Seminar Underscores Commercial Sectors’ Highs, Lows

By Sarah Baker

Memphis’ commercial real estate market for the most part appears to mirror national trends, with all four sectors boasting challenges and bright spots so far this year.

That was a message a room full of real estate professionals received when The Daily News hosted its second annual Commercial Real Estate seminar Thursday, Nov.1, at the Memphis Brooks Museum of Art, sponsored by Magna Bank and Evans Petree PC.

Andy Cates of Colliers International Memphis said year-to-date industrial absorption in the third quarter was a negative 541,915 square feet according to CoStar, but that he expects that number to “change dramatically in the next quarter.”

But Memphis’ rates are nearly the lowest in the country, with square foot averages of $2.53 locally compared with $5.14 nationally.

“This is the number that I’m screaming anytime I’m on the phone with anybody from out of town,” Cates said. “This is real, we’re not making this up, please come check us out. And it’s working.”

Industrial Developments International Inc. has two speculative buildings coming out of the ground now – one of two spec buildings exceeding 600,000 square feet being built in all of Southeast U.S. The other main players in Memphis – Prologis Inc., Hillwood Investment Properties, H&M Co. and Panattoni Development Co. – all have sites ready to build.

“I think we will see some serious activity from those guys in the near future,” Cates said, adding that the city’s investment market from large institutional buyers has really picked up speed.

Massive deals that have been executed in the last 120 days include New Breed Inc.’s 404,000 square feet, Teleflex Inc.’s 627,000 square feet, Five Below Inc.’s 605,000 square feet and Milwaukee Electric Tool Corp.’s 600,000-square-foot build to suit with IDI.

Industrial challenges include the city’s onerous, albeit improving, payment-in-lieu-of-taxes (PILOT) program. Memphis also has a very high turnover rate in its workforce, with 10.2 percent of the city’s employment in transportation, warehouse and logistics. Memphis suffers from relatively high corporate taxes and demographics for direct-to-consumer businesses as well.

On the office front, Kelly Truitt of CB Richard Ellis Memphis said vacancy rates, both nationally and in Memphis, are down.

“From an occupancy standpoint and, conversely, a vacancy standpoint, Memphis is little bit higher than our comparative cities,” Truitt said. “We got down to about 12 percent when things were really good and we’re back up to 14, and we’d really like to be down below 11 percent.”

Average office asking lease rates in Memphis during the third quarter were $18.

“If we look at our rental rates across the last 10 years in Memphis, we haven’t really seen any growth,” Truitt said. “Landlords, back when you could get good financing, were really covering themselves on refinancing, and then in the last few years, it’s all been about controlling operating expenses.”

Truitt predicted office trends in the road ahead to include: “concerning” sublease inventory with many leases about to roll into local statistics; construction to start of at least one speculative medical health care office building in the suburban submarket; International Paper to increase its presence in Memphis, including construction of a new build-to-suit building; Raymond James Financial Services Inc. to extend its lease at 50 N. Front St.; FedEx to hold off on building in the short term and absorb existing space; and Accredo/Express Script to remain here, focused on high touch/value-added pharmacy.

Meanwhile, Shawn Massey with The Shopping Center Group LLC focused on “the new normal” of the retail sector. Memphis’ retail vacancy decreased to 9.1 percent in the third quarter, and the net absorption rate is positive with 357,116 square feet. New construction starts total 302,413 square feet in the past four quarters.

Memphis lost a few retailers in recent times, such as Easy Way’s original Downtown store, Super D, Schnucks and several locations of Perkins & Marie Callendar’s LLC and Back Yard Burgers.

However, a handful of gains offset the losses. New retailers to enter the market include Chipotle, Pie-ology Pizzeria, Mellow Mushroom, Planet Fitness, ULTA Beauty, HomeGoods, Yogurt Mountain, Panda Express, Cheddar’s and Bar Louie.

Expansions are also prevalent, as evidenced by Michael’s, Essex Bargain Hunt, Gigi’s Cupcakes, Dixie Queen, Dunkin’ Donuts, Five Guys Burgers and Fries, and Lululemon Athletica.

Dollar stores are gaining grocery momentum as well. Fred’s is no longer considered an inner city store but is setting up shop in the suburbs.

“The channel switching tend means retailers must know, capitalize on competitive strengths,” Massey said.

Future retail trends to watch include either the Memphis Grand Outlets or The Outlet Shops of the Mid-South in Southaven to be repositioned (but not both); Memphis becoming more and more of a “foodie city;” the city’s food desserts to be positively enhanced with programming; high end retailers continuing to locate and expand; and Midtown to gain momentum in the Overton Square, Broad Avenue and Crosstown neighborhoods.

And in the multifamily scene, Jimmy Ringel of Makowsky Ringel Greenberg briefed the crowd on how Memphis’ Class A and B occupancy rates are similar to national levels, but “Memphis likely has a disproportionate share of C and C- properties and much lower occupancy, rent growth and revenue than national levels.”

While it took the multifamily industry about a year and a half to gain momentum after the financial crash, the sector “is going to be stable, steady” moving forward.

“Homeownership, whether it ever was at all, is definitely not seen now as an investment,” Ringel said. “Millennials, in particular, want flexibility and choice.”