Memphis Bets on Growth
Despite Negative Statistics

Not much stays in Memphis for very long, and that is reflected in the city's real-estate market.

Memphis is one of the U.S.'s major transportation hubs, sitting as it does in the middle of the country, midway up the Mississippi River. Local officials say the city's airport moves more cargo than any other in the world, and complements Memphis's excellent highway and rail connections. The tradition of transportation was one reason FedEx Corp. founder Frederick W. Smith chose Memphis International Airport to launch his overnight package business.

About 19 families that evacuated from New Orleans after Hurricane Katrina are now living in Country Squire Apartments, a 972-unit complex in the eastern Memphis neighborhood of Cordova.

Meanwhile, it is still too early to tell if the city's struggling apartment and office markets will benefit from an influx of Hurricane Katrina refugees. Memphis, about 400 miles north of New Orleans, took in an estimated 25,000 people after the storm and about 5,000 of those remain, according to Claude Talford, director of the Memphis and Shelby County Emergency Management Agency.

Despite a steady flow of tourists to Elvis Presley's Graceland estate, the city's economy trails the nation's, with unemployment at 6.4%, above the 4.9% national rate. About a fifth of the local jobs are in the trade and transportation sector.

Memphis developers are betting big on the continued expansion of the region's distribution business, even though the area's warehouse vacancy rate of 16.5% in the second quarter was the second highest of the 54 markets surveyed by Property & Portfolio Research Inc., a Boston-based real-estate consulting company. Memphis developers added more than 7.7 million square feet of new space in the 12 months ended in June. Only Dallas and Chicago built more new warehouse space, though both are larger markets, with vacancy rates of 11.1% and 10.2% respectively. The region's construction is expected to moderate to an annual rate of 3.3 million new square feet annually through 2009, PPR said.

Among the new projects is an 885,000-square-foot speculative bulk warehouse slated for completion in January by Lauth Property Group LLC of Indianapolis. Memphis is attractive because it offers low labor costs and a central location, said Chris Alexander of Lauth. There's strong demand for modern warehouses, Mr. Alexander said, and he said he wasn't concerned by the high overall vacancy rate. "That includes older, smaller space that we would never compete with," Mr. Alexander said. Modern bulk distribution facilities offer higher ceiling heights of about 32 feet and more flexible, larger spaces than older buildings, he said.

The Memphis apartment market's vacancy rate was 9.9% in the second quarter, well above the national average of 6.9%, and its rents are lowest of the 54 major markets surveyed by PPR. "It's a depressed market," said David Lichtenstein, chief executive of Lightstone Group LLC of Lakewood, N.J., which owns about 500 apartment units in the region and found only six takers for 50 free apartments it offered to Katrina refugees. "You would think there would have been a line out the door." Lightstone acquired the properties as part of larger portfolios and has chosen to hold onto the units to avoid tax consequences of a sale, Mr. Lichtenstein said.

By contrast, Mark Fogelman, president of Memphis-based Fogelman Management Group, which oversees about 5,500 rental units in Memphis, said he has rented more than 100 apartments to evacuees and believes the influx could strengthen the overall apartment market. Ron Kastner, an office broker with CB Richard Ellis-Memphis, said his company is working with two companies from New Orleans that are looking for office space in Memphis.

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