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VOL. 8 | NO. 10 | Saturday, February 28, 2015

Real Estate Pros Upbeat

Strong 2014 points to healthier commercial market this year

By Amos Maki

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After finally latching on to the broader national economic recovery in 2013, the Memphis-area commercial real estate market shook of the last vestiges of the Great Recession and roared back to life in 2014 with the office, retail, industrial and apartment sectors all producing solid gains.

Real estate leaders will explain what propelled last year’s growth and offer their thoughts on 2015 during the 12th annual Commercial Property Forecast Summit on Tuesday, March 3, at the Germantown Performing Arts Center. The Memphis Area Association of Realtors Commercial Council presents the program.

Work continues on an additional phase of construction of the South Junction multifamily development on the south end of Downtown.

 (Memphis News/Andrew J. Breig)

Mark Dotzour, chief economist and director of research at Texas A & M University’s Real Estate Center, will be this year’s keynote speaker. Dexter Muller, senior vice president of community development at the Greater Memphis Chamber, will give an overview of the regional economy and economic development conditions while Terry Lynch of Southtown Realty Corp. will discuss Downtown.

Bob Turner, president of the MAAR Commercial Council, said the combination of a national expert and well-respected local presenters will provide the audience with a comprehensive view of the market.

“There’s really something here for everybody involved in the Memphis community, information and knowledge that is very helpful,” Turner said.

Office market has best year since 2011

On the office side, the Memphis market ended 2014 with a cumulative 129,493 square feet of absorption, the highest annual total since 2011, according to CB Richard Ellis Memphis. Driven by demand for Class A space in East Memphis and strong activity in Midtown, the overall vacancy rate for the Memphis market dropped 0.3 percentage points to 13.7 percent.

The vacancy rate for Class A space in East Memphis plummeted from 10 percent at the end of 2013 to 7.1 percent last year, according to Cushman & Wakefield/Commercial Advisors. There are only one or two Class A buildings in the East Memphis submarket that can accommodate a user greater than 10,000 square feet and only a handful that can accommodate a user greater than 5,000 square feet.

And if you’re looking for space in the six office buildings along the Poplar Avenue corridor that are considered “A+,” good luck. The vacancy rate in those buildings has been virtually erased from a peak of 20 percent in 2010 to 1.5 percent today.

As the East Memphis submarket continues to tighten, developers such as Boyle Investment Co. could seize the opportunity to build a new office building while users could begin to look at other submarkets, such as the Tenn. 385 corridor, or at Class B properties near the Poplar.

“The fact that there is literally no Class A or ‘A+’ means once they get pre-leasing done, Boyle will break ground on a new building,” said Frazier Baker of Colliers International Memphis, who will address the office market at the forecast summit. “The East Memphis Class A market is tight and what that will do is push rates in those properties up, but there is still a lot of Class B and Class C space in the East Memphis market and I think there’s an opportunity there for those landlords.”

Industrial gains 4.2 million square feet

On the industrial side, metro Memphis recorded 4.2 million square feet of absorption, the fourth highest level on record and the highest since 2006, according to Cushman & Wakefield/Commercial Advisors.

Every submarket recorded positive absorption for the year; the Southeast submarket led the way with 2.2 million square feet. Class B product in the Southeast saw the most activity, with 1.6 million square feet of positive absorption.

The year’s totals were fueled by an unusually strong fourth quarter, when a bevy of large, game-changing deals were finalized. The Memphis market recorded 2.5 million square feet of absorption in the fourth quarter, the sixth consecutive quarter of positive net absorption, according to CBRE. The lack of significant move outs also contributed to the strong absorption levels.

“If we continue our strong pipeline – we’re tracking around 11 million square feet of requirements right now – and if current deals come through, we’ll keep the trajectory headed upward toward another record-breaking year,” said Patrick Walton of Cushman & Wakefield/Commercial Advisors, the event’s industrial market presenter. “On the flip side, if our pipeline halts with the 3 million square feet of speculative development going up we could see our vacancy rate jump significantly.”

Grocers fuel retail sector

Fueled in part by strong grocery-related activity, the Memphis retail sector recorded 202,000 square feet of absorption in 2014.

Sprouts Farmers Market began redeveloping two shuttered grocery stores in Germantown and Lakeland as it entered the Memphis market, the first new grocery chain to enter the area in several years.

Market leader Kroger continued to invest heavily in the Memphis area. Whole Foods completed the renovation of its East Memphis store and began construction on a new store in Germantown while the Fresh Market opened its Midtown store on Union Avenue.

“It was an unusually high year of activity from the grocery standpoint but they’re seeing Memphis as a pretty deep market and they’re trying to capture market share,” said Frank Dyer III of Loeb Realty Group, who will address the retail market.

The year also saw several new retailers enter the Memphis market or announce plans for an area presence. Texas-based retailer Conn’s Appliances inked leases for two Memphis locations. LA Fitness, the California-based fitness chain, launched two new facilities in the market and a third is on the way.

In a major announcement that included a City Hall press conference, Swedish furniture retailer Ikea announced plans to build one of its destination stores on a 42-acre site near Interstate 40 and Germantown Parkway.

Multifamily records higher rent, occupancy

The multifamily segment ended 2014 on a high note, with rents and occupancy realizing gains.

Overall occupancy for 2014 was 92.5 percent, up 10 basis points from 2013, according to CBRE.

Street rents increased 0.5 percent, reaching $772 per month for the overall Memphis market. Product delivered in the 2000s showed the strongest gains, with an increase of 2.5 percent, or $23.

New construction increased 23 percent from 2013 to 2014, with 799 units delivered during the year.

Looking ahead, Downtown should continue to perform well as millennials and young professionals continue their march to the area, said Martin Edwards of Edwards Management Inc. Realtors, who will address the multifamily market.

“Of the 17 new complexes planned or underway in 2015 or 2016, about half of them are Downtown,” said Edwards. “Millennials are not buying homes. They’re getting married later and having children later. They want availability, they want to be where the action is, they want to be where other millennials are and they want to move quickly.”

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RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 69 69 2,404
MORTGAGES 83 83 2,977
FORECLOSURE NOTICES 0 0 477
BUILDING PERMITS 97 97 5,100
BANKRUPTCIES 44 44 1,823
BUSINESS LICENSES 26 26 922
UTILITY CONNECTIONS 29 29 1,041
MARRIAGE LICENSES 13 13 356

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