MEMPHIS RETAIL MARKET IS RETURNING TO PRE-PANDEMIC NORMS

Southeast Real Estate Business   I  July 2022  I  www.REBusinessOnline.com

By: Jon Isbell, Vice President, TSCG

Memphis has seen a tight retail  market for quality space and development opportunities since the COVID- 19 pandemic. Our market sits at a 3.5 percent vacancy rate, according to CoStar Group analytics, and overall retail leasing activity is strong. Memphis has benefitted from a consumer base that is ready to return to the pre-pandemic rhythms of life. Retail sales have been healthy overall, with strong increases in sales of restaurants, particularly restaurants with a drive-thru. Rents for high-demand space have increased accordingly given the lack of quality opportunities for new-to-market or expanding retailers.

 

Investment sales activity has been steady with an average cap rate around 7 percent, according to Co-Star. Well-located and stable shopping centers are trading lower. A handful of high-profile institutional assets are either on the market or about to hit the market, and we expect those to trade at sub-7 percent cap rates.

 

Ford Motors and SK Innovation’s new electronic vehicle (EV) and battery production facility in Stanton, Tenn., (25 miles east of Memphis) is anticipated to have a positive impact on the local economy. The $5.6 billion mega campus, called Blue Oval City, will add around 5,700 new jobs at its plant, with several more thousands indirectly added as a result of the investment. The effect of this project for retail is expected to be felt most strongly in the surrounding municipalities, such as Arlington and Lakeland, Tenn. Ford and SK Innovation anticipate starting production in the new facility in 2025.

 

We have seen new-to-market concepts such as Topgolf, Whataburger, Big Bad Breakfast, Fabletics, Lovesac, Chase Bank, Gordon Food Service, popshelf, Tesla and buybuy BABY open or announce locations in the past 12 months. Starbucks continues its expansion and new coffee franchise concepts, such as 7 Brew and Biggby, have signed leases in recent months. Increasingly, restaurants and coffee concepts are requiring drive-thrus and are competing for the few high-quality opportunities that are brought to market.

 

Topgolf is expanding into West Tennessee for the first time with a new location in the Memphis suburb of Germantown. The venue will be the fourth location in the Volunteer State for Topgolf. The Dallas-based retailer is one of many concepts expanding in Memphis.

 

The downtown Memphis area has significant momentum in its abundance of development activity, including multiple apartments under construction and in the planning stages, as well as the completion of the Renasant Convention Center renovation and Tom Lee Park’s $61 million renovation. Tourism should see an uptick from the increased capacity of the newly renovated Memphis International Airport, along with increased hotel supply.

 

Breweries such as Wiseacre, Grind City and Soul and Spirit have all opened production facilities with gathering spaces for tasting rooms in recent years. Carlisle Corp.’s redevelopment of One Beale has brought significant attention to the local hotel industry, including additions of Hyatt Centric, Caption by Hyatt (opening soon), and the Grand Hyatt (construction to begin in the coming months). On the local restaurant front, Slim and Husky’s opened its first location near downtown, Andrew Ticer and Michael Hudson opened their third restaurant concept, Bishop, in the South Main District. St. Jude is in the middle of $1 billion expansion with another $8 billion planned. Overall retail vacancy in downtown and Midtown is 3.6 percent, according to CoStar.

 

East Memphis and Germantown are also seeing a tight retail market with vacancies at about 3.2 percent and 1.7 percent, respectively. Vacancies on our main retail streets of Poplar Avenue and Germantown Parkway are few, and multiple new-to- market concepts are finding it difficult to locate quality opportunities.

 

The same story is true in Southaven and Olive Branch, Miss., both considered part of the Memphis MSA. Silo Square in Southaven has opened with a great lineup of restaurants and retail, and new suburban retail development is underway in Olive Branch, as well as growing markets like Arlington and Lakeland.

 

Germantown, Tenn., an affluent suburb of Memphis, will see a significant redevelopment of Carrefour Shopping Center into a high end mixed-use project. Billy Orgel and partners recently purchased the center for $16 million with plans to scrape existing improvements and build residential, retail, office and hotel space. Also in Germantown, local developer Spence Ray is working on the fourth phase of his mixed-use project, Thornwood, with an addition of more high-end apartments.

 

The construction of 710,000 square feet of new retail space underway in the Memphis MSA pipeline amounts to less than 1 percent of the current inventory. Coupled with rising construction costs and the difficulty in underwriting rent achievement, our market should not be poised for an oversupply issue. Other challenges in the local economy are indicative of the broader economy, such as labor shortages, wage increases, inflation, supply chain and construction costs. The challenge for retail developers is to fi nd quality sites, particularly for those retailers that require street frontage and drive-thru opportunities.