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High Demand for Memphis Industrial Leading to Another Record-Shattering Year

Investor demand remains strong for industrial assets in metro Memphis. Bixby Land Co. recently purchased DeSoto A2 (pictured), a new facility in Horn Lake, Mississippi.

Fueled by the acceleration of e-commerce amid the COVID-19 pandemic, the Memphis industrial market’s record-setting momentum continued into the first half of the year. Demand fundamentals are the strongest they’ve ever been, with lease transaction volume at mid-year exceeding 12.2 million square feet for the second year in a row and total market direct net absorption reaching an unprecedented 5.3 million square feet.

To put these numbers in perspective, lease transaction volume and direct absorption through June of pre-pandemic years averaged 5.8 million square feet and 1.6 million square feet, respectively.

Jacob Biddle, Avison Young

The market’s direct vacancy rate has hovered around 6.5 percent since the end of 2019, an impressive feat given the exceptional amount of speculative product that has been added to inventory over the past year and a half.

New to the market
The region’s central location, complemented by its world-class transportation infrastructure and low rental rates, make Memphis an attractive option for industrial users. Notable deals that have occurred since the beginning of 2020 include Milwaukee Tool’s 1.1 million-square-foot lease at I-269 Industrial Park, as well as two new Amazon leases totaling nearly 2 million square feet, growing the e-commerce giant’s Memphis-area footprint to more than 6.7 million square feet since it announced its first facility in the market in 2018.

Scarcity of larger blocks of space in Memphis proper has prompted many users to seek alternatives in Fayette County in Tennessee and DeSoto and Marshall counties in north Mississippi. Among the companies that have recently opted to consolidate their operations in the suburbs are Hamilton Beach, Associated Wholesale Grocers and IG Design.

Occupiers and developers alike are drawn to the suburban submarkets for a variety of reasons, including an abundance of large tracts of cheaper land, the recent completion of the Interstate 269 beltway that facilitates truck-oriented freight and the enticing incentive packages offered by local and state governments.

That isn’t to say that Shelby County is bereft of activity as more than half of reported leasing activity since January 2020 has occurred within its boundaries.

Nearly 3.3 million square feet of infill projects have been completed in the Southeast submarket since 2018, in addition to Amazon’s 2 million-square-foot sortation facility that delivered in the fourth quarter of 2020 in the Northwest submarket. And there’s more than 2.3 million square feet of space under construction.

With larger tracts of land available at its fringes in areas like Millington, Cordova and Collierville, Shelby County is expected to benefit as last-mile logistics solutions become even more important to the movement of goods.

Pricing at all time high
The construction industry has been greatly affected by supply chain constraints. Lead times for construction materials such as steel and roofing materials have been pushed out six to nine months, and in some cases longer. Although lumber prices have started to fall, other vital materials remain high and in short supply. On top of supply constraints, the construction industry is facing significant labor shortages.

This has all pushed pricing to unforeseen levels, and it remains to be seen when prices will fall and lead times stabilize. Investors continue to speculate whether prices will ever return to previous pricing levels or if this is the new normal.

Despite these challenges, record demand has induced a flurry of development activity, resulting in new inventory being delivered at a pace far exceeding the historical average of 3.3 million square feet per year. Since the beginning of 2020, 16.2 million square feet of speculative and build-to-suit product has been added to the market, with an additional 14.4 million square feet currently underway, 80 percent of which is speculative.

Thus, the vacancy rate will rise in the short-term, though the point at which supply will begin to outpace demand is uncertain, as there are still a number of users in the market with substantial bulk requirements.

Investors drawn to Memphis
Memphis continues to see active industrial investor demand and is attracting new investors seeking to capitalize on low interest rates and favorable returns on top of the market’s solid fundamentals, though their appetite seemed to slow in the first half of 2021 with investment volume reaching only $219 million compared to the $582 million that traded in the first half of 2020.

Twelve-month average pricing fell to $45 per square foot in second-quarter 2021 after reaching a high of $49 per square foot at the end of 2020. Cap rates for industrial assets have fallen to record lows, with the market seeing Class A transactions in the low 4 percent range.

Spreads continue to narrow due to the record level of demand and competition in the industrial sector, along with the shortage of available product. Construction materials pricing and availabilities along with labor shortages have temporarily slowed industrial development in some cases.

The accelerating pursuit for industrial development is creating a shortage of quality and suitable development sites. The impact from these factors, in addition to the record level of capital in the market, has created historic demand and has pushed rent growth to record levels.

— By Jacob Biddle, principal, Avison Young. This article was originally published in the July 2021 issue of Southeast Real Estate Business.

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