Distribution centers garnering attention from those consolidating

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The Memphis industrial market, comprised of 176 million square feet of warehouse space and 7.7 million square feet of flex space, reached a total of just more than 184 million square feet at the end of 2008. Deliveries during that time included just more than 2.8 million square feet in nine new buildings, including the 1.1 million-square-foot Nike Footwear Distribution Center in the Northwest submarket. In the DeSoto County, Mississippi, submarket the 800,000-square-foot Building F in the Crossroads Distribution Center and the 600,000-square-foot Building 3 in the Olive Branch Distribution Center were added as well. Annual deliveries have been in steady decline since hitting a 5-year peak of 6.9 million square feet in 2005.
More than 1 million square feet of industrial space is currently under construction in the market, and more than half of the space is pre leased. Virtually all speculative building deliveries in the market have been occurring in DeSoto County, where the business environment is friendly and tax incentives are healthy. During the second quarter of 2008, 16 buildings were delivered in DeSoto County, driving the vacancy rate in the submarket to a high of 23.4 percent, as of the end of the quarter. Three straight quarters of solid, positive absorption brought the vacancy rate down to 19.6 percent, as of year-end 2008. DeSoto County has been the beneficiary of local consolidations, such as Diamond Comics, which relocated from Memphis and enlarged its operations in September in a 600,000-square-foot building in Olive Branch.
Overall vacancy rates hit a low of 13.1 percent at the end of the third quarter of last year. Vacancy rates closed the year at 13.6 percent as short-term leases resulting from tornadoes that hit in February ended. Hewlett-Packard also began its planned reduction of 2.2 million square feet. The year-end 2008 vacancy rate of 13.6 percent is down from the year-end 2007 rate of 14.3 percent and is the lowest year-end rate since 2002. Absorption for the year was positive at 3.4 million square feet, down from 2007’s absorption of 3.8 million square feet. Some of the largest leases in 2008 went to third-party logistics firms — including New Breed, DSC and Mallory Alexander International Logistics — in response to an apparent trend toward outsourcing product storage and distribution.
Most Memphis-area business and economic leaders agree that the market’s diverse economic base, strategic location and transportation infrastructure shield it somewhat from the heavy hits other cities are feeling in the economic downturn. As a relatively small market that hasn’t overdeveloped, the area is also expected to recover more quickly than larger cities. Overall asking rental rates in the Memphis area market stand at $2.93, as of year-end 2008. These rates are a bargain compared to the national average rate of just more than $6.
As companies seek to consolidate operations and potentially consider relocation, the Memphis market is an ideal target for distribution centers. While attractive rates — sure to become even more attractive because vacancy rates are anticipated to edge during the first quarter of ’09 — are an initial attraction, several additional factors should put Memphis front and center for consolidations. Known as America’s distribution center, Memphis is the home of the FedEx World Hub, UPS’ third largest U.S. facility and the world’s busiest cargo airport. The market is accessed by seven U.S. highways, has the fourth largest inland port and is the third largest rail center in the country. Availability of the right kind of space is critical to companies seeking to consolidate major distribution centers. Of all the cities in CoStar’s National Industrial Report, Memphis has the largest average industrial building at more than 85,000 square feet.
According to Cliff Lynch, executive vice president of Continental Traffic Service, “because of its transportation assets, its base of other logistics service providers and its location, Memphis is one of the two or three best cities in the country in which to consolidate distribution facilities.”

— Andy Cates is an industrial specialist with Memphis-based Colliers Wilkinson Snowden.

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