 years, DeSoto Country is where all of the new construction has taken place, and a considerable amount of 2010 industrial absorption did occur in DeSoto County, including Hamilton Beach Brand Inc.’s 1.2 million-square-foot lease, Siemens Building Technologies Inc.’s 619,000-square-foot lease and McKesson Corp.’s 645,000-square-foot lease.

Looking ahead to 2011, industrial leasing activity should continue to be strong in the Class A warehouse sector, Cates said. But as absorption improves, an increase in rental rates is sure to follow.

Meanwhile, the 2010 office market’s leasing activity was 37.2 percent less than the 10-year average in the third quarter, according to Commercial Advisors’ latest office report.

Overall absorption notched a 33,986-square-foot dip, with a slight positive absorption in Class B properties at 30,566 square feet. East Memphis’ Class A vacancy is currently 13.8 percent – the highest recorded level to date for the historically strong submarket.

Anthony Lopes, principal broker with Investec Realty Services LLC, foresees the latter part of 2011 as the time when some of the smaller, 1,000- to 4,000-square-foot tenants will come back into the market.

“It’s going to be a year and a half or two before we go back to what I consider a steady office market,” Lopes said. “I don’t see a lot of people upgrading in this market because there’s not a lot of Class A buildings in town.”

Perhaps the sector that has best withstood the downturn is multifamily. Four of the top 10 commercial sales of the past year were apartment complexes.

Occupancy increased 240 basis points from year-end 2009 to 91.7 percent, according to CB Richard Ellis Memphis’ third quarter report, and overall rents increased 1.2 percent from year-end 2009 but were unchanged from the second quarter at $724 per unit.

PROPERTY SALES 57 280 1,209
MORTGAGES 55 244 916
BUILDING PERMITS 158 699 2,751