VOL. 9 | NO. 15 | Saturday, April 9, 2016
By Madeline Faber
The Memphis development community is looking inward and upward to increase density in the urban core. New construction is happening across all four commercial real estate sectors, with long-anticipated projects like Trader Joe’s and the redevelopment of Central Station finally coming to fruition. Construction and operating costs continue to be a challenge as new projects hit the top of their class to command higher rents.
Retail Riding 2015 Momentum
The Memphis retail market is reaping the rewards of one of its biggest years for construction deliveries. Bass Pro Shops and Tanger Factory Outlets contributed to a total net absorption of 460,024 square feet in 2015, the largest year of construction deliveries since 2000, according to data from CB Richard Ellis Memphis. 2016 is looking to be another major year.
Construction is finally underway at Ikea’s 271,000-square-foot store in Cordova. The fall 2016 opening will cap more than two years of discussions and red tape that delayed the project. The Memphis-Shelby County Economic Development Growth Engine tailor-made a tax incentive to secure the furniture store.
Two exits west on Interstate 40, the walls are up on the Wal-Mart supercenter at 6790 Raleigh Lagrange Road. The Bentonville, Ark.-based retailer paid nearly $4 million in 2014 to assemble multiple properties northwest of the Whitten Road exit off I-40. The new supercenter will be the company’s sixth inside the city of Memphis.
Trader Joe’s in Germantown marks another long-awaited development. The specialty grocery store is set to open in the third quarter at the northeast corner of Poplar Avenue and Exeter Road.
Trader Joe’s will be built ground-up as an outparcel on the parking lot of the former Kroger at 2130 Exeter Road. Trader Joe’s will occupy 12,500 square feet of the new 19,500-square-foot building, with the remaining space going to undisclosed tenants.
The Kroger building’s footprint will be reduced from 61,332 square feet to 46,500 square feet and split into three retail bays to promote infill development.
The Trader Joe’s development is in line with a trend of repurposing big-box stores and surface parking to densify key retail corridors, like Poplar Avenue.
Within the next two years, the prized retail stretch of Poplar between Perkins Road and Interstate 240 will see an unprecedented amount of vacant space.
This year, the new ownership group of the Sears at 4570 Poplar Ave. plans to raze the three-story building. In 2017, it will open a new 135,000-square-foot shopping center in the heart of the Laurelwood Shopping Center. Nordstrom Rack and Ulta have been named as tenants, and more announcements are expected.
“This will be a great development at a great intersection within the core of the city,” said Carson Claybrook, vice president with Cushman & Wakefield/Commercial Advisors. “As class A retail space inventory continues to dry up, we will see more adaptive reuse of properties like this that aren’t being used for their highest and best use.”
The Kroger store at Poplar and South Perkins Road closed in late March, and a significant, still-unnamed tenant in the Eastgate Shopping Center is also set to close, opening up valuable retail space in a traditionally tight trade corridor.
Mixed-Use Becoming Buzzword
Thinking outside the box carries retail over to the multifamily sector, where mixed-use projects define Memphis’ construction boom.
Mixed-use typically means retail on the ground floor with multifamily and possibly office use in the upper floors. The building technique defines denser cities, and it’s coming to Memphis in a big way with Crosstown Concourse, Highland Row, Central Station and Midtown Market leading the mixed-use wave.
Jimmy Ringel, chief operating officer of Makowsky Ringel Greenberg, said Crosstown Concourse is unlike anything Memphis has seen before because of its scale and structure.
The 1.1 million-square-foot former Sears Tower will be mixed with commercial tenants, master-leased apartments for many of the tenants and conventional apartments for other residents. When Crosstown Concourse opens in 2017, the 270 apartment units will be part of a building unlike any other, with residents cohabitating with major Memphis organizations such as the Church Health Center and St. Jude Children’s Research Hospital.
“The effect this development will have is, literally transforming an entire neighborhood with thousands of people converging on this spot on a daily basis,” Ringel said.
The mixed-use Highland Row development near the University of Memphis includes 354 apartments, 35 townhomes, 32,000 square feet of retail and a 511-space parking garage. The first round of apartments will be delivered in the spring, with full completion slated for later in the year.
“This development along the Highland Strip continues a trend of new development in the University District,” Ringel said. “However, whereas developments such as The Stratum and The Gather have been strictly multipurpose, student-built housing, Highland Row is a conventional property with high rents aiming at a broader audience than just students.”
Multifamily housing construction progresses at Central Station Downtown, one of many commercial projects under way across the Memphis metro. (Memphis News/Andrew J. Breig)
Construction is also underway at the $55 million redevelopment of Central Station in South Main Downtown. The functional train station and its surrounding area will house a boutique hotel, restaurants, retail, a seven-screen movie theater and 175 apartments. The movie theater will be the first phase completed, with Malco Theatres Inc. filing a $6.5 million construction permit in March. The rest of the project is expected to be completed in early fall 2017.
Still to come is Belz Enterprises’ project at the corner of Union Avenue and McLean Boulevard. Plans for the Midtown Market include demolishing the blighted Artisan Hotel to make way for a mixed-use building anchored by a gourmet grocery store with 188 apartment units in the upper floors.
Belz has cleared some significant funding and planning hurdles since announcing the project last October, but a groundbreaking date has yet to be scheduled.
Memphis Seeing Smaller Users
Dirt is always moving in the industrial sector, just not in Shelby County.
Memphis hasn’t seen any new speculative industrial construction since 2007, while the area’s most active submarket, DeSoto County, has grown its Class A industrial offerings by more than 6 million square feet.
Brokers and business leaders agree that the Mississippi industrial market is soaring past Memphis because of incentives.
“The reason is because the incentives are better. They're less restrictive,” said Hank Martin, vice president with NAI Saig Co. “The city of Memphis and Shelby County have to figure out a way to remedy that situation. If you look at track record, they have not figured it out yet.”
At EDGE’s March 16 board meeting, the Commercial Real Estate Owners Alliance proposed a “fast track PILOT” program that would mirror North Mississippi’s program. EDGE tabled a discussion on the proposal until its April meeting. If adopted, a streamlined PILOT process would help Memphis compete with the industrial boom just across the state line.
Hillwood Investment Properties is about to wrap construction on two buildings in the Legacy Park development in Olive Branch. One warehouse will be 800,838 square feet and the other will be 293,760 square feet, according to data from CBRE.
At the same time, IDI Gazeley is nearing completion on a 272,400-square-foot building in Southaven and ProLogis is working on a 902,700-square-foot warehouse in Olive Branch.
Panattoni Development Co. is also growing its sprawling Gateway Global Logistics Park, which crosses both Marshall and Fayette counties.
Building III at Gateway, which will be 554,000 square feet and expandable up to 975,000 square feet, will be completed in the third quarter.
“These guys all have more land to build,” Martin added. “If they get these last couple leased up, they might announce something new.”
Shelby County is seeing some organic expansions, but not any speculative builds or build-to-suit deals.
Last year, Nike Inc. wrapped up the $276 million expansion of its North America Logistics Campus in Frayser. In March, the company started a $1.5 million build-out of a Lamar Avenue warehouse.
Renovations continue at Cummins Inc.’s new distribution center off Hickory Hill Road. In March, Cummins filed a $944,000 building permit for the 400,000-square-foot warehouse. In August of last year, Cummins began work on $2.7 million in internal renovations.
Martin said the Southeast Shelby County submarket was very active last year, garnering more than half of 2015’s record 8 million square feet of absorption.
“That’s been unheard of in the past five years,” he said.
He attributed the submarket’s growth to its stock of smaller, 300,000-square-foot buildings. Most newly built warehouses in North Mississippi are closer to 1 million square feet, so smaller tenants are looking to Memphis to meet their needs.
“We do not have anyone building anything that really services the sub-400 market,” Martin said. “I think there’s a definite market out there for new development of the 25,000 to 50,000 – even up to 100,000-square-foot warehouses for those that want a little more truck and trailer parking or their own identity,” he said.
Martin added that a handful of new developers are looking to bring new buildings to the industrial market, but they’re looking at DeSoto and Marshall counties. While he’s not concerned about overcrowding, he hopes that anyone new to the market would bring a different kind of product, like smaller warehouses.
Class A Office Market Tight
Tight Class A availability is the primary influence in the Memphis office market.
“Particularly in the suburban office markets, especially in the east, we're down to 3 percent vacancy,” said Ron Kastner, senior vice president with CBRE. “It’s really just the crumbs, the small spaces that are just the misfit toys, so to speak.”
Companies seeking 10,000 square feet or more have only a handful of options. As availabilities decrease, rents are continuing to rise. Last year, rents at the Crescent Center in East Memphis crossed the $30-per-square-foot threshold, which is the highest the market has ever seen. In the fourth quarter of last year, the Memphis MSA Class A average rent came in at $20 per square foot.
“The net returns of Memphis office space previous to now just weren’t lucrative enough to validate the investment to build a new building,” Kastner said.
High construction and operating costs require landlords to charge higher rents.
“If that number is too big, then what makes you think that people are going to pay it?” said Steve Guinn, vice president of Highwoods Properties Inc. Memphis.
Highwoods owns and operates the Triad III building, the newest multi-tenant office building in the East submarket, and the Crescent Center, which has the highest rents in the area.
“If the Crescent Center is $30, can you build a new building and lease it for $30 or does it have to be more than that? How do you feel about the likelihood of getting that number?” Guinn added, saying that Class A rents need to move up across the board to encourage developers.
“I guess the timing of adding new product would be clearly here in front of us,” Kastner added. “All the metrics are right – the velocity is there, demanding, pricing is there now, as far as rental rates that could be commanded.”
For the past five quarters, eyes have been on the last parcel in Boyle Investment Co.’s Ridgeway Center office park. Boyle has announced plans to build a new 175,000-square-foot Class A building, but the project is taking longer than expected to get off the ground.
Mark Halperin, executive vice president at Boyle, said that he has one letter of intent signed and three others in the process. If all of those offers come through, the new building would be fully leased. Most of those tenants are Memphis companies that have outgrown their current headquarters.
“We’re looking at approximately $30 per square foot at the new building,” Halperin added. “Those are expensive rents, but that’s what it costs to build the building and operate.”
Further east is the 10-acre TraVure planned development in Germantown. The dense, suburban project consists of two hotels, a parking garage, restaurants and retail and more than 150,000 square feet of Class A office space. After receiving hard-fought approvals from the city of Germantown in February, developer Gill Properties will soon kick off construction.
In January, graphic design firm Speak Creative began construction on its new East Memphis headquarters at 1648 W. Massey Road. The 12,000-square-foot building will have 1,500 to 6,000 square feet for other tenants.