VOL. 9 | NO. 44 | Saturday, October 29, 2016
Real Estate Awakening
By Madeline Faber
The year’s biggest office deal didn’t affect Memphis’ office absorption at all, but everyone in real estate has felt its reverberations.
When ServiceMaster Global Holdings announced its move to the shuttered Peabody Place Mall from Ridge Lake office park, it promised new life for a 328,000-square-foot black hole in Downtown’s retail market.
The move could shift the tide from the dominant East Memphis office market to Downtown, which is currently seeing a 24 percent vacancy rate. By December 2017, ServiceMaster will flood Downtown with 1,200 new employees to benefit the area’s retail, restaurants and potentially residential offerings.
“We've already seen some of the ripple effects of it,” said Jeb Fields, vice president with Cushman & Wakefield/Commercial Advisors. “Whereas typically we see more people, more corporations looking to move out of Downtown into East Memphis or the suburbs, you're seeing a lot of the reverse with people starting to consider Downtown.”
ServiceMaster will invest $15 million in its headquarters with landlord Belz Enterprises contributing $12 million to the building’s conversion.
Terry Ingram, vice president of supply management for ServiceMaster, said requirements for its new headquarters excluded any existing office building Memphis had to offer. Memphis’ fourth largest public company needed around 300,000 square feet of space that was in a dynamic environment and not in a high-rise.
“I think Downtown was very interesting because it provided us with the opportunity to do what we were trying to achieve without starting from scratch,” Ingram said. “It was already in the middle of amenities and already had the basic building foundation and the floors plates and everything we were looking for, we just needed to reconfigure it.”
Historically, East Memphis’ booming occupancy has directly hurt Downtown. Fields said that tide could be turning, with Memphis finally having enough critical mass to support the growth of several submarkets concurrently.
Over the past two years, available space in the East Class A submarket has decreased by more than 75 percent. According to third quarter data from Xceligent, the highly desired submarket has a 4 percent vacancy rate.
Ron Kastner, vice president with CBRE, said that absorption has slowed due to a lack of available office space.
“Nevertheless, there is still inherent demand within the occupier community and the need for new space, different space or better space is still driving companies to seek new locations,” Kastner said. “I don’t see this trend changing any time soon.
“Meanwhile, those tenants who cannot find the right space are deciding to renew and delay move decisions and are seeing higher proposed rates than expected at renewal time.”
Out east, the Memphis office market received a long-needed reprieve. Boyle Investment Co. has begun construction on a 155,000-square-foot Class A building in its Ridgeway Center office park. The office tower at 949 S. Shady Grove Road will be Memphis’ first substantial office project with speculative space in nearly 10 years. Pinnacle Financial Partners signed on to be the first tenant in the building, taking 35,000 square feet.
Boyle also completed a new building at Schilling Farms in Collierville. The 50,000-square-foot Class A building is 50 percent occupied by Helena Chemical Co.
“I'd say that Collierville's getting some momentum, too,” Fields said. “There’s a lot in the pipeline, from office users to new residences.”
MULTIFAMILY CONSTRUCTION HEATS UP
Multifamily in Collierville also got a big boost this year. In the second largest multifamily sale of the year, the Madison at Schilling Farms apartment complex changed hands for $34.3 million. Spyglass Capital Partners, a New Jersey-based private equity firm, purchased the 324-unit property from Arenda Capital Management.
Also in Schilling Farms, Boyle wrapped up construction on a few buildings in its Carrington West development, an eight-building apartment project.
With retail, educational, office and residential uses side-by-side, Schilling Farms is an example of the new urbanism that brings density and mixed-uses to a suburban environment.
Further north, developers of the Parkside project hope to bring the same energy to the edge of Shelby Farms. Formally approved this year, the Parkside will bring 1,200 living units and retail and office tenants when completed.
From new construction to historic rehabs, apartment construction remains strong in the Memphis urban core. Projects that are underway Downtown include Central Station, Chisca on Main, the Tennessee Brewery and the twin South End projects of Printers Alley Lofts and the 266 Lofts.
Midtown, an area that hasn’t seen new apartment construction since The Bristol went up in 2004, could see 300 high-end units. In the third quarter, Makowsky Ringel Greenberg (MRG) announced plans for the Madison @ McLean, a 108-unit development at the southwest corner of McLean Boulevard and Madison Avenue. Rents are projected to average $1.40 per square foot and range from $859 monthly for a 529-square-foot studio up to $1,329 for a two-bedroom apartment.
A block away at the corner of McLean and Union Avenue, Belz plans a 188-unit development anchored by a gourmet grocery store. Rents at the project average $1.43 per square foot with two-bedroom rents up to $1,560 per month.
Yet to be seen is what MRG has planned for eight acres of vacant Sam Cooper right-of-way that it purchased late last year.
POPLAR RETAIL SHINING
Memphis’ prized retail corridor along Poplar Avenue is having a comeback year. The historically land-locked corridor opened up with new buildings and several thousand square feet of vacancies.
Those vacancies were absorbed quickly, with the retail market finishing the third quarter with 54,000 square feet of positive absorption, according to Xceligent.
“We are still in great demand for retail space, so absorption will continue to be strong as new projects come on board,” said Shawn Massey, partner with The Shopping Center Group. “I feel rents have hit a ceiling, but will remain to justify new construction.”
Currently, there is nearly 530,000 square feet of new inventory being tracked as “under construction” along the corridor.
Seritage Growth Properties has begun demolition on the former Sears store at the corner of Poplar and Perkins Road. In the 1950s, the three-story Sears was a trailblazer in the East Memphis retail scene. As open-air and enclosed malls sprouted along Poplar over the decades, the department store dinosaur fell out of favor.
Seritage, Sears’ holding company, plans to build a 135,000-square-foot Class A retail strip there anchored by Nordstrom Rack and Ulta.
Just east of Sears is the 28,040-square-foot Kroger store, which was obtained in Kroger’s 2011 takeover of Schnucks. With a Kroger renovation recently completed just a mile away at Poplar and Truse Parkway, Kroger is looking to let go of the store at 576 S. Perkins Road.
There has been some speculation that Sprouts Farmers Market is looking to take over the space, but nothing firm has been announced.
Fogelman Investment Co. has wrapped construction on its shopping strip at 6450 Poplar Ave., the first retail center of its kind to open in the Poplar corridor in nearly 10 years.
The restaurant-oriented strip names Pimento’s, PizzaRev and Bablu Tacos & Tapas among its tenants. The Poplar projects work together to reconfigure highly-desired land in a way that meets current trends and increases the potential for sales tax revenue. In a corridor with strong traffic counts and limited land, developers are reworking sites to get the most impact. Xceligent found that the East submarket has less than 6 percent retail vacancy, with lease rates soaring at $17 per square foot.
“Absorption is strong, but could be stronger if construction could keep up to demand,” Massey said. “Rental rates continue to rise throughout the market, especially in the strongest submarkets where high rents are becoming the norm.”
INDUSTRIAL MARKET ‘ON FIRE’
Dirt is always moving in the industrial sector, with 4.5 million square feet of construction underway across Marshall and DeSoto counties. Patrick Walton, principal with C&W/CA, said the industrial market is expected to hit 6 million square feet of absorption by year-end. An all-time low 5.5 percent vacancy rate was hit in DeSoto County where there was 274,00 square feet of positive absorption in the third quarter, according to Xceligent.
In the first quarter, Tire & Battery Corp. signed a 1.5-million-square-foot lease at Gateway Global Logistics Park in Fayette County, which is the largest lease ever recorded in the Memphis area market.
“It’s still on fire,” Walton said. “We're raising rents on all product types and we expect that trend to continue. As well as rental rates going up, landlord concessions are going down.”
He said that most of that activity originates from organic expansions, with a few inbound new-to-market deals.
Unlike at Gateway, where Fayette County and Marshall County meet, new speculative construction hasn’t taken place in Shelby County since 2007. This year, the Memphis-Shelby County Economic Development Growth Engine approved a new tax incentive program that mirrors what North Mississippi offers to encourage new construction.
Fields said new construction in Southeast Memphis, the industrial stronghold for decades, is a nearer possibility than it has been in several years. A new developer is considering Memphis for an industrial park and at least one or two build-to-suit deals are floating around in the market.
“The pipeline for the first half of 2017 is stellar, and then in addition to that, more construction and speculative development will be announced soon in the MSA,” Walton said.