Memphis , TN Commerical Market Re:Cap

Memphis, Tennessee, a city renowned for its rich musical heritage and vibrant cultural scene, might be overlooked a market when considering commercial real estate. As the largest city in the state, with its strategic location on the Mississippi River and a robust transportation infrastructure, the city has become a hub for logistics and distribution companies. This Re:Cap will delve into the factors driving the retail, multifamily, industrial, and office market and examine the potential for future growth in Memphis' dynamic commercial real estate sector. Thank you to Memphis CCIM President ToDario “Todd” Harris, CCIM for making this detailed article come together.

Retail

To get a perspective on the retail market, we spoke with the self-proclaimed "Retail Geek, Shawn Massey, CCIM, CRRP, ALC. Massey celebrated his 20th anniversary at TSCG this year and is a professor at the University of Memphis, teaching real estate investments and development. 

The downtown retail market is thriving and is a healthy indication of the market as a whole. In fact, more people live in downtown Memphis than in downtown Nashville. The market has a booming tourism and residential market, with apartment vacancy rates below 1%. In addition, there are 17 hotels under construction, further supporting retail throughout the area. 

After experiencing a consecutive two-year period where net absorption exceeded new supply by over 1 million square feet, the metropolitan area commenced 2023 as part of an exclusive group of only 14 prominent markets in the United States, boasting a vacancy rate below 4%. According to Massey, healthy market conditions are in the 7-9% vacancy rate range; that way, new retailers looking to enter the market do not have a 2-year waiting period. As a result of the tight supply, rent has risen dramatically in recent years; the current market average is $14.45. 

To one's surprise, retailers like Chick-fil-A and Starbucks are establishing new locations in lower to moderate-income areas, whereas traditionally, both companies have ignored 65% of the Memphis market. Since development has slowed due to several factors, most development is coming in the form of infill projects. The NNN market has been very robust; banks, fast-casual restaurants, coffee shops, and more have all entered the suburban markets. 

Industrial 

To cover the industrial market, the team at Rockval spoke with Brian Califf, CCIM, Executive Vice President at NAI Saig Company. Califf has been in the business for over 18 years and has been awarded NAI's Global Top Ten Producer, Worldwide, each year from 2019 - 2022. 

Due to its centralized location, distribution and third-party logistics are the leading industry drivers. Memphis is the 3rd busiest Truckking Corridor in the US and ranked 1st as the busiest cargo airport in the world. For example, the shipping goliath FedEx is headquartered in Memphis. In addition, the metro's below-average market rates have attracted west coast distribution companies more recently, capitalizing on the lower traffic congestion and below national rents. The market comprises 300M square feet of inventory with an average vacancy rate of 5%. Rents for Class A assets are anywhere between $4.5 -$5/SF NNN. As of the end of Q1, there are 6.2M square feet under construction, and total absorption was 2.1M square feet. According to Califf, Class A transactions are trading between 6.5% - 7% cap rates; Class B assets transact between 7.5% - 8% cap. 

Office

The office market in Memphis has had a slow recovery post-pandemic but has remained relatively stable throughout the past six months. We spoke with Laura Meanwell, Senior Associate at Cushman & Wakefield, to get an insider look into the market conditions. Like most markets, companies are still struggling with hybrid and remote work, downsizing space, and moving to quality spaces. The downtown market has been hit the hardest; three significant office buildings are being converted into multifamily and mixed-use spaces. The market totals 27M feet, with an average asking rent of $19.60/SF NNN. Q1 posted a positive absorption level of 175k square feet, while vacancy remained flat QOQ at 16.2%. The "Poplar Corridor" has seen the most demand on the leasing side. Made up of over 10M square feet, the submarket is attractive due to its newer product and is easily accessible to the suburbs. According to Meanwell, the Memphis medical office is one of the stronger industries.

BlueOval Ford Facility

The biggest news hitting the Memphis headlines is the announcement of Ford's BlueOval city's electric vehicle center, a $5.6B investment that will add 6,000 new jobs to the surrounding area. J. Max Hamidi, CCIM noted the increase in land prices surrounding the plant; since the announcement, land prices near Memphis have nearly tripled. Hamidi is looking forward to the multiplier effect of jobs and the need for commercial assets with the addition of the plant. Memphis has had its struggles with unemployment and crime, but Hamidi believes the metro is trending in a better direction. He believes investors have begun to realize this and are getting in early. In 2019, Bloomberg ranked Memphis as one of the top 3 cities for job growth.

Re:Cap Key Takeaway

Memphis, Tennessee, often overshadowed in the commercial real estate market, is emerging as a promising hub for various sectors. Tennessee is a rapidly growing state both economically and from a population standpoint. As Memphis continues to better its economy, it provides a great long-term commercial real estate investment opportunity.