To say 2015 was a good year for the Memphis industrial market would be an understatement. The Memphis market, which comprises approximately 220 million square feet spread across seven submarkets and three states (Mississippi, Tennessee and Arkansas), set a new record in 2015 with absorption exceeding 8.4 million square feet. This total is nearly double what the market recorded in 2014 and an impressive 2 million square feet more than the record set in 2006.
Vacancy also dipped into single-digit territory for the first time ever, falling below the 10 percent mark to a new record low of 9.8 percent. Vacancy fell 370 basis points in 2015 alone, the most significant year-over-year vacancy decrease in market history.
The market’s central U.S. location, quadra-modal transportation infrastructure (river, road, runway and rail) and abundant labor force are just a few of the benefits that make it an ideal location for distribution tenants. A total of 18 Class A deals were completed in 2015 by notable companies like Nike, Post, Cummins, Dayco Products, AmerisourceBergen, T.J. Maxx and Coca-Cola, to name a few. Class A buildings made up 6.3 million square feet, or 75 percent, of total absorption.
Patrick Walton, Cushman & Wakefield | Commercial Advisors
There were five deals north of 300,000 square feet that accounted for more than 2 million square feet absorbed in the Class B sector. A direct correlation can be made with the tightening of the Class A market and trickle-down effect to Class B and C properties, showing the overall strength of Memphis market hitting on all cylinders.
E-Commerce a Driving Force
In addition to the city’s location and transportation strengths, the Memphis industrial market is starting to benefit from the shift to e-commerce, which is changing consumer shopping patterns from shopping in a physical store to purchasing online. Anecdotally, third-party logistics (3PL) activity is increasing in Memphis and can be attributed to 25 percent of the Class A deals signed in 2015. According to Cushman & Wakefield research, this activity is only expected to increase in the coming year,
“As the need for retailers and e-tailers to get their products to consumers in the quickest possible time, seamlessly, 3PLs have seen robust growth in many markets throughout the country. From 2010 to 2013, the U.S. third party logistics industry grew at a healthy 4.5 percent and is anticipated to grow by 6.4 percent through 2016.”
Shrinking Supply
As a result of this flurry of activity, Class A space is now extremely tight at 95 percent occupancy. There are only four competing properties that can accommodate a user greater than 400,000 square feet. Two of these properties are speculative construction and are expected to deliver by mid-year 2016. New construction in past years has been limited to IDI. However, we now see speculative development from Prologis, Hillwood, Panattoni and new developers entering the market.
Investors are taking note of Memphis’ strengthening market fundamentals and are looking to the market to expand their portfolios. More than 16.8 million square feet of industrial properties traded in 2015 in a market that typically sees 10-12 million square feet of sales in a good year.
A majority of buildings were purchased as part of local or multi-market portfolio sales. In addition, several recapitalizations became a part of the 2015 investment sales landscape as international investors flooded capital into U.S. markets.
Investment sale activity should continue in 2016 with buyers outnumbering sellers and more institutions looking to Memphis as a viable investment market.
What’s Next?
2015 certainly became a benchmark year with strong absorption, decreasing vacancy and rising rents. Demand for space is projected to remain strong in 2016 with more than 10 million square feet of bulk requirements seeking space in the market. Case in point, in the first 90 days of 2016, the Memphis market has signed approximately three new Class A deals totaling more than 2 million square feet, including the announcement of TBC Corp.’s 1.5 million-square-foot build-to-suit project. This development not only sets a record for largest deal in the history of the Memphis metro area, but also has kicked off a new submarket in Fayette County, Tenn.
The pendulum has shifted in the landlord’s favor for new deals to market with limited availabilities for institutional-quality space, along with landlords’ ability to push rates and lease term. Build-to-suit activity will remain an option for requirements going forward with limited Class A space and the expense to retrofit existing facilities outweighing the cost of new construction. More speculative construction is expected to be announced in the market as Class A rates push north of the $3.00 per square foot mark for the first time since the economic downturn.
— By Patrick Walton, SIOR, Principal, Cushman & Wakefield | Commercial Advisors. This article originally appeared in the March 2016 issue of Southeast Real Estate Business.