The positive momentum for the Memphis industrial market continues. For the previous three years, the market has had positive absorption every quarter. This momentum continued through 2017, where we saw an annual net gain of 6.6 million square feet of positive absorption. Memphis has not seen this type of multi-year, record-breaking performance since the early 2000s. Achieving year-over-year absorption volume at this level proves Memphis can continue to attract both new developers and investors.
Given ideal geographical positioning, Memphis is known as America’s Distribution Center, boasting unparalleled expertise in distribution and logistics. The Memphis International Airport houses the second-busiest cargo airport in the world. Companies recognize that the Memphis MSA offers reliable, cost-effective distribution, with the ability to reach 70 percent of the U.S. population within 24 hours.
Hank Martin, NAI Saig
Moreover, Memphis is one of only three cities with five Class I Rail Systems, and has the fifth-largest inland port, as well as 10 major trucking companies utilizing Interstates 40 and 55. It’s no wonder that FedEx World Hub makes Memphis its home, and UPS chose it to house a major hub.
Southeast Submarket
The Memphis market continues to see nearly all of its growth to the southeast into Fayette County, Tennessee, and Desoto and Marshall counties in Mississippi. This year, leading the charge was Desoto County with over 2.8 million square feet of annual absorption. Marshall County closed out the year with McCormick Spices leasing 615,000 square feet in Panattoni Development’s Gateway Global Logistics Center. This lease brings the total absorption in the submarket to just over 650,000 square feet.
While the numbers will not reflect this until mid-2018, the Southeast submarket had the second largest “announced” absorption at 1.4 million square feet. This includes both Amazon’s 615,000-square-foot build-to-suit and DHL’S 580,000-square-foot build-to-suit.
These new submarkets have still shown strong gains in 2017. Yet the Southeast submarket, Memphis’ largest submarket with over 95 million square feet, still remains exceptional with both steady growth in occupancy of existing properties, as well as new build-to-suits. In addition to being the largest submarket, Southeast gained a competitive advantage that seems to have paid off.
The Economic Development Growth Engine for Memphis Shelby County (EDGE) passed a new fast-track Payment-in-Lieu-of-Taxes (PILOT) program, which grants incentives for businesses to locate in Memphis. This program was the major component to winning the Amazon and DHL build-to-suits. This program should continue to maintain a competitive atmosphere between Memphis, Shelby County and the neighboring counties.
Strong Fundamentals
Another plus for the Memphis industrial market as a whole is its direct vacancy rate, which went from 7.8 percent in 2016 to 5.9 percent at the end of 2017. Rental rates are continuing to rise in the market as well. The average rental rate for Memphis is up from $3.40 per square foot in fourth-quarter 2016 to just above $3.50 in fourth-quarter 2017.
Investment sales totaled over $270 million in 2017. While this number is lower than the previous year’s totals of $358 million, the per square foot rate went up from $30.15 to $31.25 per square foot for all product types. The biggest change in the investment sales numbers, however, is cap rates. The 2017 average cap rate was 7.16 percent, which continues to trend downward from the high 7s in 2016 but is still higher than most major markets. If these trends persist, Memphis will continue to see existing and new-to-market investors compete for market share.
New Construction on Horizon
Looking forward to the rest of 2018, all signs indicate another great year. Hillwood is continuing a development in Legacy Park with another 1.3 million-square-foot property.
In addition to Hillwood’s development, Atlanta-based Core5 Industrial Partners is under construction with two buildings at Desoto 55 Logistics Center spanning 300,000 and 581,000 square feet. These should be available in the second half of the year.
Exeter Property Group is in the process of closing on 122 acres in Desoto County. The Conshohocken, Pennsylvania-based developer will be entering into the speculative building market with plans of building over 1.7 million square feet on Polk Lane. Rounding out the active Desoto County submarket is Huntington Partners and Johnson Development with their first speculative building. The firms have just co-developed an 815,000-square-foot building in Olive Branch, just off US Highway 78 and Interstate 22.
Marshall County continues its fast-paced expansions as well, with Panattoni Development wrapping up a 550,000-square-foot speculative building in early spring. The company is also developing a 1 million-square-foot distribution center for Cooper Tires & Rubber Co. at its Gateway Global Logistics Center.
All the new construction comes at a time when new investors are looking at the Memphis MSA for new investment opportunities. Industry experts are projecting an additional 4 to 6 million square feet of future development in our market. It goes to show that the Memphis market still has room for positive growth.
— By Hank Martin, Business Manager and Vice President, NAI Saig. This article originally appeared in the March 2018 issue of Southeast Real Estate Business.