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VOL. 126 | NO. 35 | Monday, February 21, 2011

2011 CRE Outlook Cautiously Optimistic

By Sarah Baker

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Optimism is in the eye of the beholder in the commercial real estate industry. In a city plagued with high vacancies and scarce speculative development, investors have Memphis on its radar – and Memphis should too.

That was a message a room full of real estate professionals received when The Daily News hosted its Commercial Real Estate seminar Thursday at the Memphis Brooks Museum of Art, sponsored by Financial Federal and Glankler Brown PLLC.

“We really are in an enviable position as far as growth in our community,” said Larry Jensen, president and CEO of Commercial Advisors LLC.

Jensen touted recent economic development deals like Electrolux and Mitsubishi, telling the audience to write to their congressman about their plans for small businesses, which create 80 percent of new jobs.

“We need a solution that’s apolitical … stop pointing across the aisle,” Jensen said.

Without a doubt, the biggest challenge ahead for commercial real estate sectors across the board is the loss of 7.5 million jobs nationwide since the end of 2007.

“There is a one-to-one correlation between job growth and office occupancy,” Jensen said. “Structurally, I don’t think we’re set up for job growth. If we have jobs, vacancy will take care of itself.”

While Memphis saw 1.3 million square feet of office leasing activity in 2010, its absorption rate remained negative 223,537 square feet with a 19.6 percent vacancy rate. The East Memphis submarket saw the most activity at 462,963 square feet.

Brad Kornegay, president and CEO of Colliers Management Group, echoed the assessment of Memphis’ progress, saying both mayors have “entered the arena with their gloves off.”

He also addressed the significance of the Memphis-Shelby County Industrial Development Board’s efforts with the new retention payment-in-lieu-of-taxes program, which has kept companies such as Cargill Inc. and Riviana Foods Inc. from moving elsewhere.

“The key is, we’re doing deals where the rest of the country is not,” Kornegay said.

Industrial vacancy rates topped 13.7 percent in 2010, with 211.3 million total square feet absorbed. But more than 1 million square feet is backfill that doesn’t hit absorption, including BP, Technicolor and ASI’s major deals.

The big box remains on top, with more than 4.5 million square feet of Class A leases above 200,000 square feet executed in the Southeast and North Mississippi submarkets. Meanwhile, Class B vacancy is expected to remain high with no significant decrease until 2012 due to the nature of the product, with absorption hoping to break even.

Investment sales, however, will see a significant uptick in 2011. Capitalization rates are decreasing, although investors will also look at “price per pound,” Kornegay said. With Norfolk Southern Corp. breaking ground on its new intermodal facility, Fayette and Marshall counties are emerging as major players.

As with the other sectors, retail speculative development will be minimal, said Scott Barton, senior vice president of retail services for CB Richard Ellis Memphis.

Memphis saw a 13.1 percent vacancy rate in 2010, with 518,338 square feet absorption at an average $9.49 lease rate. That’s compared to an almost 15 percent vacancy rate in 2009, with 367,725 square feet absorption.

But decreasing vacancies come at the expense of rent. The national average is 46.6 square feet of retail per person, and Memphis’ average reaches 35 square feet – a sign that speculative development will continue to be non-existent in 2011.

Renewal options will continue to equal negotiations, and tenant improvement dollars will involve the risk being placed back on the landlord.

“More than ever, landlords are having to bend over backwards to make these deals occur,” Barton said.

One area that has thrived in the downturn is discount retailers, including thrift, vintage and dollar stores; beauty supply companies; and medical use facilities like dialysis centers. Consumers are also becoming more and more concerned with the quality and value of goods – in everything from food to T-shirts – not just the price.

“In general, retail for the next 20 years – we all haven’t seen anything yet,” Barton said.

The multifamily sector shares that ambiguity. 2010 marked the completion of the fewest apartment units ever in the Memphis market, said Pierce Ledbetter, president and CEO of LEDIC Management LLC.

Last year saw 250 units, only 93 of which were conventional. And that’s excluding hundreds of destroyed units and hundreds more with copper stolen and too expensive or obsolescent to repair.

The multifamily sector can expect compounded years of rent growth ahead, and double-digit growth for Class A properties. Occupancies in that rank are 93.2 percent and climbing, compared to 91.4 percent overall.

Street rents and absorption are also growing, while construction is the opposite. But before building gets started again, Memphis needs less single-family inventory, and more blight, crime and employment programs.

“The bleeding has stopped, but we haven’t seen the full recovery yet,” Ledbetter said.

MORTGAGES 54 374 1,120
BUILDING PERMITS 177 767 2,425