Memphis Market Watch: 5 Crucial Insights for Retail Investors

Record-Low Vacancy Rates

As of the third quarter of 2023, Memphis retail vacancies are at their lowest, standing at 3.4%. The market has seen continuous tightening since early 2021. This trend reflects a robust demand for retail space. Over the last year, the market has become increasingly competitive.

Stable Net Absorption Despite Limited New Development

Memphis has reported a net absorption of approximately 330,000 square feet over the past 12 months. Developers built only about 31,000 square feet of new retail space during the same period. This disparity between demand and supply contributes to the market’s tightness. The limited new inventory supports a seller’s market in retail space.

Impact of Upcoming Developments

The current construction pipeline in Memphis totals 650,000 square feet, only 0.7% of the metro’s existing inventory. This pipeline is slightly higher than the national average but remains manageable. Although about 35% of this new construction is still available, its introduction will likely only slightly loosen the market. Expectations are for Memphis to maintain a tighter market than the national average.

Competitive Rental Rates and Steady Growth

Memphis’s rental rates remain significantly lower than those in major southeastern markets and the national average. This affordability and a steady annual rent growth rate of 2.4% align with both U.S. and historical local trends. These conditions make Memphis an attractive market for new and expanding retailers.

Attractive Pricing and Active Transaction Market

The average pricing for retail spaces in Memphis is generally lower than in other U.S. markets, leading to higher capitalization rates than seen nationally. Despite higher interest rates and economic uncertainties, transaction activity in Memphis has been vigorous over the past year. This active market presents opportunities for investors looking for competitive returns.

Competitive Rental Pricing in Memphis

Memphis features an average asking rent of $15.60 per square foot, significantly below the national average of $24.00. Compared to faster-growing southeastern cities like Nashville, Raleigh, Charlotte, and Atlanta, Memphis remains more affordable. This price advantage positions Memphis attractively for businesses seeking lower operational costs.

Consistent Rent Growth Amidst Low Vacancy

As of the third quarter of 2023, annual rent growth in Memphis has been steady at 2.4%, aligning with historical trends. This growth rate is slightly below the national average. Despite record-low vacancy rates, rent increases have been moderate, likely influenced by demolishing outdated retail spaces rather than new demand.

Market Dynamics and Future Outlook

Memphis’s current low vacancy rates are partially due to removing obsolete retail spaces. CoStar predicts that while rent growth may slow, it will remain positive. The limited speculative supply in the construction pipeline underpins this forecast, ensuring demand continues to outpace new development.

Implications for Investors and Retailers

Investors and retailers might find Memphis appealing due to its lower rents and stable growth prospects. The unique market dynamics, including removing non-competitive retail spaces, ensure that the market retains its viability despite slower growth. This scenario presents a strategic opportunity for long-term investment in a less volatile market.

Modest Retail Deliveries in Memphis

Over the past year, Memphis has seen only 31,000 square feet in net new retail deliveries. A notable addition was the 21,000 square feet of retail space at Silo Square in Southaven. The low volume of new retail space is part of a broader trend involving removing obsolete properties, such as a former Sears store in 2022’s fourth quarter.

Strategic Demolition to Pave the Way for New Developments

The demolition of outdated retail spaces, such as the former Lakeland Factory Outlet Mall in 2017, has been a consistent trend in Memphis. Developers are clearing these areas to facilitate new projects, like the mixed-use Lake District development in the Northeast Submarket. However, the developer’s bankruptcy has halted further development at this site.

Current Construction and Pre-leasing Status

Currently, Memphis has about 650,000 square feet of retail space under construction, slightly above the historical average for the market. Approximately 65% of this under-construction space is pre-leased. This includes The Shops at Arlington Village, anchored by a Kroger and set to open in the fourth quarter of 2023.

Shift in Construction Trends Towards Mixed-Use Developments

Reflecting a national trend, new retail construction in Memphis is moving towards smaller, more integrated spaces within mixed-use developments. Examples include developers building retail spaces in The District at Liberty Park, a mixed-use project in the Downtown/Midtown Submarket. This shift aims to create more dynamic, multi-functional urban areas.

Vigorous Retail Market Activity in Memphis

The Memphis retail market has seen robust activity, with 350 retail assets sold in the past year at an average price of $147 per square foot. This high sales volume is particularly notable given the slowdown in other markets due to rising interest rates and recession fears. The local market’s resilience highlights its attractiveness to investors.

Slight Decline in Cap Rates with Expected Increases

Despite a recent slight decline in capitalization rates, these insights predict an increase in the near term due to economic pressures. This forecast aligns with broader market uncertainties and the potential impacts of economic downturns. Investors are closely monitoring these trends to adjust their strategies accordingly.

Highlighted Recent Transactions

Recent notable transactions include the sale of Stage Crossing Shopping Center for $4.2 million and a 42,100 square foot Bowlero bowling alley for $6.97 million. These sales reflect diverse investment interests in the Memphis area, from neighborhood shopping centers to recreational facilities, indicating a healthy demand across different retail segments.

Major Transactions Showcase Market Strength

One of the largest transactions was United Properties Corp.’s acquisition of the Sumner Center, which includes major tenants like Kroger and Ross Dress for Less, for $18.4 million. This high occupancy and strategic tenant mix demonstrate the sustained investor confidence in Memphis’s retail market.

Continued Investments Despite Economic Headwinds

Before the recent uptick in interest rates, Millan Enterprises purchased Dexter Ridge Shopping Center for $6 million. This transaction, completed after 107 days on the market, illustrates continued investment despite economic challenges. The sustained activity suggests a strong underlying value in Memphis’s retail properties.

Closing Thoughts

The Memphis retail market continues demonstrating resilience and attractiveness to investors despite broader economic uncertainties. The sustained transaction activity and strategic acquisitions highlight its potential for robust returns. Detailed insights and strategic guidance can enhance decision-making for those considering investments in this vibrant market. Contact Lumicre for your investment needs to explore opportunities in Memphis’s retail landscape.