Leasing, Development Thrive for Memphis Industrial Market While Sales Slow
The Memphis industrial market was off to another record-setting year for the third straight time. Then, the Mike Tyson punch no one could have ever expected came: the shutdown of the entire country. Even after sheltering in place for months and nonessential businesses out of the office until further notice, our industrial market is holding firm.
The Memphis industrial market holds over 285 million square feet of useable space and offers the basic tenets for distribution. Memphis International Airport is the second largest cargo airport in the world. Additionally, Memphis is home to 400 trucking companies; it is the third-busiest trucking corridor (Interstate 40 spans from East Coast to California); it is one of only four cities to be served by five long-haul Class 1 rail systems; it has the fourth largest inland port in the country; and it has the second largest stillwater port.
Memphis is also home to the FedEx worldwide hub and also houses UPS and US Postal Service hubs. All these companies operate 24 hours per day, 365 days per year. Because of this, Memphis provides the most cost-effective distribution and logistics operations in the country. And in the midst of a worldwide pandemic and shelter-in-place orders, this has made the Memphis industrial area a busy market for the last few months.
Memphis has continued its expansion going southwest to Desoto County. This submarket is leading the way to growth and progress, with around 3 million square feet of new product coming on line in the past 12 months. Following close behind is Marshall County, continuing its growth with an additional 2 million square feet of product over the past 12 months. While these two submarkets have seen the bulk of growth over the past few years, we have seen new developments coming back to the Southeast submarket also.
One of Memphis’ largest developments in this submarket is by Atlanta-based Robinson Weeks. The firm recently completed its first speculative building within Distriplex Farms. The recently sold property was the first speculative development in the Memphis market in over five years. After this, Robinson Weeks closed on a piece of land for a new speculative development directly across the street.
The Mississippi submarkets have seen much new activity these past few years. Looking forward, we believe with the added pressure for online shopping caused by the worldwide pandemic many companies will need to be as close to the airport as possible for overnight delivery. This will support the growth and progress of the Southwest submarket with new development and expansion.
Over 6 million square feet of new space has come on line in the past 12 months across the entire market. There has been 2.5 million square feet of absorption with a current vacancy rate of around 6.5 percent. However, we project positive growth in the long-term. Near-term, tenants are trying to understand what their future requirements might be. Most are currently looking for more space, yet cannot predict how much.
This causes a delay in decisions, usually with tenants asking for a shorter term on their leases before they come to a final agreement. This thinking will likely continue through the end of the year. Retail companies are searching for a better understanding of the virus and the long-term effect it will have on the economy, as well as shopping habits. The long-term outlook for leasing activity should be strong. Companies like Amazon, Nike, Medline, TBC and Kellogg’s are expanding operations in the Midsouth. Therefore, space demand should be strong.
With that said, we expect to see 12 million square feet under construction. Sharp increases in inventory with the current uncertainty and delay of leasing could create vacancies, even with a large portion of the inventory under construction being preleased. With the preleasing of over 65 percent of the construction set to come on line by year end or first-quarter 2021, the increase in vacancy should be short-lived.
Market investment sales have slowed in Memphis. This trend will likely continue while investors and lending institutions struggle with how to analyze the economy. However, some institutional and large investors with cash or previous credit lines will be able to continue to purchase properties with good tenants and strong fundamentals. As mentioned previously, the Memphis industrial market is one of the strongest in the nation. This is due to Memphis’ basic fundamentals for warehouse and logistics distributions plus the number of tenants that continue to make Memphis home. Lower rents, cost of entry per square foot and relatively higher cap rates to comparable markets will continue to attract investors with capital.
During the first two quarters of 2020, we did see a number of deals close. Sealy & Co. was successful in closing over 1 million square feet in the Southwest submarket. While the properties were under contract prior to the pandemic, closings were not completed until the middle of April. Similarly, Exeter was able to complete a closing in mid-March. While both portfolios were pre-pandemic contracts, both Sealy and Exeter have large holdings in the market and have an intimate knowledge of the area. They both felt the fundamentals were strong enough to close.
We also have seen our first large portfolio sale close with post-pandemic funds and market analysis. Faropoint Investors is a larger private investment group with over 5 million square feet of industrial space in Memphis. The firm closed on a 1 million square feet portfolio at the end of June. The properties were located in the Southwest submarket. Faropoint believes the Memphis market will see growth in rent and occupancy due to its close proximately to the airport for overnight and online shopping.
Looking forward, both short-term and long-term, the Memphis industrial market will continue to grow at a steady pace. While the rest of the year may be slow with little leasing activity, look for a good start to 2021 as we all better understand the long-term effect of the pandemic. Our country is strong, its people are fighters and Memphis is a community with staying power.
— By Hank Martin SIOR, CCIM, Vice President, NAI Saig. This article originally appeared in the July 2020 issue of Southeast Real Estate Business.