Tennessee Waltzes to Prosperity
Throughout Tennessee, business is good and jobs are readily available. “The economy is stable,” says Kelly Truitt, CCIM, of CB Richard Ellis in Memphis. “[There was] $1.4 billion [of capital] invested in 1998 with 7,000 new jobs and over $2 billion of capital investment projected for 1999.” Commercial real estate professionals attribute the healthy economy to the growth of existing businesses, the entrance of new businesses, and the advent of Tennessee's first two professional sports teams. Here's an overview of how commercial real estate has been affected by the state's prosperity.
Outstanding Office “The Memphis office market is healthy and growing,” Truitt says. The occupancy rate has increased from previous years to reach 90 percent. Annual lease rates average $16.28 psf, which is 25 cents higher than year-end 1998, he says.
Numerous sales of both class A and class B properties are occurring, Truitt says. “Prices range from $60 psf to over $100 psf with most suburban [class] A product selling in excess of $85 psf,” he says.
Both build-to-suit and speculative construction are occurring with no sign of letting up soon, Truitt says. “Memphis will experience continual growth the next 18 months and inventory is closely monitored, so I do not expect an oversupply of product,” he says. Now that the commercial mortgage-backed securities market has settled down, financing is much easier to obtain. “Local banks, conduits, and funds are all active,” he says.
In Nashville, the state capital, growth recently has leveled off. “Office market activity has stabilized after several years of unparalleled growth,” says Joel McAlister, CCIM, of Colliers Turley Martin Tucker in Nashville. “Absorption remains active with key submarkets leading the way. As the economy continues to grow and new corporations enter the Nashville market, positive absorption should continue for the next 12 to 24 months.”
Class A occupancy rates range from 90 percent to 98 percent depending on the submarket, McAlister says. Suburban class A lease rates range from $18.50 psf to $22.50 psf annually. Downtown class A space ranges from $20 psf to $22 psf annually.
Buck Forcum, CCIM, of Grubb & Ellis/Centennial in Nashville says significant speculative construction still is occurring. “The market is getting a tad overbuilt with spec properties,” Forcum says. “The office market will continue to be strong, but it will take a while for the spec space to fill up.”
Not many office sales have occurred, Forcum says. One building recently sold for $30 million at an average of $135 psf. “Sales prices have been stable from what they've been in the last couple of years,” he says.
The office market in Knoxville is very tight with a less than 8 percent vacancy rate, says Mitchell Taylor, CCIM, of NAI Collins, Sharp, & Koella in Knoxville. Annual rates for class A space average $17 psf, while class B space averages $14 psf. Both rates have increased from recent years.
“Class A office construction is occurring in west Knoxville with the addition of over 300,000 sf,” Taylor says. “I feel office will continue to be very active with call center activity being on the increase.”
Industrial Hub “By virtue of its central location within 600 miles of 43 percent of the nation's population, Memphis is often labeled as ‘America's Distribution Center,' ” says Joe Fulmer, CCIM, of Boyle Investment Co. in Memphis. As a result, the city is home to about 140 million sf of industrial space.
“Traditionally, the greatest growth in tenant demand, lowest vacancy rates, and most new construction in Memphis have been experienced in the southeast market,” Fulmer says. This is due to the area's close proximity to the airport, major railroad lines, and quality housing.
Lease rates for traditional warehouse and manufacturing facilities range from $2 psf to $3.90 psf and have remained constant due to new construction, he says. Rates for office/showroom or hybrid industrial/office space range from $7 psf to $11 psf. Land prices for industrial use generally range from $1 psf to $2.50 psf, he reports.
In Nashville, the industrial market is “vigorous with lots of activity, especially in larger spaces. It's somewhat slower in the flex-market space,” says Leslie Pomeroy, CCIM, of RCM Realty LLC in Nashville.
The occupancy rate is up from recent years, at around 92 percent, Pomeroy says. Sales prices also are up, ranging from $25 psf to $35 psf. “[Lease] rates are level because of new product,” averaging $3.75 psf, she says. She predicts rates will grow steadily and then adjust as new product is brought on line.
Industrial financing is easy to obtain and both spec and build-to-suit construction is occurring in the area, Pomeroy says.
Retail Report Construction in the Memphis retail market is occurring at a rapid pace, says Frank M. Dyer III, CCIM, of Loeb Properties in Memphis. “The strong economy with low interest rates has encouraged start-up businesses,” Dyer says. “These start-up businesses have kept demand for small retail space very strong, which has kept developers busy building new centers.”
Dyer says the construction is mainly spec for small stores and build-to-suit for big-box stores. Financing from private investors is plentiful, he says.
The retail occupancy rate in Memphis is 88 percent and annual lease rates average $13.17 psf. “As long as the economy stays healthy, the retail segment will stay strong,” Dyer says.
Knoxville has a “tremendous amount of retail construction, leasing, and sales,” says George Frankenberg, CCIM, of American International Properties in Knoxville. He credits the healthy market to the region's balanced economy.
The retail occupancy rate is 95 percent in primary locations and 87 percent in secondary locations, says Jim Simpson, CCIM, of Prudential Volunteer Realty in Knoxville. “These rates are up from the early 1990s,” Simpson says.
Sales prices and lease rates also have increased. “Rates are slightly up and range from $10 psf to $16 psf per year in most strip malls,” Frankenberg says. “Regional malls are much higher, especially for small spaces.”
In the next few years, “Big-box category killers will continue to put pressure on traditional retailers,” Frankenberg says. “[But] specialty stores may actually make a comeback.”
Multifamily Trends The Knoxville multifamily market has been taking advantage of low-income housing tax credits. “The recent trend in multifamily has come from investors who are looking for multifamily properties that are located in areas that have been designated as special census tracts to receive government tax credits,” says Evelyn Lakin-Lahti, CCIM, of Prudential Volunteer Realty in Knoxville. “These developments are designed for low- to medium-income apartment dwellers.”
Lakin-Lahti says because the local economy is good, the demand is high for multifamily product. “One thousand to 1,500 units have been added during the last 18 months,” she says. “[And] with interest rates down, there has been increased demand for condos.”
Assisted living is one multifamily segment that is leveling off after a brisk period, Lakin-Lahti says. “We are seeing a slowing of assisted-living construction while the absorption rate increases,” she says.
Market Glance Dallas -Fort Worth Riding High
“As one of the stronger metropolitan areas in the United States, the Dallas market continues to move forward as the local economy approaches its seventh consecutive year of economic growth and expansion,” says Scot C. Farber, CCIM, of Jones Lang LaSalle in Dallas. Commercial real estate professionals address how this growth and expansion in the Dallas-Fort Worth area has affected the industry.
Consistent demand for office space has led to lease rate increases over the last six and a half years, Farber says. Class A properties currently average $24.38 psf and class B properties average $18.71 psf.
Demand also has led to new construction. “In 1999 and 2000, an additional 7.8 million sf of nonowner-occupant space will be delivered,” Farber says. “Additionally, there is approximately 1.9 million sf of owner-occupied space being added to the market.”
“Overall, multifamily activity is down somewhat compared to 1998, with sales of new construction lagging due to slow lease-up,” says Debra S. Corson, CCIM, of Corson & Associates in Dallas.
The current occupancy rate is about 92 percent, which is down 2 percent from the previous year. Corson says she expects the occupancy rate to continue to drop because 5,000 new units currently are under construction.
Sales are occurring in the Dallas-Fort Worth area for class B and class C properties. “Current prices are in the range of $30 psf to $50 psf,” Corson says.
The Dallas-Fort Worth retail market is performing strongly, partly due to an influx of new residents. “New retail growth is a direct result of rooftops,” says Greg McDonald, CCIM, of the Weitzman Group in Dallas. “New homes and apartments follow job opportunities and create new shoppers.”
The occupancy rate for grocery-anchored centers has been higher than 90 percent for three years, McDonald says. Currently, two regional malls are under construction and two more are in the final planning stages. “Most retail construction has the anchors leased and in many cases over 50 percent preleased of the smaller lease spaces,” he says.
“Industrial occupancy rates dipped [in 1998] and [in 1999] because new construction overshot demand,” says John M. Stone, CCIM, of John M. Stone Co. in Dallas. “In recent years, the market was in equilibrium.” Most new construction has been build-to-suit with some spec tacked on to it.
Lease rates are stable with some slight growth in selected areas, Stone says. “Given the grade of diverse types of space available, rates can vary all the way from a low of $1.50 psf annually all the way up to $6 psf annually,” he says.