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E-commerce and the automotive industry drove a resurgent Nashville industrial market in 2013, and we predict another strong, steady year for absorption and investor demand this year. Perhaps the biggest question mark, though, revolves around backfilling second-generation space as its former occupiers move into new build-to-suits. This factor is indicative of robust build-to-suit activity, and while it may increase vacancy early in the year and stall speculative development, the market’s overall health and forward momentum is unquestionable.
Nashville’s 200 million-square-foot industrial market closed 2013 with vacancy at 7.9 percent, down from 8.7 percent at the end of 2012, on positive absorption of 3.4 million square feet. The 55 million-square-foot Southeast submarket proved to be the region’s most active, with 1.7 million square feet of net absorption for the year and a vacancy rate of 10.1 percent, followed closely by the East, with 1.6 million square feet of net absorption and a 13.9 percent vacancy rate.
Clearly, build-to-suit activity was and is king in Nashville, as it is in many markets. Four build-to-suit projects are currently underway, including distribution centers for Dex Imaging, Allied Modular, Hogebuilt and Panattoni Development Co.’s 240,000-square-foot building for medical products firm Hollister. Panattoni also delivered a 706,000-square-foot build-to-suit for CEVA Logistics last year, while Duke Realty completed a 695,000-square-foot development for Starbucks Coffee. Nissan provided the preponderance of fourth-quarter Southeast submarket net absorption with its 460,000-square-foot build-to-suit. Additionally, Amazon occupied two e-commerce fulfillment centers totaling 1 million square feet each at the end of 2012, while Saks Fifth Avenue occupied its 564,300-square-foot fulfillment center a few months earlier.
Of course, some of this growth left large availabilities, as CEVA ended two leases totaling 514,000 square feet in the ICBD submarket and Amazon vacated 446,000 square feet of bulk, Class A space in the East submarket. In addition, Starbucks Coffee will vacate 450,000 square feet in the first quarter of this year. These are the holes that could increase vacancy early in 2014, but they are also quality spaces providing a great opportunity for prospective end users.
Nashville is within 250 miles of 30 major auto manufacturing and distribution facilities in the Southeast and Midwest, and the automotive sector has generated more than 10 percent of Tennessee’s post-recession new jobs. Naturally, the sector has an enormous impact on Nashville’s industrial market. In addition to Nissan’s new build-to-suit, it added a second and third shift at its manufacturing facilities last year. In another big automotive win, GM announced a $350 million addition to its Spring Hill plant and more than 2,000 new jobs. Suppliers, too, are expanding to meet demand. In October, South Korean’s Hankook Tire Co. announced an $850 million investment for its first U.S. manufacturing operations that includes 1.5 million square feet and 1,800 new jobs during the next four years.
Certainly, not every announcement is of the magnitude of Hankook, but auto suppliers continue to drive the bread and butter, 50,000- to 100,000-square-foot deals that are essential to a healthy market. In fact, rents for these types of users have rebounded significantly in the past three years to more than $3 per square foot net, while bulk rents are in the $2.85 to $3 per square foot range.
Even though absorption and rents have risen steadily, Nashville had no speculative construction underway as we entered 2014, though IDI has a site graded for a 500,000-square-foot to 1 million-square-foot distribution center in the East submarket. While vacancy has declined markedly, two Class A 500,000-square-foot buildings sit vacant in Smyrna and Portland and a handful in the 400,000-square-foot-range are vacant as well. We believe that the Smyrna property will achieve significant lease-up in the first half of 2014, which will open the door for speculative development of an expandable bulk property of approximately 500,000 square feet.
Of course, rising rents and absorption and declining vacancy also have made Nashville a darling of investors seeking better yields in secondary markets. Overall, buyers such as Industrial Income Trust, Exeter and ProLogis directed funds totaling more than $250 million toward Nashville industrial properties in 2013. In the fourth quarter alone, ProLogis closed the $77.3 million acquisition of a six-building, 1.8 million-square-foot portfolio, while Exeter acquired the 234,264-square-foot Eastgate Technology Center for $9.2 million.
After two solid years, Nashville’s industrial market is at an interesting juncture. With the recent gains we’ve made, we will discover by year-end how much confidence developers and lenders have to proceed with speculative development. There’s little doubt, though, that the auto sector will continue to grow, and there’s no doubt that e-commerce fulfillment as a key driver is here to stay. Those two factors alone will propel more growth in 2014 and reaffirm Nashville’s spot as one of the top secondary markets for industrial real estate in the United States.
— By David McGahren, senior managing director and principal, Cassidy Turley. This article originally appeared in the February 2014 issue of Southeast Real Estate Business magazine.