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VOL. 125 | NO. 115 | Tuesday, June 15, 2010

Cautious Optimism

Industrial leaders hopeful for market turnaround

By Eric Smith

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Industrial real estate, which thrives whenever companies choose one of the city’s numerous warehouses and distribution centers to store their goods, plays a significant role in Memphis’ economy.

So as the recession improves and consumerism rebounds, the industrial sector is bound to show improvement as will the city’s financial climate.

Already, the city is seeing its fortunes change as highway access improves, as railroads beef up their operations here and as Memphis International Airport – thanks to FedEx – continues to rank as the world’s busiest cargo airport.

But while the most recent industrial figures show an uptick in leasing and sales activity as businesses prepare for the economy to regain its health, Memphis has a long way to go before the market is fully recovered.

On the sales side, Shelby County saw just 69 industrial sales during the past 12-month period (May 2009 to April 2010), a 20 percent decline from 86 the previous period and a 51 percent decline from 140 the period before that, according to the latest data from real estate information company Chandler Reports, www.chandlerreports.com.

(For this report, industrial sales mean any transaction involving a warehouse, office showroom, sales and service center, truck terminal, aircraft hangar or airport.)

On the sales side, deals in the past 12 months averaged $1 million, up 32 percent from $758,554 in the previous period but down 41 percent from $1.7 million the period before that.

Also, the total sales volume of $69.3 million marked a 6 percent improvement from $65.2 million in the previous period but a 70 percent decline from $234.2 million the period before that.

The largest industrial deal of the past year occurred in December when American Snuff Co. LLC – then known as Conwood Co. LLC – bought the 787,500-square-foot building at 5106 Tradeport Drive for $19.3 million.

The company is now in the midst of expanding and converting that property to a manufacturing facility of smokeless tobacco products.

Also, Freehold, N.J.-based Monmouth Real Estate Investment Corp. bought the 449,262-square-foot, Class A warehouse at 5025 Tuggle Road for $14.6 million. The facility, which just underwent a $1 million expansion, is 100 percent leased by FedEx Global Supply Chain Services Inc.

Notable Leases

May ‘09 – April ‘10

Technicolor SA
Summit I: 580,131 square feet
Summit II: 789,291 square feet

Siemens AG
Airways Distribution Center
619,000 square feet

Solae Inc.
Deltapoint Business Park
472,000 square feet

Fiskars Corp.
Southaven Distribution Center
260,000 square feet

The third-highest industrial deal of the past 12 months occurred when Genuine Parts Co. bought the 128,481-square-foot auto parts distribution center at 7415 U.S. 64 for $10.2 million. Its auto distributor brand NAPA Auto Parts already was housed there.

One other sale of note was International Cotton Depots Inc. paying $5.1 million for the 335,080-square-foot facility at 3965 Pilot Drive.

On the leasing side, the local market saw a handful of small and large deals, highlighted by Technicolor SA signing a pair of leases, one for 580,131 square feet in Summit I and another for 789,291 square feet in Summit II.

Also, Siemens AG signed a 619,000-square-foot lease in Airways Distribution Center and Solae Inc. signed a 472,000-square-foot lease in Deltapoint Business Park.

Andy Cates, vice president of brokerage services for Colliers Wilkinson Snowden (whose name will soon change to Colliers International; see story Page 1), said he is pleased with what he is seeing in light of the ongoing economic slump.

Notable Sales

May ‘09 – April ‘10

American Snuff Co.
5106 Tradeport Drive
787,500 square feet
$19.3 million

Monmouth Real Estate 
5025 Tuggle Road
619,000 square feet
$14.6 million

Genuine Parts Co.
7415 U.S. 64
128,481 square feet
$10.2 million

Int’l Cotton Depots
3965 Pilot Drive
335,080 square feet
$5.1 million

“The market is very active right now,” he said. “I can’t say there’s been a ton of growth in the rental rates, but there’s been a lot of activity in clients looking for space and some deals are actually starting to get signed.”

Those deals, many of which happened in second quarter, are a breath of fresh air following the previous quarter’s leasing statistics, which saw a negative absorption of 186,810 square feet, according to CB Richard Ellis Memphis’ most recent industrial “MarketView.”

Jim Mercer, executive vice president of industrial brokerage services for CBRE, said the local market is “faring pretty well” thanks to those large leases.

“Since the beginning of the year, we’ve seen 4.5 million square feet of leasing activity and currently, there’s approximately 5 million square feet of active deals in the marketplace looking for space,” Mercer said. “Some of this activity has been renewals and tenants moving within the market but a significant amount has been new business to the area.”

Dick Faulk, broker at Crump Commercial LLC, is one of many practitioners who used the term “cautious optimism” when describing the industrial sector. He likened the market to the Tour de France bicycle race, which is filled with easy legs and challenging legs, mountainous climbs and sprints.

“We’re kind of in the bottom portion of the course and we’re in the smooth track,” he said. “We’ve still got all the uphill.”

Faulk pointed out that the large deals have been tempered by a void in the 50,000- and 200,000-square-foot range– the “stuff in between the ears,” Faulk said – where activity hasn’t been strong.

On top of that, he added, lending is tight as companies struggled to get financing and often don’t have the equity needed for a purchase or move.

“I think we’ve been fortunate as a market,” Faulk said. “There were some major deals made the latter part of last year, which took a lot of inventory off the table, and that helped the numbers tremendously. But still we have that unsettling feeling. This recession has gone so deep and so long, that you just can’t turn on a light switch and all of a sudden everything’s fine. We’re in better shape than we were 12 months ago, but we’re not out of the woods yet.”

But Faulk, like most brokers, believes Memphis will rebound in due time, even if no one knows for sure when that happens.

Simply put, the city’s natural distribution capabilities coupled with its myriad transportation assets bode well for the industrial market.

PROPERTY SALES 57 94 2,713
MORTGAGES 16 37 1,820
BUILDING PERMITS 303 621 6,322
BANKRUPTCIES 138 138 1,115