The strength of Memphis’ commercial real estate market is its industrial sector, but the city’s bread and butter suffered a rare misstep in 2009, the most recent data show.

Memphis saw negative absorption of 352,797 square feet during the fourth quarter and negative absorption of 913,871 during 2009, according to a year-end report from CB Richard Ellis.

The year closed with a 19 percent vacancy rate, in part because of continuing economic woes as businesses right-sized their operations. That means companies have shed some of their distribution space or retooled with sale-leasebacks or other cost cuts.

One of the biggest hits to the industrial sector last year – and perhaps the biggest impact on the overall commercial market – was Hewlett-Packard Co. vacating 1.4 million square feet.

But Jim Mercer, executive vice president for industrial services at CBRE, said the story isn’t quite as bad as the numbers indicate because a couple of high-profile deals, like the HP transaction, skewed the big picture.

“With the loss of Hewlett-Packard and general downturn in the economy, the numbers could have been worse,” Mercer said. “With the building sales that count as activity but not leasing absorption, there was still positive activity.”

Notable deals

Those building sales were highlighted by Conwood Co. LLC buying the 787,500-square-foot facility at 5106 Tradeport Drive in Hickory Hill South for $19.3 million. Conwood last year announced plans to buy the building, where it will expand its manufacturing operation of smokeless tobacco products.

Next came International Cotton Depots Inc.’s purchase of the 335,080-square-foot warehouse at 3965 Pilot Drive in Oakhaven/Parkway Village. The company, an affiliate of Noble Americas Corp., a subsidiary of Hong Kong-based Noble Group Ltd., paid $5.1 million for the building from CLP Industrial Properties LLC.

Another notable transaction included Cal Western Packaging Corp. buying the 100,000-square-foot warehouse at 2665 Riverport Road in the Rivergate Industrial Port in South Memphis. Operating in the transaction as HHTP Leasing Co. LLC, Cal Western paid $2.4 million for the property, which backs up to McKellar Lake.

“Three user purchases (Conwood, International Cotton Depot and Cal Western Packaging) of for-lease buildings in 4Q 2009 removed 1,223,580 square feet of rentable area from the data set of available buildings for lease,” Mercer said. “Had these users elected to lease instead of purchase, over 870,000 square feet of space would have been absorbed in the fourth quarter and the market would have posted positive absorption of 309,709 square feet for 2009.”

On the leasing side, rental rates averaged $2.64 per square foot in the Memphis area, a number that is sure to increase with no or little new construction expected in 2010.

“Lease rates will rise as absorption increases and more buildings are leased,” Mercer said. “No speculative construction is planned and this will help the market rebound even faster. Currently, there are over 5 million square feet of active deals in the market, so we see absorption rising and vacancy dropping in 2010.”

Positive signs

Andy Cates of Colliers Wilkinson Snowden said at last week’s Commercial Property Forecast Summit that 2009’s performance should be atoned for this year, especially as companies look to Memphis as the economy improves.

Memphis boasts lower rental rates than peer cities and has nearly unmatched transportation assets, ranging from the world’s busiest cargo airport to five Class I railroads to the most trafficked interstate (I-40) in the U.S. to a vibrant river port.

Not only that, but because the city has a labor force of 78,930 people, coupled with the current high rate of unemployment, Memphis is positioned to tap into a recovery.

“We have a labor force that’s trained in transportation and logistics, and what does mean?” Cates said during the speech. “Truly, these people are people that are working in warehouses that run forklifts and automated systems and understand the process. Per capita Memphis has quite a few of those people.”

Granted, that’s because Memphis is a distribution network and a largely uneducated work force, but the city possesses an impressive ability to move and store goods.

Close to 12 percent of Memphis’ work force is employed in transportation, warehousing and utilities – the highest among the top 100 largest metropolitan areas in the U.S., according to the Greater Memphis Chamber.

Perhaps that’s the reason companies like Nike, Asics, Conwood, Lexmark Products, Smucker’s and Smith & Nephew all recommitted to the Memphis area with new or extended leases in 2009, Cates said.

“These are big deals for us, these are big deals for the market,” he said. “It’s really important to see that these companies have dug in and committed to Memphis. It’s very positive for our market.”

Cates said brokers remain “cautiously optimistic” about some potential deals brewing, about absorption increasing, vacancy decreasing and the market improving.

“Nationally, Memphis will continue to be an affordable option for most large industrial tenants,” Cates said. “I think there’s really good reason to be excited about Memphis.”