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VOL. 6 | NO. 34 | Saturday, August 17, 2013

Industrial Revolution

Memphis brokers clamor for city to match DeSoto’s speculative success

By Amos Maki

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It’s a striking figure for some commercial real estate experts.

Industrial Developments International has begun an expansion of the 478-acre Crossroads industrial park in Olive Branch to meet growing demand in North Mississippi.

(Memphis News/Andrew J. Breig)

No speculative industrial space – meaning constructed without a tenant in hand – has been built in the city of Memphis over the last four years, while 4 million square feet of speculative industrial space has been built, or is under construction, in DeSoto County.

“The number of developers building speculative distribution space has been nonexistent in Memphis,” said Kemp Conrad, principal with commercial real estate firm Commercial Advisors/Cushman & Wakefield.

Conrad and other local business leaders say Memphis’ high property tax rate and the process for obtaining incentives, although improved under the Economic Development Growth Engine of Memphis and Shelby County, have put the proverbial lid on speculative industrial development in Memphis.

It may be time, they say, for local officials to consider a pre-development tax freeze program to spur speculative development, which they say would lead to increased capital investment, higher tax revenues and more jobs.

“A lot of it is driven by the tax rate here in Memphis,” Conrad said. “The carrying rate for that tax cost is quite high, especially when compared with North Mississippi. When you’re talking about industrial real estate, a nickel or a dime can cost a lot”

Industrial Developments International Inc. has been the most active industrial developer in the Memphis market following the recession. And the Memphis market, which includes DeSoto County, has been IDI’s busiest market company-wide in 2012 and 2013.

But all of IDI’s activity has been focused on DeSoto County while the company’s 130-acre site at Holmes and Tchulahoma roads in Memphis the company bought in 2005 remains undeveloped.

IDI recently signed a 500,000-square-foot lease at Crossroads Building G. IDI inked two large leases in the first quarter totaling 788,148 square feet. Trane U.S. Inc. renewed its 373,644-square-foot lease at the Stateline H facility while the TJX Cos. Inc. signed a new 414,504-square-foot lease at Chickasaw D.

IDI has begun an expansion of the 478-acre Crossroads to meet growing demand. Building L, slated to be 241,994 square feet with an October completion date, broke ground in June. Building D, scheduled to be 241,920 square feet and delivered in November, also broke ground in June. Including the two new buildings, Crossroads contains seven buildings totaling 3.2 million square feet.

IDI vice president of leasing Tim Moore said a combination of factors – including the ease of doing business in DeSoto County, the reliability of incentives and a ready workforce – has caused IDI to focus on DeSoto County.

“If there’s a perceived risk of not getting those incentives, we’re going to be more reluctant to make that capital investment where we think the risk of not getting the incentives is higher,” Moore said. “And there is the availability of large tracts of land that have drawn developers to the Southeast, which just happens to cross the state line at DeSoto County, where you have the labor ability. I think those two things really combine for the majority of the reason you’re seeing all the development in DeSoto County.”

The payment-in-lieu-of-taxes (PILOT) program administered by EDGE includes a scoring matrix that grades projects on capital investment, the number of jobs created, wages and other factors. Companies seeking PILOTs must get approval for the tax freezes from the EDGE board and transfer the title of the property over to the Industrial Development Board. The entire process can take weeks or longer.

“The North Mississippi process is very streamlined,” Moore said. “It’s a two-step process for the most part. They’re very accommodating.”

Conrad said that while investors generally don’t care where their capital is flowing – North Mississippi or Memphis – and that development in DeSoto County is still positive because it is part of greater Memphis, the lack of development in Memphis should be a red flag for policymakers.

“From a political perspective, people are typically going to want to live close to where their job is, so if jobs are going to another municipality people are going to live there and spend money there,” Conrad said. “From a policymaker standpoint, you’d rather them be here.”

Long-term, Conrad said the city must get a much better control on costs and reduce property taxes to spur development inside the city’s limits.

“We have to have the PILOT program because our taxes are so high,” he said. “If our property taxes weren’t so high we wouldn’t have to do as many PILOTs.”

In the short-term, Conrad believes it is time to consider implementing a pre-development PILOT to encourage developers to build speculative space in Memphis. The current PILOT program awards tax freezes to companies that want to be tenants in an industrial building. The pre-development PILOT would be applied to the undeveloped land, lowering costs for the developer and tenants.

Even with a PILOT, the developed land would produce more revenue for the city than vacant, undeveloped land.

“Developed with tax incentive, it would produce much more revenue than land sitting there fallow,” Conrad said.

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