Nashville’s office market, frequently heralded as up and coming, continues to see a great deal of interest from both local and outside investors, and the region’s rapid population growth and low vacancy rates continue to sustain a construction boom. Even with a high influx of new projects highlighting local news, the Nashville area still maintains the lowest vacancy rates of any market in the United States, according to CoStar. Compared to the rest of the country, Nashville has the second highest employment growth and the highest office employment growth, combined with one of the lowest unemployment rates of any major metro area.
These encouraging demographics lead most to believe that Nashville will continue its growth rate, especially in the urban core.
John Rogers, NAI Nashville
Since the 1990s the Nashville market followed national trends, seeing most office market growth creep from the central business district (CBD) to the suburban submarkets. After the Great Recession began to subside, which around here was in 2011, an optimistic focus was placed on the growth of the CBD. This local storyline was buttressed by a national narrative of a return to urbanism.
This growth, which really began its current unprecedented run late in 2011 and early 2012, is supported by the average household income of Nashville surpassing the U.S. median during this time. From 2010 to 2016, the Nashville MSA on average grew more than 55,000 new residents annually. This pace continues today.
Devin McClendon, NAI Nashville
One of the first deals to exhibit this optimism in downtown and near $200 per square foot mark was the 29-story Pinnacle at Symphony Place. Built in 2010, the sale of this 519,633-square-foot building in 2013 confirmed investor confidence in Nashville’s downtown office market. Add to that the opening of the Music City Convention Center and the launch of the popular TV show “Nashville,” the downtown renaissance and that of the entire region was off to the races.
The Downtown submarket, characterized by the presence of multiple construction cranes, has led all submarkets for deliveries from 2012 to 2017. With an average gross asking rent now surpassing $40 per square foot for Class A office space, the area’s rent growth has been consistent in its appreciation over the past five years.
While overall sales volume has gradually declined, pricing has continued to soar due to the high demand and low supply in high-rise office space. Combined with upscale apartments and popular amenities such as the resurgent entertainment district, the CBD has never been hotter. Notable tenant moves to downtown include Bridgestone Americas‘ headquarters later this year, Parallon Business Solutions, the Sarah Cannon Research Institute, UBS, ServiceSource, Warby Parker, Uber and Lyft. The dominance of Downtown would be near complete if not for the near identical statistics of its suburban counterparts.
Looking to the Suburbs
While suburban submarkets don’t carry the notoriety of downtown Nashville, they are home to some of the most attractive office markets in the Southeast. The region’s suburban markets are exceptionally alluring due to their affluent surrounding areas. They have experienced the same incredible growth as downtown.
In terms of rent growth, typical deals in Nashville’s suburban markets hovered around $21 per square foot as recent as 2011. Currently Class A space will run a tenant upwards of $30 to $35 per square foot depending on the building’s age.
All the while, until recent moves and scale backs by a few tenants, the suburban office market in the area maintained a vacancy rate below 5 percent. Nashville’s suburbs are home to headquarters such as Nissan North America, Tivity Health, Community Health Systems and Hardee’s/Carl Jr.’s. The suburban submarket has witnessed more delivery of speculative space (as a percentage of inventory) compared to downtown, which features more build-to-suit growth. All of these factors combined with the lower cost of construction in suburban markets pushes back on the storyline of an urban takeover.
Overall, the Nashville metro area continues to be one of the most intriguing growth markets in America. Middle Tennessee is arguably one of the most attractive locations in the Southeast. Whether downtown returns to dominance or the suburban markets keep the race close is yet to be seen. Regardless, with the overall market growth in the area, it appears that it will be a while before we know.
— By John Rogers, Advisor and Devin McClendon, President, NAI Nashville. This article originally appeared in the February 2018 issue of Southeast Real Estate Business.