VOL. 7 | NO. 35 | Saturday, August 23, 2014
EMPHASIS Commercial Real Estate
Memphis Multifamily Sector on Firm Ground
By Amos Maki
It was 2008 and Memphis-based Makowsky Ringel Greenberg had just acquired a swath of property inside Boyle Investment Co.’s master planned Schilling Farms community in Collierville for a new multifamily development.
South Junction is under construction, one sign of the city’s healthy multifamily market, especially in the Downtown sector.
(Memphis News/Andrew J. Breig)
Then the housing market crashed and the recession tightened its grip on the economy, delaying MRG’s launch of The Signature at Schilling Farms.
But that seems like a distant memory now, and MRG just opened the first of 25 apartment buildings at The Signature, which will contain a total of 250 units, for occupancy. Demand was so intense that 25 units were acquired sight unseen.
“We held onto the land and just shelved the project for about three-and-a-half years,” said MRG principal Jimmy Ringel. “When we broke ground last year we were hoping we would be well received and we were happily surprised by the amount of traffic we’ve got sight unseen.”
The multifamily market in the Memphis area – particularly the newer product in prime locations – is on firm ground, with rents and occupancy levels holding steady.
“The rental market in Memphis continues to move in a positive direction,” said Blake Pera of CB Richard Ellis Memphis. “Occupancies have increased compared to the previous quarter, as has rents in most locations.”
Overall occupancy for the Memphis market was 92.3 percent in the second quarter, up from around 91 percent in the first quarter. Occupancy for Class A and Class B properties weighed in at 93.7 percent in the quarter. Through the first half of the year absorption was 685 units, up from 248 units in the first quarter. Average market rents increased 0.8 percent to $765.
“Class C properties, and especially those not well maintained, tend to drag down the overall occupancy levels of the overall market,” Pera said. “If you drill down to Class A and even Class B product, you will find performance levels comparable to other peer markets.”
While the recession and its aftermath took a heavy toll on other commercial real estate sectors, the multifamily market overall performed solidly. Consumers increasingly turned toward apartments as the credit markets froze and lending standards became more stringent.
“Fundamentals at most properties in multifamily in Memphis did not change greatly during the recession, at least in the stronger locations,” Pera said. “As homebuying became more difficult, rental product became the preferred housing type. Qualifying for apartments became somewhat of an issue for renters who may have lost their homes, as credit usually took a hit during the recession.”
The more stable communities and neighborhoods in the Memphis market – such as Downtown and suburbs like Collierville – are performing well while lower in class properties in struggling neighborhoods have not fared as well.
“The market is stable,” Ringel said. “It’s always been a tale of different parts of town and a tale of different properties. “I think you can draw a line in the sand and say anything built in the mid-1980s and after is performing very well. The older properties in some parts of town – Parkway Village, North Memphis and Whitehaven – can be difficult. It’s harder to perform in those markets than it used to be.”
Through the second quarter, 467 units were brought online and an additional 693 units should be brought online by the end of the year. All of those units are coming online in Germantown, Collierville, Downtown and Cordova.
There could be opportunities now for the owners of older properties in or near prime locations to make upgrades to attract renters or potential investors.
“There certainly has been increased interest in well-located, older properties in this cycle,” Pera said. “Properties receiving upgrades are enticing to renters and the properties are able to command a premium rent depending on finish-outs.”
Through the first half of the year 17 sales totaling 2,431 and $104 million were recorded, down from 4,427 units and $171 million over the same period last year. However, CBRE Memphis expects 2014 to meet or exceed 2013 levels because of “investor demand an opportunities available in the market.”
Ringel believes Midtown will experience a surge in new renter interest due to the increased investment happening in the neighborhood.
“We see an influx of new demand in Midtown,” Ringel said. “In Midtown we’re used to seeing renters move from one area, or one location, in Midtown to another. What our people on the ground are telling us is that they are seeing people who are not Midtowners show interest in Midtown.”
Ringel and Pera also said they expect the growth of multifamily housing in Downtown to continue and don’t see any sign of an apartment bubble developing there. Henry Turley Co. is kicking off more units near its South Junction community in the South Main Historic Arts District.
“The Downtown market is still very hot and I don’t really see an end to that,” Ringel said. “I’ve yet to see a developer build Downtown who has had trouble.”