News Article | 9/2/2011

Hillwood to buy former Mazda distribution center

While it’s not the wild west of a few years ago, national industrial developers are growing in the Memphis market through build-to-suit deals and acquisitions as they wait until the market is ripe for speculative building.

The latest example is Hillwood Investment Properties, which is growing its local industrial portfolio through acquisition.

The Dallas-based commercial developer has a contract to purchase a 605,427-square-foot warehouse in Olive Branch. It is scheduled to close near the end of the year.

Mazda North America Inc. owns the building at 9105 Hacks Cross Road and has been using it as a parts distribution operation. Built in 2000, the property sits on 66 acres at Stateline Road and Hacks Cross.

Hillwood has developed 4.1 million square feet of industrial space in the Memphis market, all in the DeSoto County submarket. The company has enough land to build another 7 million square feet of industrial space.

Toby Rogers, vice president at Hillwood, had no comment on the pending purchase.

If the sale goes through, the building would represent one of the largest vacancies the market has, according to Brad Kornegay, president of Colliers International Memphis’ asset services division.

“The options for larger spaces are becoming fewer and fewer,” he says. “In the absence of building any speculative buildings, which is not planned for the near future, having a 605,000-square-foot building would be good for the market.”

If a tenant is looking for a minimum of 400,000 square feet of warehouse or distribution space, there are only a handful of options in Shelby County and DeSoto County, Kornegay says.

“We used to have several options for users to look at and analyze,” he says. “We just don’t have that many anymore.”

Southeast Memphis and DeSoto County have seen good industrial leasing activity this year, with Cummins Inc., Nike Inc., CEVA Logistics U.S. Inc. (1.27 million square feet) and Newegg Inc. (414,960 square feet) all absorbing space.

If this continues as many expect, large industrial space could be at more of a premium.

While the Mazda building could provide some space, a developer such as Hillwood would probably have to make some changes, such as adding dock doors or truck parking, to make it more marketable to a wider range of users.

Grubb & Ellis Co. vice president John Pomer and Grubb & Ellis Memphis executive vice president Scott Pahlow are the property’s listing brokers.

Expanding through build-to-suits
While Hillwood looks to expand its local footprint through acquisition, Industrial Developments International Inc., is expanding through a build-to-suit project.

In August, the Atlanta-based company started building a 234,660-square-foot warehouse and distribution center for Anda Distribution in Olive Branch. The $23 million project will open at IDI’s Crossroads Distribution center in 2012.

The company will apply for LEED certification of the property at 8644 Polk Lane when completed.

In 2005, IDI purchased 475 acres in Olive Branch from Dunavant Enterprises for $16 million. The property at the intersection of Polk Lane and Stateline Road, dubbed Crossroads Distribution Center, gave the company enough land to build 7 million square feet of industrial space.

IDI built several Class A bulk warehouse properties, including one of the last speculative industrial buildings in the Memphis market. That property, Crossroads Distribution Center A at 9124 Polk Lane, was completed in 2008.

The 452,743-square-foot Class A bulk warehouse building is leased by Smiths Medical ASD Inc., which occupies 240,000 square feet.

Hillwood’s play for the Mazda building is a good example of a company building its inventory, but not developing product.

“With this acquisition, they’re buying core assets in markets they have a presence in,” Tim Moore, vice president of leasing with IDI, says. “It seems like a reasonable acquisition.”

Rate increase needed for spec building
While industrial leasing activity has been healthy, it would take an increase in rental rates across the board to justify a reappearance of speculative building, according to Moore.

“I think you’ll see that pressure on rates in the large bulk segment of the inventory before you see it in other parts of the overall inventory,” he says. “I think we’re closer than we were a year ago, but I don’t think we’re quite there yet. The vacancy rates are looking good; we just need pressure on rental rates.”

The average asking lease rate in the overall Memphis market has remained flat. In mid-year 2010, the average asking rental rate was $3.99 per square foot, according to Xceligent Inc. This included triple net leases for bulk warehouse, standard warehouse and flex space. At mid-year 2011, the average asking lease rate had increased to $4.02 per square foot.

This, paired with a slow national economy, has stopped national players like Hillwood, IDI, Panattoni Development Co. and ProLogis from expanding their Memphis-area footprint with speculative building.

However, the opportunities to acquire property and do build-to-suit projects are keeping industrial growth alive locally, both for national companies and more regionally focused firms.

An example is Jackson, Tenn.-based H&M Co. and its development partner, Olive Branch Partners. The two companies developed a 520,000-square-foot distribution center for Asics America Corp. at Chickasaw Trails Industrial Park in Marshall County.

The partner companies are looking for more build-to-suit projects for lease or ownership with room to construct 5 million square feet in that park.

Industrial activity in the greater Memphis area, paired with Chickasaw Trails’ location adjacent to the future I-269, should help fill up that park, according to Roger Cook, senior vice president with H&M.

“I think it’s great to see these building being purchased and tenants being brought in,” he says. “I can’t help but believe Memphis will still attract a lot of large build-to-suit and lease projects.”