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Tertiary commercial markets like Jackson now more attractive to investors

By BECKY GILLETTE

Historically tertiary commercial real estate markets like Jackson have lagged behind larger markets across the nation. But capitalization (CAP) rates have been compressing over the past two years in the larger markets, said James O. Turner II, MAI, managing director of business development, Integra Realty Resources for Ridgeland, a commercial appraisal firm.

“The tertiary markets are now more attractive to national and international investors seeking high rates of investment returns for investment properties,” Turner said. “The compression in CAP rates in larger markets should continue to have a positive impact on tertiary markets throughout the Southeast, including Jackson. For example, CAP rates for apartment complexes in Atlanta range from 5.5. to 6.5 percent, while similar properties in tertiary markets have CAP rates ranging from 7 to 8.5 percent. So that is a lot better rate of return.”

However, tertiary market properties might not have as much potential for valuation increases. Turner said larger markets like New York, Atlanta and Chicago have a strong ability to increase market value quickly, an advantage over tertiary markets.

“That is driven by the scarcity of land,” Turner said. “We have no scarcity of land in Mississippi.”

Turner said the Jackson metro market is looking good at present.

“The direction is important and right now everything is moving in a positive direction,” Turner said. “It you are looking five to ten years in the future, forecasting is difficult because you can’t foresee drastic changes in interest rates or economic conditions. However, currently I think in the Jackson metro area is moving in the right direction.”

Turner said the office market continues to experience significant differences between the central business district (CBD) and the suburban office market.

“The CBD remains in the third phrase of a recession as vacancy rates continue to be stagnant and lease rates continue to be stagnant,” Turner said in the Integra Viewpoint 2018 report, aggregate commercial real estate sales data prepared from appraisal reports. “The suburban office market continues in the third phase of a recovery as evidenced by decreasing vacancy rates and stabilizing lease rates. The recovery of the suburban office market has been spurred along by a significant reduction in the number of new office buildings constructed since 2009.

JIM TURNER

“The suburban Class A office space has continued to recover as evidenced by decreasing vacancy rates and the construction of a new five-story, 120,000-square-foot, multi-tenant office building (and adjoining parking garage) in The District at Eastover than is now 100 percent leased and the new 3-story, 40,000-square-foot, multi-tenant office building with parking garage in Ridgeland along the Highland Colony Parkway. New supply will keep lease rates stable as occupancy rates are controlled by new supply.”

CBD Class A, suburban Class A and suburban class B office properties are expected to not change in value in the next 12 months, while CBD Class A and suburban Class A are expected to remain steady with increases of .1 percent to 1.9 percent in CBD Class B and Suburban Class B.

John R. Praytor, MAI, senior managing director for Integra in Ridgeland, said the retail market continues in the third phase of a recovery as evidenced by continued decreasing vacancy rates and stabilizing lease rates.

“Except for a few small areas of the Jackson Metropolitan market area, most of the retail markets are in the first phase of a recovery,” Praytor said. “The recovery will be aided by the continued limited amount of new construction of retail properties since 2010 which will allow for faster absorption of existing vacant retail space. Based on the most recent data, the retail market should enter the first phase of an expansion within the next 12 to 18 months.”

Value of community retail and neighborhood retail is expected to increase .1 percent to 1.9 over the next 12 months while increasing in value 2 percent to 3.9 percent in the next 36 months.

The multifamily market remains in the third phase of recovery, said Michele Alexander, MAI, managing director of multifamily valuation for Integra.

“The multifamily market is influenced by most municipalities in the Jackson Metropolitan area having a moratorium on new multifamily buildings,” Alexander said. “The majority of multifamily properties are experiencing low vacancy rates and year over year increases in rental rates. The majority of the new supply is occurring in the CBD and involves conversion of existing buildings to multifamily properties. Most of the properties located in the CBD that have been converted to multifamily use are experiencing minimal vacancy and stabilized rental rates.”

Alexander said several investors are planning to convert additional properties in the CBD to multifamily use but no specific plans have been announced. In addition, two new projects are ongoing in the central area of Jackson, The District and The Meridian at Fondren. These two properties are expected to supply additional upscale housing to the medical community.

The change in value for urban Class A and Class B multifamily is expected to remain at 0 percent while suburban Class A and Class B properties are expected to increase .1 percent to 1.9 percent. For 36 months, urban Class A and Urban Class B properties are expected to increase .1 percent to 1.9 percent while suburban Class A and Class B properties are expected to increase 2 percent to 3.9 percent.

The industrial market continues to experience stabilization, said Jonathan Stone, MAI, director of industrial evaluation for Integra.

“The industrial market in now in the third phase of a recovery,” Stone said. “Positive absorption is continuing and lease rates have remained stable. Flex industrial space continues to show signs of recovery as evidenced by a steady number of new construction starts of industrial flex buildings within numerous suburban areas. Construction of other types of industrial space has been intermittent which points to a longer recovery due to the current higher inventory levels and amount of vacant space. Expectations are for the industrial markets to stabilize in the near term, as the remaining excess inventory has been absorbed. Flex Space industrial continues to show strong demand influences in suburban markets.”

Stone’s forecast for the next 12 months is for flex industrial and industrial to gain .1 to 1.9 percent in value. For the next 36 months, value for both types of industrial is expected to increase 2 to 3.9 percent.

“Expectations for increasing demand for manufacturing industrial space in the Jackson Metro area will be driven by the construction of the new Continental Tire Manufacturing Facility in Clinton,” Stone said.

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