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VOL. 7 | NO. 45 | Saturday, November 1, 2014

Real Estate Rally

Memphis metro’s commercial market shows improvement

By Amos Maki

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Commercial real estate can offer insight into the strength of the local economy. Through the office, retail, industrial and apartment developments that mark the region the economy at work in the real world can be seen.

And like the Memphis area’s unemployment rate, which has shown improvement but lags behind the national rate, local commercial real estate continued to show strong signs that a rebound, although it might be smaller and slower than in other large metropolitan areas, was underway, according to third quarter reports and interviews with local brokers.

“We’re not setting the world on fire but we all feel more comfortable than we have in the last five years,” said Bob Turner, co-founder of Southern Properties and president-elect of the Memphis Area Association of Realtors Commercial Council. “Everybody has adjusted to where we are now and we just have to get better at what we’re doing.”

FedEx Trade Networks is preparing to move into a 22,000-square-foot space at the Primacy II office building in East Memphis.

(Memphis News/Andrew J. Breig)

Office Space

FedEx Trade Networks is preparing to move into a 22,000-square-foot space at the Primacy II office building in East Memphis, a lease it inked during the third quarter.

Located at 6055 Primacy Parkway near Ridgeway Road, just off the Poplar Avenue corridor, the 129,104-square-foot office building was acquired by Southland Primacy LLC in February for $4.6 million.

Southland Primacy LLC launched an extensive makeover of the grounds and interior common areas of the building, spending millions to shine up an asset that was poised to benefit from the tightness of Class A space along the Poplar Avenue corridor.

The FedEx Trade Networks lease and the repurposing of Primacy II are trends that have marked the office market this year, ones that look to continue into next year.

Class B buildings in prime locations increasingly have a chance to snare tenants and see rental rate improvement because the highly-coveted Class A space around Poplar and Interstate 240 in East Memphis is so scarce.

“I look at that as a really good case study on where things are going with local real estate and where there’s opportunity,” said Ron Kastner of CB Richard Ellis Memphis, who represented Southland Primacy in the FedEx Trade Networks lease. “Well-located ‘B’ buildings in ‘A’ locations are having a really good time right now.”

Occupancy of Primacy II now stands at 78 percent, up from 48 percent when the property was acquired earlier this year.

Availability in Class A office space in the Memphis market is scarce, meaning more opportunities for well-positioned Class B space.

(Memphis News/Andrew J. Breig)

The vacancy rate for Class A space in East Memphis ended the third quarter at 2.9 percent, according to CBRE Memphis. East Memphis saw 68,918 square feet of Class B absorption in the third quarter, by far the most in any submarket. And the vacancy rate for Class B space in East Memphis dipped to 13.7 percent, a level it hasn’t dropped below since 2010, when it hit 12.7 percent.

The top three office leases in the third quarter all occurred in Class B buildings just off the Poplar Avenue corridor, according to Cushman & Wakefield/ Commercial Advisors.

There is only one Class A building with 13,000 square feet of contiguous space in the East Memphis market and with no new Class A buildings on the horizon just yet, Class B options for tenants and investors should remain attractive, said Phil Dagastino Jr. of Cushman & Wakefield/ Commercial Advisors.

“With Class A tightening up, there are a lot of options in Class B if you’re a user,” said Dagastino Jr., who is representing Lone Star Funds in the leasing of the Lakecrest office building at 6060 Primacy Parkway, a Class B building it acquired earlier this year for $6.9 million. “And if you’re an owner and your building is positioned properly in that area, you’ve got a real opportunity.”

During the quarter, FedEx, the Memphis area’s largest private employer, gave back 75,000 square feet it occupied at the Lenox Park complex and announced it would not renew an 11,000-square-foot lease at the Renaissance Center that expired Oct. 1.

Despite the loss of the Lenox Park space, which contributed to the market starting the third quarter with a loss of 105,000 square feet, negative absorption for the quarter was only around 8,000 square feet. The market was largely able to recover thanks to a sizeable number of smaller deals, usually small- to medium-sized local businesses looking for 2,500 square feet to 5,000 square feet, a sign of confidence in the local economy.

“That’s typically your local companies, local decision makers, which have historically been the lifeblood of the Memphis market, and that’s positive to see,” said Kastner. “What that is telling me is it’s no longer duck-and-cover. These companies have come through the recession, retrenched and now they feel more confident about making these decisions.”

While East Memphis garners most of the office headlines, Downtown should not be overlooked. Downtown ended the quarter with 8,660 square feet of absorption, the fifth consecutive quarter Downtown has garnered positive absorption, according to CBRE Memphis.

Steve Guinn of Highwoods Properties said the city and county need more new white-collar employers to really ignite the office market, including the development of a new Class A building.

“There’s enough activity in the market potentially for an announcement to happen relative to another building but the thing we have to work on is attracting new businesses here,” said Guinn, adding that a reduction in property taxes could help attract investment. “I think you’ve got to stimulate activity and that people react to economic stimulus, whatever it may be. That’s going to take some severe, significant surgery and I just don’t see that happening in any major way. There’s no short-term answer to it.”

Going to the Store

Grocery store activity, particularly with higher-end, organic-focused chains, sprouted again in the third quarter.

Sprouts Farmers Market began redeveloping two shuttered grocery store locations – the former Kroger at 9050 U.S. 64 in Lakeland and the former Schnucks at The Shops of Forest Hill in Germantown – as it enters the Memphis market, the first new grocery chain to enter the area in several years.

The new Fresh Market grocery store on Union Avenue is just one of several grocery projects.

(Memphis News/Andrew J. Breig)

In August, Fresh Market opened its Union Avenue store in Midtown and construction of a new Whole Foods store at Poplar Avenue and Pete Mitchell Road in Germantown is now underway. Whole Foods earlier this year completed the redesign and expansion of its East Memphis store.

“Grocery has been something that has been hot in other markets and it is finally hitting Memphis,” said Shawn Massey of The Shopping Center Group LLC. “The people at Sprouts saw an opportunity to come into the market and Whole Foods said we can expand our East Memphis store and build out our new store design in Germantown and they are looking for more locations.”

In addition, Cash Saver took over the closed Kroger store on Thomas Street in Frayser.

The retail market ended the third quarter with 44,822 square feet of absorption, the third consecutive quarter of positive net absorption.

Looking ahead, Massey said the Memphis area needs more new retail product to handle leasing demand. No new product was delivered in the third quarter.

“I could probably do 15 more restaurant deals if we had more space,” he said. “We just don’t have much space and there’s not a lot of new space coming on line, although some is planned.”

All in the (Multi)family

The multifamily sector in the Memphis area is heating up, with rents, occupancy and absorption up overall.

The multifamily sector is heating up with rents, occupancy and absorption all up overall in the market.

(Memphis News File/Lance Murphey)

“Fundamentals in the multifamily sector of Memphis remain strong and are improving in most areas,” said Blake Pera of CBRE Memphis.

After a slow start, sales activity gained steam in the second and third quarters. With nearly $231 million in deals closing through September and an additional $107 million closing so far in October, the Memphis market has already blown past last year’s total of $277 million.

“Sales in the market started off slow, but we expected a busy summer and that certainly turned out to be true,” said Pera.

Pera said the owners of older multifamily stock in sought-after locations – Downtown, DeSoto County, Cordova, Germantown and Collierville – could benefit from making upgrades.

“Value-add repositioning is something that has been well received in the stronger submarkets of Memphis,” said Pera. “A number of properties have been able to reposition themselves by offering updated unit interiors and/or through amenity upgrades.”

Big Bombers

The industrial market so far has continued the upswing that started occurring in 2012 and could top last year’s level of around 3.2 million square feet of absorption.

The industrial market has continued an upswing that began in 2012 and could top last year's level.

(Memphis News File/Lance Murphey)

Net absorption for the third quarter was 904,499 square feet – the fifth consecutive quarter for positive net absorption – and the vacancy rate dipped to 10.1 percent, according to CBRE Memphis.

“For the year, that puts us at a little over 2.7 million square feet of absorption,” said Jim Mercer of CBRE Memphis. “Can we hit 5 million? I don’t know, but I think we can beat last year’s 3.2 million. We could end the year below a 10 percent vacancy rate and I don’t remember the last time we were below 10 percent.”

And, like the office market, smaller deals and transactions for Class B space are helping lift the overall market, especially in Memphis, which has more of that product type.

Through September, leasing activity for Class B buildings was 6.7 million square feet, up 26 percent from 2013, according to Cushman & Wakefield/ Commercial Advisors. During the third quarter, all but two lease transactions were requirements less than 200,000 square feet. The average lease transaction in the quarter was 60,000 square feet and Class B buildings made up 43 percent of the total transactions in the quarter and 46 percent for the year through September.

“There’s a ton of activity in that range and that’s good for Memphis proper,” said Kemp Conrad of Cushman & Wakefield/Commercial Advisors. “Of course, we look at this regionally but when you look at where the inventory is, Memphis has a lot more of that inventory than the major competing submarket, which is DeSoto County.”

Big box developers and tenants still clearly prefer Northwest Mississippi.

No new speculative industrial building has been built in Memphis since 2008 and deliveries and construction continue in DeSoto and Marshall counties.

Industrial Developments International delivered an 861,252-square-foot building at Crossroads Distribution Center and Panattoni Development Co. broke ground on a 554,000-square-foot building, which is expandable to 1.1 million square feet, at Gateway Global Logistics Center.

Looking forward, three companies – FedEx Supply Chain Services Inc., Benchmark Education Co. and ACS Clothing Limited – recently received tax incentives from Memphis and Shelby County and users are looking for around 10 million square feet of industrial space in the market.

Conrad said the Memphis market could benefit from two trends: Companies seeking a single national distribution center and large distributors moving into secondary markets.

“If the stars align, the fourth quarter may be as high flying as Bo and Luke Duke’s General Lee when being chased by Sheriff Rosco P. Coltrane, Enos and Boss Hog,” said Conrad, referring to the “Dukes of Hazzard.” “And we are due for a barn-busting quarter.”

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RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 128 183 20,949
MORTGAGES 130 174 24,535
FORECLOSURE NOTICES 4 27 8,637
BUILDING PERMITS 163 359 42,696
BANKRUPTCIES 61 116 14,018
BUSINESS LICENSES 24 46 6,447
UTILITY CONNECTIONS 29 85 13,596
MARRIAGE LICENSES 24 47 5,116

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