Diverse economy a plus for market.

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The secret to success in any market is diversity. When a city’s economy isn’t wedded to a single industry, there’s more chance that area can survive a downturn. Crews Johnston of Colliers Turley Martin Tucker says Nashville is such a place. The city has a significant healthcare presence and a number of automakers, but Johnston says none of these industries have suffered an outright collapse akin to the downfall of the big financial firms.

“Everybody talks about a diversified economy; we actually have one,” he says.

This array of companies has left Nashville office brokers with a better outlook on the current crisis than their contemporaries in similar markets. Unemployment is sitting steady, and office vacancy has topped out at around 13 percent, with most of the empty space situated in the downtown and airport markets. The Interstate 65 corridor, which includes the Cool Springs and Brentwood submarkets, is actually doing relatively well. In fact, national tenants looking to move into Nashville often find the market is tight.

According to Johnston, four or five national firms are currently circling the city, looking for available space. On the flip side, very little is happening in the sales arena. Sellers are reluctant to enter a sub-par market, and lenders aren’t willing to finance an acquisition loan for less than 55 to 75 percent debt, if a lender can be found at all. The biggest single office deal this year totaled $11 million, but that closed in May.

The recession is bringing benefits to both landlords and tenants in the market. Since the market is still healthier than others, there aren’t a lot of foreclosures. Sublease space and short-term leases are now attainable. Tenants have also given landlords a break by not requiring the level of TI support they have demanded in the past. “There’s a newfound frugality to corporations and small businesses … but they’re going to want concessions for not spending money,” he said. Landlords seem to be keen on this new development as well. “They’re not having to spend a lot of capital in this market.”

Developers are no longer contributing to the market’s vacancy rate because speculative development has stopped and financing has dried up. “There are fewer and fewer developers that have the money and the ability to get bank financing,” Johnston says. “And you probably have to be 65 to 70 percent pre-leased to build a building.” There are a few build-to-suit office deals swirling around the market, but many developers have downsized their operations and are now chasing distressed debt and properties. “They go where the action is, and so now they’re more investors than they are developers,” he says.

Nashville’s economy is somewhat stable, and the office market is positioned for positive growth in the future. Once developers can obtain financing and sellers regain the confidence to enter the market, activity should really start up again.

— Jon Ross

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