Investors Heat Up Commercial Market

25 Businesspeople who have made a difference in Memphis, 1979-2004
– Memphis Business Journal –

Real estate is moving in Metro Memphis, at least if the number of commercial transactions over the first eight months of 2004 is any indication.

Through August 2004, 737 commercial properties were sold, compared with 658 in the same period last year, according to Chandler Reports, www.chandlerreports.com. It’s a sign that Memphis real estate investors are staying busy.

Driven to invest. Jo Steffner, president of the Memphis Area Association of Realtors Commercial Council and vice president in charge of third-party property management and leasing for office and industrial portfolios with Colliers, Wilkinson & Snowden, said factors such as a slow stock market have driven investors to the real estate market. The stock market “really hasn’t revived the way investors need it to, particularly institutional investors,” Steffner said. “It has created a demand for real estate because the other markets aren’t working that well. That’s what has driven the market to be so interested in real estate.”

By category. The most significant changes during the first eight months of 2004 compared with the first eight months of 2003 came in land transactions, multifamily and elderly housing transactions and office transactions.

Land sales are improving – 235 transactions this year came in at an average price of $741,056, compared with 224 at an average of $453,955 in 2003. The first eight months of 2002 saw 203 land transactions at an average of $514,033.

Multifamily and elderly housing sales saw a strong increase in the first eight months of this year, with 96 at an average price of $1.4 million this year, up from 74 at an average price of $711,638 in 2003. The number of transactions in 2002 was 86, with an average sale price of $1.6 million.

Multifamily. While prices and transactions have increased, the Memphis market hasn’t necessarily been flooded with major investments in multifamily and elderly housing properties. Rather, a number of smaller properties have changed hands.

“What I know is that there had been a lot of interest in the last couple of years in smaller buildings, particularly from out-of-town investors,” said Mike Greenberg, chief executive officer of Makowsky Ringel Greenberg.

Midtown’s 38104 ZIP code led the way with 26 transactions averaging 10,109 square feet in size and $461,752 in price.

Affordable commodity. Mark Halperin, executive vice president of office development for Boyle Investment Co., said low interest rates have made real estate an affordable commodity.

“Real estate has been an interesting alternative for people,” he said, “And when they’ve compared it to alternative opportunities, they’ve been willing to pay relatively good prices for real estate. Some of the things that have sold have appeared to be pretty high.”

Average price for office properties in the first eight months of this year was $922,208 for 102 properties, down slightly from $1.3 million for 73 properties in the same period in 2003. That compares to an average of $451,598 for 108 properties during the first eight months of 2002, according to Chandler Reports, which is owned by The Daily News Publishing Co. “As interest rates have gotten lower, the prices at which things have traded have risen,” Halperin said. “That, to some degree, was in concert with the stock market going down.”

Office activity. The 38134 ZIP code, located near Interstate 40 in East Memphis, had the highest number of office transactions this year at 12. Average price was $385,833. The 38017 ZIP code averaged $831,867 over 10 transactions. While not as high in total transactions, the 38117 East Memphis ZIP code saw an average selling price of $3.2 million for six properties

“You have to look at the class of office space, the quality of the tenants and the location of the building,” Steffner said. “If you’re comparing apples to apples, I don’t think the rates have really gone up that much.

“But the impact on prices, if they have gone up, is because of interest rates and because of the tremendous amount of money that is still out there to be placed in real estate. People are buying buildings at lower cap rates than they might have three to five years ago because rates are down, but also because they’re afraid rates are going to go back up and they want to lock the lower rates.”

Retail steady. The number of retail properties moving in the first eight months of 2004 compared with recent years has remained relatively unchanged, with 115 transactions in 2002, dropping to 107 in 2003 and rising by one to 108 in 2004. And prices have been declining, from an average of $1 million in 2002 to $735,818 in 2003 to $723,192 this year.

But Scott Barton, vice president of retail services with CB Richard Ellis, said things are looking up for retail.

“In general, there are a fair amount of transactions going on right now,” he said. “The investment market is very hot right now, for retail in particular.”

Barton agreed that prices have fallen somewhat.

“They’re high, but not quite as high as they were four, five, six months ago,” he said. “Cap rates are probably up slightly. It’s still a very healthy market in retail.”

Entertainment. Changes in the entertainment real estate market – which includes restaurants, bars, theaters and hotels – were minimal. Thirty transactions in the first half of 2004 marked a drop by one form the same period in 2003. Average selling price remained nearly the same, with $1.3 million in 2004 compared with $1.5 million in 2003.

That compares to 45 sales in 2002 at an average price of $597,338.

Industrial forecast. Changes in the industrial market were also minimal, increasing by two to 74 sales for the period. Properties were smaller in size and price this year, averaging 34,641 square feet and 736,414, compared with 70,378 square feet and $1.4 million in 2003.

Steffner warned that sales of industrial properties in Shelby County could begin to dwindle.

“The industrial market has continued to, and will continue to, change and move toward DeSoto County,” he said. “But that’s really a function of property taxes as much as anything.”

Future hotspots. Land transfers indicate that future development will occur in the predictable places. Arlington led the way through the first eight months of this year with 38 transactions at an average price of $332,328. Collierville was second with 26 at an average price of $1.7 million Cordova’s 38018 and 38016 ZIP codes also performed well, with 35 transactions between the two areas.