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Stability Will Be Defining Characteristic of Memphis Multifamily Market in 2018

The 414-unit Preserve at Forest Creek sold for $136,700 per unit — a new record for a suburban sale in the greater Memphis market.

Consistency is key, and that’s exactly why investors find Memphis more attractive than ever: the Grind City’s financial and commercial real estate stability.

The area has grown into a hub for both the distribution and transportation industries. As the largest economic driver in the state, Memphis International Airport alone injects over $20 billion a year into the region’s economy. Thanks in large part to FedEx, the airport has become the second-busiest cargo airport in the world. FedEx’s presence creates a secondary demand from all retailers as they want to have a large distribution presence in the market.

Going High-Tech
Marketable growth in the Memphis economy extends beyond the distribution and transportation industries. Sizable expansions at University of Tennessee’s Medical School, St. Jude Children’s Research Hospital, Methodist University Hospital and LeBonehur Children’s Medical Center, as well as the migration of medical device manufacturers such as Smith & Nephew and Medtronic, show how Memphis is not only the Home of the Blues and global shipping, but also a high-tech healthcare hub for the Mid-South region.

Blake Pera, ARA Newmark

Blake Pera, ARA Newmark

All this growth has helped propel Memphis’ millennial population, especially 20- to 34-year-olds who make up a high percentage of the city’s workforce. Last year, Memphis marked a record-high 650,000 jobs and projected continued growth due to several substantial announcements:

• Amazon’s new 615,000-square-foot receiving center will employ 600.
• American Lebanese Syrian Associated Charities (ALSAC)/St. Jude Children’s Research Hospital plans to create 1,800 jobs and invest $1 billion over the next six years.
• Double-digit growth in construction jobs.

Steady Gains in Multifamily
Memphis continues to show a strong multifamily inventory as nearly 1,200 units were delivered in 2017, up 21 percent from 2016. While projections for 2018 level off (approximately 1,110 units in suburban and infill), expect record-setting rents.

Historically, rent growth has remained steady in Memphis, which rarely experiences the rollercoasters that other metros do. Solid occupancy growth post-recession has also led to modest rent growth — 2 percent overall with up to 6 percent in stronger submarkets in 2017.

While some markets nationally are experiencing some softness due to overbuilding, Memphis’ development has been steady and absorption remains balanced. And with a healthy economy, the market should continue to post strong results.

This success exemplifies why Memphis continues to attract a national audience. As larger markets see yield compression, Memphis enjoys an influx of new capital to the market, including a fair amount of overseas equity coming from investors looking to enter this market for the first time.

According to ARA Newmark research, cap rates here hover around 5.7 percent, a bit higher than most secondary or tertiary markets.

Value-Add Remains Popular
Value-add product, especially 1980s and newer product, remains popular among investors. Since many owners got a late start on upgrades, there are still many great opportunities in mostly classic condition with a considerable amount of upside remaining.

The metro also has a good pipeline of properties under renovation, with close to 5 percent of the total inventory currently upgrading units. These renovations are taking place in most submarkets throughout the market to great success.

One of the largest properties in the market — Madison at Cypress Lakes (1,002 units) — traded for $47,700 per unit. The Preserve at Forest Creek (414 units) sold for $136,700 per unit, which is a new record for a suburban sale.

Submarkets Stay Strong
Both the Germantown/Collierville and Downtown submarkets remain Memphis’ strongest, with high occupancies and the best rents. Demand in these locations remains high, as renters want convenience to work as well as retail and entertainment options. Look for Midtown to be one dark horse of 2018 as the first few infill developments contrast against older high-rise properties near the business core and medical district.

Overall, the market should remain in balance with steady absorption outpacing new deliveries this year.

— By Blake Pera, Vice Chairman, ARA Newmark. This article originally appeared in the March 2018 issue of Southeast Real Estate Business.

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