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VOL. 126 | NO. 251 | Monday, December 26, 2011

Prolonged Recession

CRE professionals wading through painful market decline

By Sarah Baker

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In the words of Phil Woodard, an owner of multiple residential and commercial properties in Downtown Memphis, breaking even is the new profit.

A building at 5865 Ridgeway Center Parkway in the heart of East Memphis was recently leased to 100 percent capacity by Boyle Investment Co. 
(Photo: Lance Murphey)

Or as national real estate expert Jonathan Miller said earlier this month at the Urban Land Institute’s Real Estate Outlook for the Mid-South, “We cannot expect to make money the way we did a few years ago.”

Attendees at ULI’s 2010 conference learned about “an era of less.” Industry experts projected the local and national market to turn around in 2011, albeit the industry would have to settle for baby steps.

This year, the theme was dourer and to the point: “facing a long grind.” A shrunken industry, lower returns, crimped profits and substantial losses mark the current state of the market.

“Historically, post-World War II recessions have been short, with a robust comeback,” said Dr. John Gnuschke, director of the Sparks Bureau of Business and Economic Research and co-director of the Center for Real Estate at the University of Memphis. “But the Great Recession has been notably different – long, deep and very prolonged.”

Top concerns locally and nationally include slow job growth, refinancing, vacancy rates, deleveraging, tax policies and income and wages.

“We had a full steam ahead of activity throughout most of the year, but as we got into the third quarter and the financial markets started going a little bit bonkers, most of our activity still remained, but everything pretty much just kind of slowed down,” Brad Murchison of CB Richard Ellis Memphis told The Daily News in November.

The year was kicked off with notable deals that included Panattoni Land 3 LLC’s two sales at 4795 Imagination Drive for a total of $19.2 million in January, and Richard Stern, principal with Canadian investment group Olymbec, buying the 1.1 million-square-foot Space Center at 3051-3133 Tranquility Drive for $7.3 million.

January was also a milestone for Boyle Investment Co., which bought a significant stake in Belz Enterprises’ Germantown Village Square for $14 million. This transaction marked the first local purchase since the firm set up its Mid-South Capital Fund I LLC, which is targeting $125 million to $130 million in real estate investment opportunities throughout the Mid-South over eight years with a focus on Memphis and Nashville.

Furthermore, it shed new light on Belz, a longtime Memphis CRE firm that began shedding assets at the end of 2010 with its sale of Park Place Centre to Loeb Properties Inc. and continued doing so during the first quarter of 2011 with its sales of Eastgate Shopping Center and a center in Orlando, Fla.

Other major deals that were years in the making finally came to fruition in 2011. In August, an entity of Dallas-based Mayfield Properties LP purchased a majority of Memphis Depot Business Park near Memphis International Airport for $35.8 million.

And in November, Willow Lake Business Park and Corporate Park – a mixed-use, 17-building portfolio in Hickory Hill – sold for $26 million in foreclosure, as compared to $53 million in 2006. In its heyday, the park included tenants like International Paper Co., FedEx Corp., Terminix and Netflix.

Across all property sectors, 2011 proved to be a booming year for bank sales, as evidenced by the sale of Cross Creek Shopping Center at Winchester and Riverdale roads for $12.7 million and Trinity Ridge Business Center in Cordova for $7.6 million.

Meanwhile, on the local office front, experts predicted any growth in 2012 to be in Boyle’s land near 999 S. Shady Grove Road, where the firm leased its Ridgeway Center building up 100 percent in October with Education Realty Trust and NewSouth Capital Management.

When asked when new office construction will occur, Cushman & Wakefield/ Commercial Advisors LLC’s Kemp Conrad said, “First of all, you really can’t buy the land and build a building and make money in A and B, that’s why you need A-plus,” citing the office building at 999 S. Shady Grove as a prime example.

Conrad said a handful of office buildings saw positive absorption in 2011, including Triad III, Goodlett Farms Business Center, Marsh Center, Thousand Oaks, Lenox Park Building D and One Commerce Square.

On another note, the local retail sector has its fair share of celebratory deals in 2011, including a plethora of household names enter the market. National retailers Chipotle, Five Guys Burgers and Fries, Urban Outfitters, Staples Inc. and Pure Barre all chose Memphis as part of its growth pattern after being in cities like Atlanta and Nashville for years.

PROPERTY SALES 74 196 20,828
MORTGAGES 86 244 23,989
BUILDING PERMITS 138 453 43,046
BANKRUPTCIES 64 174 13,354