While several sectors of the Memphis area commercial real estate market weakened slightly during 1998, industry officials are satisfied with the year's leasing activity, new development and investment sales, all of which held steady amid international economic troubles.

The strength of the local market was clearly illustrated in a recently released Memphis Area Chamber of Commerce study that reported expansions and relocations within the private sector created about $1.4 billion in capital investment in the metropolitan area.

"The fundamentals in the four main sectors - office, industrial, retail and multifamily - are very strong and have remained strong despite the turmoil in the capital markets in the fall," says Earl Blankenship, chief executive officer of CB Richard Ellis Memphis.

Industrial market Industrial real estate, primarily bulk distribution, absorbed nearly 5 million sq. ft. of space, which is slightly lower than the 5.1 million sq. ft. in 1997 and 5.8 million sq. ft. in 1996.

With a number of new developments completed or launched, rental rates dipped in 1998, averaging from $2.75 per sq. ft. to $3 - depending on the location, size and class.

"We expect the rates to remain relatively stable for at least the next three to six months," says Tommy Farnsworth, president of Memphis-based Farnsworth Investment Co., which recently launched a 300-acre industrial park.

Adjacent to Farnsworth's park is a 128-acre industrial complex being developed by Sacramento, Calif.-based Panattoni Development Co. The development, known as East Park, is Panattoni's fourth industrial park in the Memphis area.

Across the street from those two parks is a 245-acre complex being developed by Atlanta-based Industrial Developments International. The industrial park is known as Chickasaw Distribution Center and has already attracted high-profile projects like Palo Alto, Calif.-based Hewlett Packard Co. and Research Triangle Park, N.C.-based Glaxo Wellcome Inc.

Glaxo, one of the nation's largest research-based pharmaceutical companies, just began construction on an $18.5 million distribution center that will consist of 120,000 sq. ft. That project joins Hewlett Packard, which is building a 625,000 sq. ft. light assembly/distribution center.

"Vacancy rates have increased to about 13%, which is pretty high for our market, but demand remains strong so I think that number will come back down pretty quick," says Kurt Nelson, IDI central region leasing associate.

While net absorption in 1998 won't likely equal the previous year, leasing activity has been very strong, according to Memphis-based Wilkinson & Snowden. There was just more than 8.1 million sq. ft. of leasing activity in 1997, and 1998 saw about the same.

"That's excellent leasing activity, but new product keeps coming online," says Bayard Snowden of Wilkinson & Snowden. "Still, the new space is being leased before the foundation is dry."

That was the case with a 500,000 sq. ft. spec facility being built by Denver-based ProLogis, formerly Security Capital Industrial Trust. The real estate industrial trust, which is developing a 68-acre industrial park that will consist of 1.5 million sq. ft., leased the spec to Glen Allen, Va.-based Hamilton Beach-Proctor Silex Inc., which will distribute toasters, blenders, coffeemakers and other small appliances.

"We have had some big name tenants enter the market, and existing companies are seeing healthy growth as well," says Wyatt Aiken, senior vice president of Memphis-based Commercial Tennessee Inc. "Memphis, Shelby County [Tenn.]and DeSoto County, Miss., will continue to grow."

Office market While the international economic crisis created some chaos in the local office market during 1998, the absorption continued to show signs of strength as a steady demand for space created a stable environment with increasing rental rates.

As in the industrial real estate sector, the office market experienced a dip in absorption compared to the traditional annual average of 500,000 to 550,000 sq. ft. But an equilibrium between supply and demand spurred steady increases in rents, which range from $17 to $22 per sq. ft.

Overall, leasing activity has been solid with a marginal increase in vacancy, which inched up to about 7.2% during the first six months compared to 6% during the same period in 1997.

"We saw some slowdown in the REIT market early in the year, but it is beginning to pick up," says Mary Singer, president of Memphis-based Commercial Realty Group.

There's a slate of new developments either under construction or announced that will go online during 1999-2000. The projects include: Weston's $26 million Renaissance building, a 200,000 sq.ft. high-rise office building in East Memphis; Memphis-based Clark & Clark's newest Lenox Park building, a $13.5 million, 97,000 sq. ft. facility; and Jacksonville, Fla.-based Koger Equity, Inc.'s $8 million, 83,000 sq. ft. office building.

Weston also is nearing completion on a 96,000 sq. ft. building that has been leased to Memphis-based FDX Corp., the parent company of Federal Express Corp. And Raleigh, N.C.-based Highwoods Properties Inc.'s 64,000 sq. ft. building at Southwind is expected to be completed in early 1999.

The East Memphis submarket, which consists of nearly 10 million sq. ft. of the total 20 million sq. ft. of inventory, continues to perform strongly as occupancy hovers around the 93% mark. East Memphis Class-A rental rates increased from $17.29 to $17.51 during the first six months of 1998.

In the central business district, Belz has been instrumental with its Peabody Place development. The latest lease - and largest in 1998 - was a 34,000 sq. ft. lease to Executive Suites, which is launching an operation in the 125,000 sq. ft. Pembroke Square Building at Peabody Place.

The real estate firm also has experienced success with its 15-story, 154,000 sq. ft. Tower at Peabody Place, the first high-rise office building launched downtown in about a decade. There is about 11,700 sq. ft. of space available at the Tower.

Overall, downtown occupancy was about 80% with rental rates falling slightly from $13.30 per sq. ft. to about $13.25 at the mid-year mark.

While both downtown and East Memphis remain the strongest office markets, projects also are springing up further east as developers begin opening new corridors like I-40 and Nonconnah Parkway.

Places like Southwind, Goodlett Farms and Lenox Park - areas benefiting from the construction of Nonconnah Parkway and improvements to I-40 - are attracting more and more build-to-suits as well as speculative developments. Spurring the growth of those two corridors is that Memphis' traditional office corridor along Poplar Avenue is essentially built out, causing land prices to increase and eliminating the ability to develop low-density office complexes.

FedEx is developing a 1 million sq. ft. technology campus in Collierville and an 89-acre headquarters at Southwind, where developments have been launched by Thomas & Betts and Varco-Pruden, among others.

Nonconnah has spawned developments like Clark & Clark's Lenox Corporate Park, which is located off Nonconnah and Mt. Moriah. Clark & Clark is currently developing a $13.5 million, 97,000 sq. ft. office building, which marks the start of the second phase of the $100 million, 85-acre office complex.

Retail market Retail properties in the Memphis area continue to remain stable with several projects under construction, but the story of 1998 was investment sales. The biggest deal was inked in May when Weston sold six retail centers totaling 850,000 sq. ft. for $80 million to Atlanta-based Lend Lease Real Estate Investments, the nation's largest pension fund manager.

Nearly 2 million sq. ft. of Memphis-area retail real estate has changed hands in the past year alone, as real estate investment trusts, institutional investors and other groups built up their portfolios and shopping-mall owners consolidated.

The retail properties range from Oak Court Mall - a 720,000 sq. ft. regional mall that's part of a portfolio sold to the Simon DeBartolo Group - to Hickory Ridge Crossing, where 70,000 sq. ft. out of a total of 89,000 sq. ft. was sold to a Pennsylvania-based privately held REIT.

Charlotte-based Faison & Associates, which was acquired by Trammell Crow earlier this year, developed The Commons shopping center, a 550,000 sq. ft. property across from Wolfchase Galleria, and sold it in 1997 to a German investor for $34.7 million.

While investment sales have been strong, new development is holding steady as a handful of firms develop strategically placed, smaller shopping centers.

"The big years for new development were in 1996 and 1997 when about 2.5 million sq. ft. was developed," says Kelly Truitt, CB Richard Ellis Memphis senior vice president. "We've seen a little bit of a slowdown recently, but the market isn't overbuilt."

Occupancy remains above 90%, and the market is capable of supporting new projects.

Memphis-based Boyle Investment Co. is currently developing Gallina Centro, a 400,000 sq. ft. shopping center just west of Collierville. The center is scheduled to be completed during the first quarter.

Multifamily market The multifamily sector of the market saw a surge in new construction that caused occupancy rates to fall to about 92%. But officials expect the new units to be absorbed in short order, particularly since most developers are putting off new construction until mid-year 1999.

New multifamily construction in the local market surged ahead in 1998 with about 3,000 units scheduled for completion by year end, a 68% increase from the 1,800 completed in 1997.

Large apartment developments expected to go online in 1998 include: the 408-unit Lincoln at Wolfchase by Tulsa, Okla.-based Lincoln Properties; Memphis-based Mid-America Apartment Communities' Reserve at Dexter Lake, a development that currently consists of about 250 units and will eventually consist of 700 units; and the 324-unit Fieldstone at Southwind by San Antonio-based Embrey Partners.

"We are adding more product than we can absorb right now, but rents are up almost 3%," says Steve Rudesill, president of the multifamily division of CB Richard Ellis Memphis.

Investors ranging from REITs to pension funds to private investment groups acquired about $151 million worth of apartment properties in 1998, and about 94% of the acquisitions included properties with 100 units or more. The $151 million investment was the largest total since 1994 when about $207 million was recorded, and it also was 22% higher than the $123 million recorded last year.

Senior Housing market While the concept of senior housing developments only took hold in the Memphis area a few years ago, demand for the facilities is brisk with several multi-million dollar projects either under construction or scheduled to begin in 1999. The booming market has companies ranging from Marriott International Inc., to Memphis firms like American Senior Development and Pickering Inc., eager to tap the local market.

Pickering and American Senior, both based in Memphis, are launching a $17 million, 140-unit assisted living facility that will house up to 250 people.

Wesley Senior Ministries, a subsidiary of Memphis-based Wesley Housing Corp., is expanding its assisted living portfolio to 35 centers by 1999 and has secured $10.5 million in federal funding for five independent living communities serving low-income residents 62 and older in Memphis, Dyersburg and Jackson and Jonesboro, Ark., and Savannah, Tenn.

Hotel market The local hotel market has remained steady throughout 1998 with about a 3% increase in new rooms and 67% occupancy. But 1999 is projected to see a 16% increase as the total number of rooms increases from 16,000 to more than 18,000.

"A lot of companies, particularly the REITs, are taking advantage of the strong local market," says John Oros, senior vice president of convention development at the Memphis Convention & Visitors Bureau.

The significant increase in new rooms is expected to have a negative impact in terms of occupancy, which is projected to fall to 65% next year. Still, officials are optimistic.

"The decrease in occupancy won't be devastating," Oros says. "Downtown demand is still very strong and the East Memphis market, which is the strongest in the area, is strong. And we're starting to see credit tighten, so new construction will probably slow up slightly."