News Article | 12/23/2005

Memphis among Top 5 U.S. cities in amount of industrial space absorption

Characterizing Memphis industrial growth is becoming increasingly difficult as DeSoto County has mounted its hottest competition yet in 2005.

A regional thinker would be extremely satisfied with the huge deals that landed in the Memphis area this year, but most of the big fish were caught south of the border.

2004 might have been the year the Shelby County vs. DeSoto County matchup came to full light, but 2005 was the year DeSoto County took a definitive lead on the competition.

Dallas-based Hillwood Investment Properties was the beneficiary of most of the year’s action, including Helen of Troy’s 1.2 million-square-foot facility and Kuehne & Nagel’s 880,000-square-foot distribution center. Exel Logistics and PFSWeb also made major investments in Mississippi in 2005.

Hillwood’s DeSoto Trade Center had an edge on other developments because of the sheer size it could offer. Industrial Developments International purchased 475 acres in mid-2005 to have the opportunity to match size with Hillwood and compete with the 1 million-square-foot-plus build-to-suits.

Memphis’ industrial vacancy rate is 17.9%, according to CB Richard Ellis MarketView. The Southeast, still the king of industrial availability with almost 64 million square feet of product, and the DeSoto County submarkets show nearly identical vacancy rates though, at 16.1% and 16.2% respectively.

Dan Wilkinson with Colliers Wilkinson & Snowden, says 2005 was a better year than most professionals anticipated with about 6 million square feet of absorbed industrial space. Wilkinson says that places Memphis in the top five U.S. cities, in terms of absorbed space.

“You have to look at that and say, ‘That’s a very good year,’ ” he says.

2005 was a good year but could have been a “banner year” before Katrina and rising fuel costs hit the economy, says Patrick Burke, CB Richard Ellis Memphis vice president. Deals were surging but slowed significantly in the fourth quarter, a quarter that typically sees the most action.

“Had the deal flow continued at the same pace, it would have been an incredible year,” Burke says.

2005 was also a major transformation year for DeSoto County developers, Wilkinson says.

“2005 was also the year the major developers really began to cast a long eye toward Mississippi as an alternative for the next phases of development,” he says.

Wilkinson is careful not to take too much away from Memphis. Tennessee landed some big fish, including Hewlett-Packard’s 789,000-square-foot expansion and Jabil’s 350,000-square-foot expansion. ProLogis, Panattoni and Lauth Property Group all have big boxes in Tennessee waiting for tenants in 2006.

About 5.7 million square feet of warehouses were built in the Memphis area from fourth quarter 2004 to third quarter 2005, according to CoStar Group, Inc. Eddie Saig, president of NAI Saig Co., says the continuing amount of new speculative warehouse product developers deliver in the Memphis area will keep prospects looking at Memphis.

The Memphis City Council is currently analyzing the city and Shelby County’s PILOT program, which provides tax incentives to lure business to the area. Any changes could affect the county’s ability to attract users, but Saig is hopeful the legislative bodies will reach a “reasonable conclusion as to what Memphis is going to be able to offer to be competitive.”

Real estate tax abatements provided by the PILOT program historically have been predictable, and questions regarding the program could make enticing companies more difficult.

“Until they get the program in more of a condition where there’s not so much uncertainty, (developers) are just going to stop building buildings,” Burke says.

There aren’t a lot of prospects hunting for space in the Memphis area market, but Wilkinson says that is not unusual. Over the past decade, the industrial community has hit these “where-is-everybody” periods, but he expects bigger prospects to start stalking in spring 2006.

Burke is currently working with three tenants in the 250,000-square-foot-plus size range, but he knows his situation is fortunate. “When I talk with brokers in other cities, they’re clearly seeing things pick up more so than we are here,” he says.

Even though a lot of the speculative product is on the market, that should only help Memphis in 2006, in terms of competitive pricing based on recent spikes in construction costs following Hurricane Katrina.

“With this inventory that we have available, a lot of those buildings were built under an old pricing structure which does assist the developer as far as having available inventory at an older construction price,” Saig says.

But for 2006, Wilkinson says it will be the first year in his memory that more speculative space will be built in Mississippi than in Tennessee, a trend that should stick for the next three-four years.

“The land owned by developers gives them a lot more room to build new product on than the land owned in Memphis by developers,” he says.