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VOL. 10 | NO. 31 | Saturday, July 29, 2017

Fully Loaded

Industrial market sets tone, but all commercial sectors rising in Memphis MSA

By Patrick Lantrip

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It’s almost like the first half of 2017 was a decade in the making, at least when it comes to commercial real estate. Throughout all four major sectors of the Memphis-area commercial real estate market – industrial, office, retail and multifamily – figures are consistently reaching or exceeding pre-recession marks.

That’s not to say everything is perfect in the Bluff City, as Memphis’ growth curve lags that of many comparable cities, but it is, however, a testament to the grit and grind mentality the city is known for.

Of the main commercial real estate sectors, industrial is where Memphis and the Mid-South thrives, which is no surprise given the area’s natural logistical advantages.

Over the last 10 quarters, the Memphis metropolitan statistical area has seen more than 17 million square feet of absorption, according to CBRE’s second-quarter market report.

“As lease rates go up, it’s easier to finance these buildings,” Jim Mercer, senior vice president at CBRE, said. “With that amount of absorption and rates increasing, I think that’s why you’re seeing these guys jump in here and start construction.”

North Mississippi is leading the charge with more than 4.2 million square feet of speculative development currently under construction. Of that 4.2 million, more than 3.7 million square feet is under construction in DeSoto County, with the remaining 554,040 square feet under way in Marshall County.

Five developers – Core 5, Hillwood, Panattoni, IDI Gazeley and Johnson Development – are responsible for the majority of the current speculative activity.

“To have five developers all building buildings over 500,000 square feet at the same time is really exciting for our market,” Colliers International CEO and president of Brokerage Services, Andy Cates, said. “I would imagine that a large portion of those will have either full or partial leasing by the end of 2017.”

According to CBRE’s market report, the industrial sector experienced 1.2 million square feet of absorption in Q2 2017 and approximately 1.5 million square feet of new bulk warehouse space was completed.

Of that 1.5 million, Panattoni delivered 615,600 square feet in Gateway Global Logistics Center in Marshall County that was completely leased by McCormick & Co. upon delivery. Hillwood delivered 947,620 square feet in the DeSoto Trade Center, of which 517,000 square feet was leased by IT and consumer electronics distributor Synnex Corp.

“As far as where our rental rates and operating expenses are, Memphis and North Mississippi continue to be competitive across our peer cities and the amount of developers building at once proves that,” Cates said.

According to Cushman & Wakefield/Commercial Advisors’ second quarter market report, the Southeast Memphis submarket has reported the most leasing activity this year with a total of 2.5 million square feet, followed by DeSoto County with 2.2 million square feet.

These two submarkets also recorded the highest leases of the second quarter – the aforementioned Synnex deal; Geodis’ 392,220-square-foot lease in Stateline Business Park Building D; Electrolux Home Products’ 337,655 square feet at 4550 Swinnea Road in Memphis; and Barrett Distribution’s 233,800-square-foot lease in Southpoint XI, according to Cushman & Wakefield.

Meanwhile, Mercer said there is also an increase in demand for smaller tenants in the 80,000- to 150,000-square-foot range in North Mississippi as well.

“Next year, for sure, will not only be the big-box buildings that we’ve seen, but we’re also going to see more smaller buildings built in Mississippi,” Mercer said.


If the name of the game in the industrial market was speculative development, in the office sector, it was musical chairs.

“The main forces right now are the settling of the dust, if you will, of the numerous large deals that have been circling over the market for the first part of the year,” CBRE senior vice president Ron Kastner said.

Kastner was referring to the reshuffling of the corporate headquarters of three Memphis companies – ServiceMaster Global Holdings, Sedgwick Claims Management Services and Thomas & Betts Corp., the former of which kicked off the dance when it announced it would move out of its 860 Ridge Lake Blvd. location for a new home in the former Peabody Place Mall in Downtown Memphis.

Earlier this year, Sedgwick CMS was the second piece to fall when it announced in February that it was moving into Thomas & Betts’ headquarters at 8155 T&B Blvd. in Southwind.

The only catch was, Thomas & Betts was still in there.

The stalemate carried on until June when the Memphis-based electrical components manufacturer announced it would be moving into ServiceMaster’s original Ridge Lake headquarters.

When Thomas & Betts went before the Economic Development Growth Engine for Memphis and Shelby County in July, an official with EDGE said the county’s ability to retain all three headquarters saved more than 2,500 jobs and resulted in more than $92 million in local investments.

“Meanwhile, you got your typical second half of the year,” Kastner said. “Third and fourth quarters are typically pretty busy, and I see that happening again this year.”

According to Cushman & Wakefield/Commercial Advisors’ second-quarter market report, 442,218 square feet of office was absorbed during the last quarter, the majority of which was due to the delivery of the largest single development of office space in the market since Clark Tower was completed in 1973 – Crosstown Concourse. Additionally, the state of Tennessee notched the largest lease transaction in the second quarter with a 9,553-square-foot lease at 1991 Corporate Ave. in the Airport submarket.

Ron Riley, senior vice president of Colliers International’s Office Division, said the overall volume of activity is similar to pre-recession levels.

“Typically during the summer months, a lag will occur because decision-makers are out of pocket, but this summer we have seen no lag,” Riley said.

Riley said Memphis is now on the radar of buyers that have traditionally not been willing to consider secondary cities, adding that several investment groups new to Memphis have purchased office product in the last 12 months.

According to Cushman & Wakefield’s data, the two largest office sales were notched by Nashville investor Priam Capital, which snagged a 60,006-square-foot building located at 8700 Winchester Road for $8.3 million, and Primacy II, a 123,265-square-foot building for $16.6 million.

“For the second half of 2017, there will be some pretty significant announcements of some high-profile tenants shuffling around in the market,” Riley said. “Currently, we are tracking approximately 300,000 square feet of major tenants larger than 15,000 square feet that are in the marketplace, as well as a handful of acquisitions with new-to-Memphis investment groups.”


Technology, perhaps, has had the most effect on development in the retail sector.

Shifting demographics and spending patterns have changed the way developers look at new projects.

“You see that mixed-use and grocery-anchored retail are predominant as far a new developments go,” Brian Whaley, CBRE senior associate said, citing recent notable deals like Carter USA’s mixed-use development in Germantown, the proposed Belz development at Union and McLean, and the Central Station overhaul.

“I think it’s been a really healthy market the first half of the year and I think that will continue on for the second half of the year,” Whaley said.

The changing landscape of technology, Amazon’s ever-increasing influence and the living habits of millennials, Whaley said, are some of the driving factors behind the change in retail development.

“(Millennials) aren’t necessarily all going to the Downtown-Midtown urban core of the city,” he said. “They are also going to the Germantowns and Lakelands of the world, but when going there, they are still also wanting the experiences you get in Downtown and Midtown.”

Traditional grocery-anchored shopping centers are still regarded as relatively safe investments, as most people still prefer to get their produce and poultry in person instead of off Amazon Prime.

“Those aren’t as affected by the change of technology,” Whaley said. “Same thing as with the mixed-use.”

According to Cushman & Wakefield’s second quarter retail data, the Memphis metro saw 230,145 square feet of leasing activity for the second quarter, which brings the yearly total to just under 700,000 square feet.

The North submarket, which includes Millington and Raleigh, recorded the most leasing activity for the quarter, followed by the East, Midtown/Downtown, and Southeast Memphis submarkets. The North submarket also leads the way in year-to-date activity, this time followed by Southaven/Horn Lake/Hernando, Cordova and the East submarkets, respectively.

While retail activity unsurprisingly is strong in the traditionally well-performing areas, grocery-anchored retail is starting to spring up in nontraditional areas as well.

In February, The Binghampton Gateway, a Save-A-Lot-anchored retail center in the heart of what was once a food desert broke ground, and further north, the proposed $16 million Frayser Gateway project received a 15-year tax abatement from EDGE in June.

Though not technically related, both projects are represented by The Shopping Center Group’s Shawn Massey.

“Some places like Binghampton and Frayser haven’t seen major (retail) development in three decades,” Massey said. “That’s not good for the city, and that’s not good for the citizens in those communities.”

Massey also said he is in the early stages of bringing a similar project to the up-and-coming South City neighborhood, which is an important connecting corridor between the core of Downtown and the South Main Historic Arts District.

“There is a lot of new housing developments going up there, and we need to find the kind of grocery store that can serve a dichotomy of people,” he said. “It’s not always easy for a grocery store to appeal to both segments of the population.”

Massey hopes to leverage some relationships he made with grocery stores chains while working on the Binghampton project for the South City development.

“I kind of know what they are looking for, and if I package it right, maybe we have an opportunity,” he said.


In some ways multifamily is a bit of a missing piece in the Memphis MSA.

While the market is certainly healthy in the popular urban core areas like Midtown and Downtown, the city’s population has remained stagnant for quite some time now.

To help address this issue, EDGE created a tax incentive program called the Residential PILOT (payment-in-lieu-of-taxes), with the hopes of spurring development and adding density.

“The Residential PILOT has to be one of the most influential things that’s going to impact development the next 24 months or so,” said James Maclin, principal of M&M Enterprises. “It should have an impact on the number of new developments in the second half of the year in terms of deals and 2018 in terms of construction.”

The trial version of the program approved in May will be limited to 10 projects. Then EDGE and the mayors of Memphis and Shelby County will evaluate the program to determine whether to continue, modify or discontinue it.

Like EDGE’s other PILOT programs, applicants will be graded on a matrix, where they have the potential to receive up to 15 years of incentives including a 75 percent abatement of city and county property taxes.

“It increases the taxes on the property, so the city gets more taxes than it had on the property before,” Maclin said. “But it gives the developer a tax break on what it could be, relative to the improvements on the property.”

For each project, developers have to reserve a specific percentage of units for low- to moderate-income individuals or families. Projects with 25 to 50 units would be required to designate 10 percent to this category, while projects with 51 to 75 units would designate 15 percent and projects with 76 or more units would designate 20 percent.

Earlier this month, a $14 million, 132,477-square-foot, 108-unit apartment complex proposed by Makowsky Ringel Greenberg in Midtown called Madison @ McLean was the first Residential PILOT recipient.

“Getting more density in the core helps everybody,” Maclin said. “You get more jobs, more people, and more affordable housing, which creates more activity and more growth. You can’t have one without the other, so it all works together to benefit each other.”

PROPERTY SALES 62 288 2,619
MORTGAGES 52 197 1,783