Nashville Industrial Market Will Continue to Ride its Hot Hand Through 2017

by John Nelson

The Nashville commercial real estate market’s growth is no longer a local secret. In fact, it very well may be one of the most desired areas for investors for an MSA with a population less than 2.5 million people. In case you haven’t heard, read or taken notice, you likely have been living under a rock.

Those who call this market “hot” are making an understatement. As the downtown core sees land sites trade in excess of $13 million per acre (and in a few interesting cases eclipse $1,000 per square foot), the multifamily and hospitality markets have moved at a torrid pace. Even office rents have climbed to record highs near $40 per square foot for full service gross rates. Some covering that sector project this number will peak around the $50 per square foot mark due, in part, to the higher land costs driven by the other sectors.

Lee Black, NAI Nashville

Lee Black, NAI Nashville

Multifamily developers have seized upon this growth by paying record prices for downtown real estate in hopes of capturing the fancy of Millennials as they enter the workforce. Top this off with hotel stays in downtown costing as much as those found on Times Square in Manhattan, some ponder the question, “When will the bubble burst for Nashville?”

While the answers to this question for those “sexy” product types like multifamily, hospitality and office will run the full gamut between the bulls and the bears, one thing is clear, the Nashville industrial market shows all indications that it will continue its current pace for the coming year and beyond.

Why Industrial?
The middle Tennessee industrial market is desperately undersupplied, with vacancy hovering around 4 percent. Last year saw the delivery of more than 5 million square feet of Class A distribution space and very little of that product actually made it to the “available” category. Why? Because most of it is build-to-suit or, alternately, spec-to-suit. With an additional 4 million square feet set to deliver in the third quarter of this year, little has changed to alleviate the bottleneck caused by pent-up demand for modern distribution properties.

To further complicate the issue, the topography around middle Tennessee, euphemistically referred to as gently rolling, is not generally conducive to quick, easy or inexpensive industrial development.

Having long since absorbed the low hanging fruit, developers have begun to loosen their opinion of what constitutes a good industrial site and are using creativity in their site selection process. Panattoni Development Co. might take the prize for the cleverest utilization of a less than ideal site with its Skyline Distribution Park development. Other players making their first forays into the Nashville industrial scene include Huntington Development with new projects in Smyrna and Mt. Juliet and Hillwood with Airport Business Park located adjacent to the Smyrna Airport. With lenders becoming wary of the saturation found in the multifamily and office markets, the current environment is favorable for continued investment into more stable sectors like industrial.

What is Driving Demand?
Even with the regression of big box brick and mortar retail, the emergence of e-commerce has taken a dominant role in the local distribution market. Leading the charge within the Nashville market is Amazon, with two 1 million-square-foot distribution centers. Joining in the fray is Under Armour’s 1 million-square-foot facility at Beckwith Farms and Lowe’s Home Improvement’s 1 million-square-foot facility in Robertson County. With the e-commerce model demanding shorter and shorter times for delivery to customer, key locations like Nashville will be increasingly important for online retailers’ warehousing and distribution networks.

Another factor that continues to drive the Nashville market is the continued arrival of manufacturing jobs to the middle Tennessee area. Across the country, businesses have come to realize that Tennessee has created an excellent environment for manufacturing, placing Nashville as “one of the top-four large cities in job growth” according to Forbes magazine. Long-time middle Tennessee mainstay GM is adding more than 800 jobs at the Spring Hill Assembly Plant and Nissan North America is expanding facilities in Smyrna by 1.5 million square feet, both adding to the already more than 30,000 current jobs in the automotive industry.

With the addition of a Beretta Firearms facility and others including a build-to-suit for Axem Distrbuting Inc., the market has already seen the ripple effect as suppliers vie for industrial space to service these facilities.

Outlook for the Future
Barring some unforeseen political or socio-economic upheaval, the Nashville market should continue its growth in 2017. Demand will outpace development for 2017 once again as lending conduits are open.
Developers are looking for that next site, and the smart money will look north of Nashville where the land is cheap, developable and accessible.

You can see why Nashville’s industrial market is so hot. Come on down for a visit and we will take you out for some Nashville Hot Chicken.

— By Lee Black, Vice President, NAI Nashville. This article was originally published in the February 2017 issue of Southeast Real Estate Business.

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