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Office

According to Henry Stratton, a broker with Colliers Wilkinson & Snowden, the excellent reciprocal relationship that Memphis enjoys with DeSoto County stems from the absence of a physical barrier such as the river between the city of Memphis and the state of Mississippi. Business moves easily from Memphis into DeSoto County and from the outlying areas into Memphis. The communities of Olive Branch, Southaven and Hernando are small but growing, and they benefit from their proximity to a large city with a powerful urban presence. Brokers have to be licensed in Mississippi to be able to do business in DeSoto County, and brokers in Mississippi who do business in Memphis are licensed in Tennessee. This ability to cross borders to find the best deals for clients works well on both sides of the state line.

In the office sector, DeSoto County offers a variety of new space. With some of the overdevelopment that resulted from Baptist Hospital’s successful growth in the county, office real estate is not leasing as fast as originally projected in that area, and the overall total vacancy statistics for office space in the MSA is about 19.9%. This represents a steady decrease in occupancy since the fourth quarter of 2003. There is a 53% vacancy rate in DeSoto County, which makes it a good tenant’s market, according to Stratton.

“We had a little bit of positive absorption for sublease space, but we still have about 245,000 square feet of sublease space on the market. Until that burns off, it will keep the pressure on the rates,” Stratton says. Building owners and developers will be forced to lower rental rates or wait until the market comes back to them. The upshot of this will be less and less new construction and development. Of course, the abundant vacancies are good for those looking for new office space, especially in the subleasing market where potential tenants can get as much as a 25% to 35% discount on the face value of leases.

Belz Enterprises, a real estate development firm headquartered in Memphis, owns and manages 18 office buildings throughout the Memphis area, including office towers downtown, corporate campuses and buildings in the technology corridor in East Memphis. Belz prides itself on its involvement in the redevelopment of downtown Memphis in the last decade. Outside of downtown, Shelby Oaks Corporate Park, a National Association of Industrial and Office Parks award winner, offers high quality office space in East Memphis.

Within Memphis proper, class A property in East Memphis is in good shape with positive absorption in the last quarter. Class C properties downtown, including older buildings with fewer amenities, are not moving as well.

Retail

Steve Bowie, a senior vice president with Commercial Advisors, shares his thoughts on the retail real estate market in Memphis and the larger MSA: “The inner beltway redevelopment, which is being led by Loeb Properties, emphasizes the continuing prominence of urban growth from the Mississippi River through Collierville and on Poplar Avenue.” Bowie credits Loeb Properties with taking the lead in acquiring and redeveloping strategic pieces of real estate.

Poplar Avenue is considered “main street retail” in Memphis, according to Bowie, and probably always will be. All quality residential, commercial and office real estate traditionally has been found along the ridgeline from the river eastward. Poplar Avenue defines the Memphis retail story historically and is reflected in the “big box” choices, too, as in Collierville in the last year.

The prominent regional retail market is shifting from the heart of Collierville southeastwards with the development of The Avenue at Carriage Crossings, an 800,000-square-foot “lifestyle center” and joint venture of Cousins Properties of Atlanta and the Jim Wilson Co. of Birmingham. The Avenue will be anchored by Parisian and Dillard’s. It is the most important retail development happening in the region at this time, being the first major regional center to be developed since Wolfchase Galleria approximately a decade ago. The Avenue is slated to be opened in the fall of 2005.

A “lifestyle center” refers to a development that takes tenants that traditionally moved into an enclosed regional mall and moves them to an open-air environment. According to Bowie, the economic feasibility of an enclosed regional mall is increasingly limited. A lifestyle center allows you to “phase” a project. A developer can start with a manageable amount of square footage, such as 750,000 square feet, and then build from there. This adds flexibility to a project and allows a developer to think “upscale” when adding square footage.

The main areas of retail development and growth in Memphis are Cordova and the Wolfchase Galleria at Germantown Road, Collierville and DeSoto County. In DeSoto County, the community of Olive Branch is seeing individual big box and ancillary retail development, and Southaven is witnessing the biggest concentration of new retail development outside of Collierville, with several major retail developments underway. CBL, a Chattanooga-based major mall developer, has a 750,000-square-foot lifestyle center at DeSoto Crossing, anchored by Dillard’s and JCPenney.

Within Memphis, Poplar Avenue has been historically strong, though opportunities are limited due to the already-developed urban nature of the area. The other strong retail markets include the Cordova area, along Germantown Parkway, which culminates in the northeast with Wolfchase Galleria, Collierville and the DeSoto County area. “There is a dramatic proliferation of strip retail that reflects residential growth, and also reflects that interest rates and cap rates have been so favorable for that product,” Bowie says.

Frank Dyer, senior vice president of Loeb Properties, concurs. “The retail market in Memphis continues strong, and the suburbs is where growth continues rapidly,” he says. But Loeb Properties, which concentrates its business mostly in the retail sector with 18 shopping centers around Shelby County and approximately one million square feet of retail space, is leading the way with new growth and development in the Midtown area. “We’re building two new shopping centers this year that are redevelopment projects,” Dyer says. Palisade Place is a development at Poplar and Holmes that will redevelop the space previously occupied by a church into a 14,000-square-foot shopping center. At Union and Belvedere, a group of small retail shops will be demolished and Belvedere Collection, a new modern shopping center, should be under construction soon, with groundbreaking to take place any day now, says Dyer.

Loeb Properties currently owns and manages a portfolio of over 150 properties in the Memphis area that total over 2.5 million square feet of retail, office, multi-family and industrial properties. Most of the retail properties owned or managed by Loeb are neighborhood shopping centers—smaller, unanchored shopping centers of 13,000 square feet or so, with no large national anchors. The market has seen a slowdown but not a downturn in this area, Dyer says, and his outlook for 2005 is optimistic.

Belz Enterprises reports substantial growth in the retail sector, especially at Centennial Crossing and Germantown Village Square. “Our retail centers attract businesses from all over the country because they offer the right combination of retail at convenient locations throughout Memphis,” Morris Thomas, vice president and director of brokerage and leasing, says in the company’s Fall 2004 Report.

Industrial

Memphis’s location makes it a strategic spot for industrial and distribution real estate, and the city offers an efficient market for industrial companies to serve their customers on both the East Coast and middle America. The city is called “North America’s distribution center,” and companies continue to consolidate and put larger warehouses in Memphis. In general, the industrial real estate market in Memphis is seeing less regional warehouses and more national and international distribution centers being developed.

In the industrial sector, Belz has been a leader for over 60 years, since Philip Belz saw the need for large-scale industrial warehousing in Memphis in the early 1940s. He built the first large industrial buildings in the city on six acres of land he owned in North Memphis. Today, Belz owns and operates more than 20 major industrial facilities, industrial parks with a reputation for strategic locations, well-maintained appearances and quality service.

According to Jeremy Giles, vice president and market officer for the Memphis market with ProLogis, customers find that Memphis is a great area from which they can serve all areas of the Unites States. There is readily available and talented labor and a number of tax incentives that make Memphis a thriving industrial market, and customers are investing in distribution facilities to keep up with the economy.

ProLogis is a leading provider of distribution facilities and services with 291 million square feet of properties owned, managed and under development in 70 markets on three continents. In Memphis alone, ProLogis has 10.2 million square feet of industrial property in its portfolio. Giles points out that while the events surrounding Sept. 11, 2001, caused a general economic slowdown that impacted Memphis, locally based, smaller businesses are beginning to invest and expand. “And we’re seeing large, national and global players expand their presence in Memphis as the economy continues to pick up,” Giles says.

Andy Cates with Colliers Wilkinson & Snowden agrees. “The industrial real estate market took some hits in recent years, but big box developers are building,” he says. Five developers currently have buildings of half-a-million square feet or larger under construction in the area. “Activity is healthy enough for the builders to take a chance on new development,” Cates says.

Many second and third generation buildings have higher vacancy rates, Cates says, with a difference of 10 to 15% compared to newer developments. In southeast and southwest Memphis, there is a 9% vacancy in the class A markets, and a 22-23% vacancy rate in the class B markets.

Multi-Family

As in other real estate sectors, a glut of overbuilding has left the multi-family market with excess units to absorb. But according to Blake Pera with CB Richard Ellis, the multi-family market is showing improvement. “It could be better, and it is getting better,” says Pera, “and as we continue to absorb the excess units built over the last few years, occupancy will improve.”

CB Richard Ellis surveys roughly 63,000 units each quarter, typically buildings of 50 units and larger and excluding tax-credit housing. Currently, there is an overall occupancy of 91%. Pera says 2001 was a peak year of construction for multi-family housing and 4,600 units were built. “This is a little over twice what we typically absorb in a year,” Pera says. There were a number of reasons for that amount of construction, including delayed construction starts from 2000 and the arrival of several new groups in the Memphis market at that time. The result was that the market grew soft, with occupancy rates dipping below 90% for a period of time. Since then, construction has been held in check and absorption has helped occupancy increase slowly and steadily.

New construction is not at a complete standstill. As of mid-year 2004, the market has delivered about 500 units and is expecting a little over 1,600 units for the year. The outlook for the upcoming year is positive, although location continues to be a factor. Certain markets are improving and concessions are tightening. The downtown, Cordova and Germantown submarkets are already turning the corner.

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