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VOL. 6 | NO. 46 | Saturday, November 9, 2013

Commercial Real Estate Market Reawakens

By Amos Maki

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After suffering through a prolonged slump, the Memphis commercial real estate market this year began to shake off the rust that gathered during the “Great Recession,” and brighter days could be ahead for the prime markets in the apartment, retail, office and industrial sectors, according to local experts.

Brad Kornegay, president of Colliers International Memphis’ asset services division, says incentives programs are necessary for commercial real estate – and the local economy – to thrive. Kornegay was among the speakers at the 2013 Commercial Real Estate Review & Forecast Nov. 7.

(Andrew J. Breig)

However, to make sure the commercial real estate market continues its rebound, civic and business leaders must maintain a laser focus on job creation.

Those themes emerged during the 2013 Commercial Real Estate Review & Forecast hosted by The Daily News on Thursday, Nov. 7, at the Memphis Brooks Museum of Art.

“The biggest question for Memphis is, ‘Is the city going to do what it takes to lure jobs?’” said Brad Kornegay, president of Colliers International Memphis’ asset services division. “Are we willing to do what it takes to bring (jobs) in? I don’t know.”

Kornegay praised Memphis Mayor A C Wharton Jr. and Shelby County Mayor Mark Luttrell for their economic development efforts but said other elected officials and policymakers must grasp a better understanding of local incentives programs and need to present a more business-friendly posture for the local economy – and commercial real estate – to thrive.

“It’s not that you want to give out incentives. You have to,” said Kornegay. “The concept is that we’re giving all this money away (in incentives). We’re not giving money away because we never had it.”

Kornegay has watched as DeSoto County has transformed itself from a sleepy, largely rural suburb into a powerful competitor for residents, jobs and investment. New industrial development has been on the rise in North Mississippi for years, while activity inside Memphis has slowed. No speculative industrial space has been built in Memphis since 2007, and 59 percent of all absorption in the Memphis industrial market over the last few years has happened in DeSoto County, Kornegay said.

“That submarket has become the second largest submarket for Memphis, and the crazy thing is that it just started in the early 2000s,” Kornegay said. “We said it would continue to dominate and it has, and we don’t see any reason for that slowing down anytime soon.”

This year, IDI launched an expansion of the 478-acre Crossroads Distribution Center with two new speculative buildings: the 241,000-square-foot Crossroads L building and the 430,212-square-foot Crossroads D building.

Hillwood Investment Properties announced plans for a 514,980-square-foot building at DeSoto Trade Center, and Panattoni Development Co. is building a 554,000-square-foot speculative warehouse in the Marshall County, Miss., portion of the 1,500-acre Gateway Global Logistics Center industrial development.

“I think everybody is preparing for what they hope will occur in 2014,” Kornegay said.

A CB Richard Ellis Memphis third-quarter industrial report said the Memphis market has a chance to end the year with 3 million square feet of absorption, the first time the Memphis market would hit the 3 million-square-foot level since 2008.

On the office side, the overall vacancy rate for the Memphis market increased 1.5 percentage points to 20.1 percent during the third quarter, according to Cushman & Wakefield/Commercial Advisors.

“That’s not good news, but we do have good news coming,” said Wyatt Aiken, executive vice president and chief operating officer of Cushman & Wakefield/Commercial Advisors.

Wright Medical Group plans to move its corporate headquarters to Cherry Road in East Memphis from Arlington. Highwoods Properties is constructing a new office tower for Memphis-based International Paper. National Bankers Trust will move its headquarters to 813 Ridge Lake Blvd. from 8245 Tournament Drive in Southwind.

While the overall office market numbers have not impressed, the city’s most desired office market, East Memphis around Poplar Avenue and Interstate 240, is starting to show strong vital signs. The vacancy rate for what Aiken described as “Class A+” space in six buildings along the Poplar corridor in East Memphis has been cut by more than half, dropping to 7.7 percent in third quarter from its peak of 20 percent in 2010, according to Cushman & Wakefield/Commercial Advisors.

“This is where the really good news is in our office market,” said Aiken. “Those buildings are finally making money again.”

As supply tightens in the highly coveted submarket, real and quoted rental rates should increase. And as occupancy and rental rates rise in East Memphis, some tenants – especially those looking for more than 8,000 square feet of space – may turn to other submarkets, and developers could launch new speculative office space.

In the multifamily sector, overall occupancy through the third quarter was 92.4 percent, up 0.7 percent since year-end 2012 and below national occupancy rates, which hover around 95 percent, according to Blake Pera, executive vice president of CBRE Memphis’ multifamily division.

However, a closer look reveals occupancy rates for properties built in the 1990s and later is between 94.1 percent and 94.7 percent. Pera said the newer Class A locations, mostly in Downtown, Collierville, Germantown and DeSoto County, have been able to rebound much faster than older properties over the last few years and are seeing increased rental rates.

“We have been able to recover over the last few years,” said Pera. “Class A submarkets didn’t get beat up that bad and have really rebounded after the recession.”

Pera said the new supply coming online over the last few years has been orderly and is creating a new upscale tier in the rental market.

“We have a very manageable pipeline going forward,” said Pera. “The ones we’re seeing now are unbelievable, with amenity packages that are just incredible.”

On the retail side, the Memphis-area retail market closed the third quarter with positive absorption of 95,242 square feet, the seventh consecutive quarter of positive absorption for the retail market, according to CBRE Memphis. The market vacancy rate remained relatively stable, dropping 0.1 percent to 13 percent.

Jason Polley, managing leasing director for Stonecrest Investments LLC, said the prime retail submarkets in East Memphis, Germantown, Collierville, Cordova and DeSoto County continue to perform well, while other submarkets struggle.

“We are seeing declines in vacancy rates across many of the submarkets, but it has been uneven,” Polley said. “Vacancy rates will continue to decline, but the rate of improvement will remain uneven.”

The city of Memphis is seeing a bit of retail resurgence in the core city, with Bass Pro Shops’ plan to transform The Pyramid, Loeb Properties’ redevelopment of Overton Square, The Fresh Market’s plan to repurpose the Ike’s store on Union Avenue and the proposed transformation of the long-vacant Sears Crosstown building.

Memphis’ suburbs are also experiencing retail growth.

The Shops of Saddle Creek in Germantown will be getting a multimillion-dollar makeover and expansion, and Whole Foods Market has submitted plans to the city of Germantown to develop a new store at the southeast corner of Poplar Avenue and Pete Mitchell Road.

In Olive Branch, Malco Theatres Inc. is building a 12-screen movie theater, and Michael Lightman Realty Co. has plans to build a 5,500-square-foot retail building in front of the Malco. In addition, Stonecrest Investments plans to expand its Wedgewood Commons development at the northeast corner of Goodman and Pleasant Hill roads.

“The retailers are always going to follow those rooftops,” Polley said.

PROPERTY SALES 59 59 4,335
MORTGAGES 48 48 4,862
BUILDING PERMITS 100 100 10,251
BANKRUPTCIES 45 45 3,194