'En Fuego'

Retail, industrial activity heat up Memphis' commercial real estate

By Amos Maki

When Southaven Mayor Darren Musselwhite took office in June 2013, one of the first tasks that landed on his desk was a long-planned regional outlet mall.

The outlet mall, planned for a roughly 33-acre site at Church Road and Interstate 55 in the DeSoto County city, had been on the drawing board for some time, but the recession and its aftermath caused developers and Mississippi officials to put it on hold.

“I would describe it as a great opportunity but one that didn’t have legs,” Musselwhite said. “It was a challenge for us, but it was a great opportunity to have early on.”

Today, Tanger Factory Outlet Centers and Memphis-based Poag Shopping Centers are in the midst of building the 310,000-square-foot regional retail destination, which Musselwhite said could produce $3.5 million in new annual sales tax revenue, create 1,000 to 1,500 new jobs and draw visitors from at least six states.

“We expect to have not just your local traffic but we expect it to be regional draw,” said Musselwhite. “We expect people to come to this area specifically to come to the Tanger development.”

PANATTONI (Submitted)

TANGER OUTLET MALL (Memphis News/Andrew J. Breig)

TANGER OUTLET MALL (Memphis News/Andrew J. Breig)

LEGACY PARK (Memphis News/Andrew J. Breig)

HIGHLAND ROW (Memphis News/Andrew J. Breig)

HIGHLAND ROW (Memphis News/Andrew J. Breig)

The Tanger outlet mall is part of a wave of retail activity that has washed over the Memphis area in the first half of 2015, making it one of the strongest-performing sectors in local commercial real estate.

Retail: ‘Activity breeds activity’
Retail construction and leasing momentum picked up in the Memphis area in the second quarter as the market closed with net absorption of 134,251 square feet, according to CB Richard Ellis Memphis.

Around 800,000 square feet of retail space is currently under construction in the Memphis area, and another 430,000 square feet is planned or proposed. Of the projects under construction, more than 500,000 square feet is expected to be delivered by the end of 2015.

“The activity is there,” said Shawn Massey of The Shopping Center Group LLC.

“You’ve got a growing economy and you have a lot of retail demand,” Massey said. “Memphis has been off the radar for several years for a few retail concepts, but now it’s back on the radar.”

The Tanger outlet mall, the first large-scale retail development built in the Memphis metropolitan area in several years, is taking shape as other destination retailers have targeted the Memphis area.

Bass Pro Shops opened its destination store at The Pyramid on April 29, making it the largest retail construction delivery since 2008. Swedish furniture giant Ikea is moving forward with plans for a $63 million store near Interstate 40 and Germantown Parkway, and The Cheesecake Factory is opening a restaurant at Wolfchase Galleria in the fall.

Massey said word of those projects has spread like wildfire in the retail community and will help lure additional retail to the area.

“When you have Bass Pro and Ikea, a lot of people say, ‘What’s happening in Memphis? We need to take a look,’” Massey said.

That scenario is already playing out in Southaven.

On the heels of the Tanger development, the Hutton Co. – a large Chattanooga-based development firm – has proposed a 300,000-square-foot retail center at Airways Boulevard and Church Road.

While Goodman Road has been a retail powerhouse in DeSoto County for years, the Tanger and Hutton projects should open a new retail corridor along Church Road, Musselwhite said.

“Obviously, activity breeds activity, and it improves the customer base for the whole area having those developments there,” Musselwhite said. “We expect they will be a spark to get things going in the Church Road area.”

PANATTONI (Submitted)

In the city of Memphis, momentum continues to build in the core city.

In the Midtown area, excitement from recent redevelopments such as Overton Square has increased investor confidence. The success of the dining, retail and entertainment district has caused other Memphis organizations, such as Ballet Memphis, to consider relocating closer to Midtown.

Construction began in the second quarter on Crosstown Concourse, the former Sears regional distribution and mail-order processing center in Midtown. The development team behind the $200 million project is transforming the once-blighted building into a towering urban town center anchored in arts, education, and health and wellness.

In addition, Milhaus and Poag Shopping Centers are currently turning dirt on the Highland Row development on Highland Road near Central Avenue. Highland Row features a mix of residences and commercial space.

Massey said he expects the wave of new retail projects to set off intense interest from national retailers.

“When those boxes come online you’ll see a tremendous amount of growth,” he said.

Industrial: Big boxes – and small ones, too
It’s not just the retail market that appears to be firing on all cylinders. Buoyed by a resurgent economy, the Memphis-area industrial market is poised to have a record-breaking year.

Through the first six months of 2015, cumulative net absorption in the Memphis industrial market hit 4.5 million square feet, surpassing the 2014 yearly total of 4.3 million square feet, according to CBRE Memphis. Net absorption in the Memphis area was 3.4 million square feet in the second quarter alone, almost triple the net absorption from the first quarter, and the eighth consecutive quarter of positive net absorption.

If the current positive leasing activity continues, cumulative net absorption for 2015 will be the highest the market has seen since 2000.

“The market is en fuego,” said Kemp Conrad, principal with Memphis-based Cushman & Wakefield/Commercial Advisors. “There’s a lot of momentum across a wide spectrum of industries, from pharmaceutical and e-commerce to distribution and manufacturing.”

All of that activity has led to historically low vacancy rates, which has allowed some landlords to ask for higher rental rates.

The overall vacancy rate in the Memphis market fell to a record low of 12 percent in the second quarter, down 0.3 percentage points from the first quarter, according to Cushman & Wakefield/Commercial Advisors. Vacancy rates for Class A bulk buildings dropped to 8.3 percent, the lowest they have been in 10 years.

The industrial market is seeing strong activity from both large users and businesses seeking smaller spaces, a strong indicator of broad economic momentum as a variety of companies vie for warehouse and distribution space.

Through the first six months of the year, 10 Class A deals have been completed, totaling 3 million square feet – a significant development considering only 2.2 million square feet of Class A deals were completed in all of 2014. On the flip side, 35 of the 52 leases signed in the second quarter were for less than 50,000 square feet.

“We truly are seeing activity at all levels of the market,” said Jim Mercer, an executive vice president at CBRE Memphis specializing in industrial real estate.

The surge in leasing activity and businesses’ continued strong interest in warehouse and distribution space has led to the first real rental rate growth in the Memphis area in five years. Average asking rents are now at $2.68 per square foot, which is up around 10 cents from the beginning of the year, according to Cushman & Wakefield/Commercial Advisors.

PEABODY PLACE (Memphis News/Andrew J. Breig)

With the vacancy rate tightening up, developers are bringing new product to the market.

About 2.3 million square feet of new construction was delivered in the second quarter. Panattoni Development Co. delivered a 554,040-square-foot speculative building at 39 E. Wingo Road in its Gateway Global Logistics Center in Byhalia, Miss. The speculative building is expandable up to just more than 1 million square feet.

Nike also delivered a 1.7 million-square-foot expansion at 3178 New Frayser Blvd., which, when added to their existing 1.1 million-square-foot facility, makes it one of the largest distribution warehouses in North America.

And Hillwood Investment Properties launched construction on two speculative warehouses totaling nearly 1.1 million square feet at the new Legacy Park development in Olive Branch.

Looking ahead, industrial experts say the new buildings and continued strong economic growth are setting the stage for a record year.

“It feels like we’re seeing a new project name almost every week,” said Andy Cates, partner and vice president of Colliers International Memphis. “I feel really positive about the third and fourth quarters, and I can’t wait to see what happens the rest of year.”

Office: Improving but not stellar
The Memphis area office market, while improving, has not been as robust as industrial and retail markets poised for banner years.

The Memphis area ended the second quarter with negative net absorption of 14,302 square feet, primarily because of long-anticipated movement at the Toyota Center building adjacent to AutoZone Park Downtown.

The Memphis Redbirds vacated round 16,000 square feet in the Toyota Center, and Extra Space Storage vacated 134,200 square feet after moving its headquarters to Salt Lake City. Meanwhile, GTx signed a lease for 26,000 square feet there, while Memphis-based firms LRK Inc. and Sullivan Branding leased about 52,000 square feet between them.

Two of the largest leases for the quarter were signed in the area around Memphis International Airport, a submarket in dire need of new leasing activity. In a move that could create 400 new jobs, Connexion Point leased 28,000 square feet in Nonconnah Corporate Center for a new contact center. The other airport-area lease was courtesy of River City Avionics, which leased 21,250 square feet at Airport Business Park I.

One of the most notable transactions during second quarter was a lease by TruGreen at the Forum II building at 1790 Kirby Parkway. TruGreen leased 65,607 square feet in the Class B building and will be relocating from space it currently shares with its former parent company, ServiceMaster.

Another notable deal that happened this year was the decision by Total Quality Logistics to open a sales office at the 100 Peabody Place building, a move expected to create 100 new office jobs.

Since mid-2014, locally owned small- and medium-sized businesses have contributed to the strength of market activity, and that trend continued in the second quarter. Of the 41 leases signed during the second quarter, 25 were for Class B space in East Memphis, with the majority of those deals for spaces between 1,000 and 4,000 square feet.

“It’s promising to see the smaller tenants, because that size of tenant is a local tenant whose CEO or president or decision maker lives in Memphis, or it’s a regional office for a national company that is expanding,” said Ron Kastner, a senior vice president at CBRE Memphis specializing in office real estate. “That is our lifeblood.”

While smaller users have so far dominated the market, Kastner said he is seeing interest from larger users that would be new to Memphis.

“We’re tracking them and we’re showing space to larger national companies that would be new to Memphis,” Kastner said.

“I feel pretty encouraged that by year end, one or two of those companies will select Memphis. But in the meantime, it’s encouraging to see the medium and small companies are there and solid.”