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VOL. 8 | NO. 45 | Saturday, October 31, 2015

Office, Industrial Real Estate Enjoy Strong Third Quarter

By Madeline Faber

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Memphis’ industrial and office sectors are seeing healthy activity, and some areas are experiencing record fundamentals.

Less than 8,500 square feet remains in the 338,000-square-foot Crescent Center, owned by Highwoods Properties. The office and industrial sectors both experienced a strong third quarter.

(Memphis News/Andrew J. Breig)

At the Crescent Center building in East Memphis, prices per square foot have reached $30.50, a level that hasn’t been seen before in the Memphis market.

Steve Guinn, vice president at Highwoods Properties, expects these rates to hold steady, if not increase, barring an economic pitfall.

“We have very little space in the building and very little rolling over,” Guinn said.

Only 8,457 square feet remains in the 338,000-square-foot Crescent Center, and the outlook is similar at two other Highwoods properties, Triad III building and International Place Tower II.

With rates so high, Class A space at 99 percent occupancy and no new construction on the horizon, Class B properties are seeing a boost.

Average rental rates are now at $18.20 per square foot, the highest level since 2010, after increasing over the last 10 quarters. The third quarter’s top three lease transactions all exceeded 20,000 square feet, and all three of them occurred in Class B buildings, according to data from Cushman & Wakefield/Commercial Advisors.

And of the top 10 deals in the quarter, half of the leases were signed for Class B space in the East Memphis submarket. Those deals accounted for more than 80,000 square feet, according to CB Richard Ellis data.

“It’s really all boats rising,” said John Mercer, director of leasing for Highwoods.

“We are seeing more inbound office business in the last six months than we've probably seen in the last five years,” said Kelly Truitt, executive vice president with CB Richard Ellis Memphis.

“Now, it's all inquiries right now. But that's where it starts.

“Most of the activity is internal, but we are seeing more inquiries from out of town.”

Rate growth should strengthen out-of-town interest in the Memphis market.

Steve Guinn, Tony Argiro and John Mercer of Highwoods Properties.

(Courtesy of Highwoods Properties)

“Probably, the yields are higher here meaning the returns are better,” said Guinn. “It’s a second-tier market, and a lot of the first-tier markets are really getting quite expensive, so I think the values probably look better form a nationwide perspective here than they would in Atlanta or Dallas or some of the gateway markets on some of the East or West coasts.”

On the industrial side, vacancy dropped to 11.1 percent in the third quarter, the lowest level recorded in market history. Four out of the six submarkets are seeing increased absorption with vacancy in the Southeast submarket dropping dramatically from 15.8 percent at the beginning of 2014 to 9.9 percent in the third quarter of 2015.

Through the end of the third quarter, 2015 saw 18 Class A deals total 5.4 million square feet. Last year saw only three Class A deals, which collectively totaled 2.1 million square feet, according to Cushman & Wakefield/Commercial Advisors.

“It's easy to read the headlines and talk about Class A deals, but I think with the amount of activity going on in Class A and no more inventory coming on as well, the Class B market this year will now have three straight years of positive absorption,” said Patrick Walton, vice president with C&W/CA. “The stats of Class B are also impressive, and they're really showing the overall strength of the Memphis industrial market.”

Walton, along with C&W/CA vice president Kemp Conrad, represented building owner Panattoni Development Co. in the largest industrial lease of the year: TJX Cos. at the Memphis Oaks III warehouse.

“This significant 800,000-square-foot lease with a stellar Fortune 500 company is an example of the fuel that is powering the record industrial year we are having in the Memphis region,” Walton said.

“In addition to 3PLs (third-party logistics) and retailers, we are starting to see more e-commerce companies considering Memphis,” said Patrick Burke, senior vice president with CBRE Memphis.

While there is limited available spec space in Memphis, new construction is coming down the pipeline with an estimated 1.5 million square feet to be delivered in DeSoto and Marshall counties before the end of the year.

Projected 2015 deliveries are expected to total more than 4 million square feet, which will be the highest level since 2005.

“Rates will likely continue to increase for Class A space as availability tightens,” Burke said. “Activity should remain strong for next year as there are several large tenants looking around at existing space and build to suits.”

PROPERTY SALES 23 23 1,365
MORTGAGES 21 21 1,068
BUILDING PERMITS 117 117 3,173