August 03, 2015

Development Across Office, Retail, Industrial Crawls With Broader Economy

By Andy Ashby
– Memphis Business Journal –

As the economy has slowed, commercial real estate development has stalled across all property types.

Each major property type — office, retail and industrial — has been affected by the recession in different ways, but none have escaped unscathed. When development could return depends on the property type and on who you ask.

On the office front, Memphis has been blessed by entering a recession without a lot of inventory, according to Rusty Bloodworth, executive vice president at Boyle Investment Co.

Boyle recently completed a 150,000-square-foot office building at 999 S. Shady Grove in East Memphis and has land for an adjacent companion building.

However, Boyle’s office development, like many companies, is driven by key tenants.

“The key tenants’ willingness to move into new space can be triggered at any time, both by merger or a change in business strategy,” he says.

Also in East Memphis, Highwoods Properties, Inc., is currently building the 155,000-square-foot Triad Centre III. That property is 17% pre-leased, but would have to hit 80% before the company starts looking at new speculative developments, vice president Steve Guinn says.

Money which might have been used for commercial development is being redirected to debt.

“When you have rollovers of debt, it’s more important to concern yourself with getting your debt taken care of than it is worrying about putting new capital into acquisitions or new development,” Guinn says.

Highwoods can switch gears during development downturns because it also owns, manages and leases properties.

“If development’s your primary focus, it’s tough right now,” Guinn says. “If you’re strictly development, you could go and try to get third-party management to get some cash flow coming in to pay the bills. Short of that, there’s not much else to do.”

One example of this is Panattoni Development Co., which closed its Memphis office and farmed out its third-party management to Colliers Wilkinson Snowden.

Highwoods is also focusing on refreshing the 135,000-square-foot PennMarc Centre, which it acquired from Belz Enterprises, Inc., in 2008.

Similarly, when not in development mode, Boyle looks at repositioning its existing properties.

“You can come back in and freshen up, check any form of obsolescence,” Bloodworth says.

On the retail side, Bloodworth doesn’t think there will be large development anytime soon without a large tenant committed and it’s hard to predict when that could happen.

Weingarten Realty Investor’s 312,000-square-foot Ridgeway Trace Center development in East Memphis is the latest large-scale retail project, and it’s anchored by Target, Sports Authority and Best Buy.

“However, I think retail is tightening up and new store locations will be pretty dampened for the next 10-18 months,” Bloodworth says.

Matt Prince, senior vice president of brokerage and development for Loeb Properties, Inc., says the economy has led to a lack of consumer spending, which has stopped retailers from expanding. Add in the fact that the credit markets are frozen and capitalization rates are rising, and it’s slowed retail real estate development.

“In short, the margins are being compressed to the point that the risk is outweighing the reward,” Prince says.

Retail development will pick back up once the current vacancy has been absorbed and the residential market stabilizes and grows.

“I don’t know when that will be,” Prince says. “I think infill projects in the right locations will continue to gather some interest because it will offer density and demographics which certain retailers will see as a chance to get into the right location.”

While industrial development has stopped across the country, the Memphis market is in pretty good shape when development picks up again, according to Toby Rogers, vice president with Dallas-based Hillwood Investment Properties.

“As we continue to move through difficult economic times, it has caused some industrial clients to consolidate into larger facilities and Memphis will benefit from that,” he says. “Memphis is a great market for consolidations. Hopefully, that will continue to take space off the market and at some point it will make sense for development to come back.”

The slowdown in industrial real estate development is being seen across the country, not just Memphis, and it’s affecting development companies.

“You’ll see some shut their doors and others which have the staying power to weather the storm and wait for it to come back,” Rogers says. “Everyone knows this business is cyclical.”