In spite of national trends, news of spiking default rates and a prediction of a national decline in retail tenancy, the middle Tennessee region appears to be emerging in equal (or better) condition from one of the most unusual years in history.
Prior to the government-mandated shutdowns last year, retail activity in Nashville was at a fever pitch. A decade of year-over-year population and economic growth created a strong seller’s and landlord’s market, with no end in sight. The University of Tennessee’s Boyd Center for Business and Economic Research projected a 1 million-person population growth for Middle Tennessee by 2040. This strong, sustained growth pushed retail rents up more than 50 percent since 2010 and represents one of the largest cumulative increases in the nation, behind only Miami and Austin. In 2019, the Nashville region saw asking rents above the national average, according to CoStar Group.
Trey Kirby, NAI Nashville Stanton Group
One year ago, the sudden and unexpected COVID-19 shutdowns made the collective hearts of 2008 survivors skip a beat. A real concern of what the next week or month might look like hit both landlords and tenants in the region, particularly in the downtown retail district that is historically reliant on tourism. As music venues closed and tours were cancelled, convention and leisure travel grinded to a halt, at which time many in the region were predicting a dire future with rampant tenant defaults, borrower foreclosures and a hit to the more than 10-year run of growth. However, it was the resiliency of the overall Middle Tennessee region that presents the striking data.
While much of the discussion inside and outside of the industry was focused on the national news and the heartbreaking loss of the tourism industry to Nashville’s most known area (Broadway and downtown), the remainder of the market appears to have absorbed the punches with ease.
Approximately $850 million of retail property traded hands throughout 2020, despite the pandemic and uncertainty in the retail sector. This compares with $778 million in 2019. Market pricing trends showed a rise in square-foot pricing over the prior year and growing at a faster rate than national benchmarks. Cap rates in the region continued to compress, moving from an average of 6.8 percent in 2019 to 6.6 percent at the end of last year.
Retail leasing strength also continued. Only two submarkets in the region reported an overall vacancy rate above 5 percent at the end of 2020, while the regional average experienced a nominal increase from 3.3 percent to 3.9 percent. Prime submarkets in the region reported rent increases 5.2 percent (Cool Springs), 4.8 percent (Brentwood), 4.7 percent (Green Hills), and 4.8 percent (Midtown) during 2020. All of this while the region delivered more than 300,000 square feet of new product and maintained a positive abortion just shy of 100,000 square feet.
Of course, there have been trouble spots as the tourist-driven retail market in the central business district struggled. At the granular level, many of the operators of the restaurants and bars were forced to close and absorb losses or have chosen not to reopen. Like many areas of the country, Nashville was not different in that regard. However, the degree to which the “pain” occurred appears to have been comparatively muted in purely statistical terms. While the availability rate rose from 4.6 percent to 4.9 percent, submarket rents also increased 6.2 percent during 2020.
Where does this leave the Middle Tennessee retail market in 2021? Many industry insiders are predicting a robust leasing market to return with early returns on first-quarter activity already showing promise. Underlying factors such as no state income tax, a favorable business climate and remarkable population growth are shaping up to pick back up — or simply continue — as if the pandemic never happened.
— By Trey Kirby, Vice President, CCIM, NAI Nashville Stanton Group. This article originally appeared in the February 2021 issue of Southeast Real Estate Business.