The Memphis multifamily market has recently captured attention from prospective buyers with some impressive statistics. With 2020 rent growth at 6.6 percent and year-to-date 2021 at 10.5 percent year-over-year, the metropolitan showed resiliency through a turbulent period as peer Sun Belt cities experienced stagnancy and even decreases in rents.
This trend has put the metropolitan area on acquisition radars and garnered sales to new-to-market buyers looking to plant a flag in the market. But it raises questions concerning the longevity and sustainability of the rent growth.
Luke Searcy, Capstone Apartment Towers
By taking a further look at the market’s fundamentals, economic drivers and rent trends across market segments, we can shed some light on this over-arching question.
Logistics and healthcare
Memphis’ stable 2020 and 2021 multifamily performance is grounded by an economy rooted in logistics and medical services. Within the Memphis metropolitan area, 42 percent of the workforce is in the transportation/logistics or education and health service industries, compared to a national aggregate of 20 percent.
The growing reliance of these industries insulated the Memphis economy from the worst of repercussions stemming from the pandemic-induced recession.
While quarterly wages decreased an average of 6.5 percent in peer markets in the second quarter of last year, Memphis experienced only a 1 percent decrease. This wage steadiness and rebound in later quarters provided a tenant base capable of not only paying current rents, but also with the ability to renew at higher rates across asset types.
The well-known FedEx headquarters, the Port of Memphis, five Class I railroads, Interstates 55 and 40 and the busiest cargo airport in the world — Memphis International Airport — power the market’s logistics cohort. And with the growing need for e-commerce, this workforce portion is expected to grow 6 percent through 2023.
On the healthcare front, 15 hospitals and a multitude of healthcare support companies employ over 60,000 people in Memphis — nearly half located in the Medical District between Downtown and Midtown. With St. Jude’s commitment to invest $11.5 billion in the next six years and University of Tennessee Health Science Center’s recently announced $45 million expansion, the medical field is poised to continue to create high-paying healthcare jobs in the region.
As expansion and growth continue in these sectors, this will continue to create a growing tenant base across socio-economic levels and a demand for both workforce housing and high-end new construction.
Rent growth by asset class
Memphis’ economic growth in the logistics and medical service industries has translated to a resiliency through 2020 and continued demand growth across asset classes. Class A and B properties have experienced the largest increases in rent over the past 36 months.
This spur is attributed to the addition of over 2,000 units since 2018, largely comprising Downtown and Midtown projects and eastern suburban greenfield developments.
With another 2,000 units in the pipeline to be delivered through 2022, coupled with an annual absorption of over 2,000 units, rents are expected to continue to climb for Class A and B product as newer construction supplies more higher-end units and rents.
Beyond the pipeline in the next 18 months, the Memphis pipeline is very active, particularly Downtown. The Walk, a massive mixed-use project by Big River Development, is nearing Phase I construction and is slated to deliver nearly 700 apartments on the eastern boundary of Downtown.
Just past Interstate 40 on the northern side of Downtown, the 18Main master plan will comprise a substantial mixed-use redevelopment in the Pinch District that will bring over 1,000 units and 400,000 square feet of retail and office space to the undersupplied submarket adjacent to St. Jude Children’s Research Hospital.
The Memphis market has also experienced a multitude of value-add repositions. With over 55 percent of the inventory constructed between 1970 and 1999 and strong demand for more workforce-oriented product, value-add operators have benefitted from renovations implemented on an array of older vintage assets.
A key incentive to these rehabilitations is the city’s use of the Payment In Lieu of Taxes (PILOT) program, which offers ground-up developers and value-add providers tax relief for up to 15 years for qualifying properties. This updated inventory has prompted the 6 percent rent growth across the more workforce-oriented, Class C assets, as well as a portion of the 14 percent growth in Class B properties.
Positive forecast
With the continued interest in the Sun Belt, Memphis has experienced its share of capital demand, evident in the sales volume in 2021 on pace to exceed 2019 volume by 24 percent.
This new capital has been drawn to the city’s positive economic outlook, well-rounded development pipeline and existing value-add product.
And with these strengthening fundamentals, sales volume, renter demand and rents are expected to continue to climb in Memphis.
— By Luke Searcy, Investment Sales Advisor, Capstone Apartment Partners. This article was originally published in the July 2021 issue of Southeast Real Estate Business.