By Stewart Lyman and Robby Davis of Stream Realty Partners
Contrary to popular belief, the office market is not dying, particularly not in Nashville. While the market is facing headwinds from the interest rate environment and general economic uncertainty, Nashville has shown resiliency, bolstered by the city’s strong population growth, low unemployment rates, and a vibrant, diverse job market.
However, while flight-to-quality has been experienced well before the COVID-19 pandemic, the positive performance of top-tier buildings compared to the rest of the market has accelerated coming out of COVID-19. In 2023, Class A Tier I buildings posted 1.17 million square feet of positive absorption compared to negative absorption of 141,900 square feet and negative 32,267 square feet in Class A Tier II and Class B assets, respectively.
Top-tier buildings signed some of Nashville’s largest leases in the past year, such as Creative Artists Agency (CAA) for 75,000 square feet at Nashville Yards, Designed Conveyor Systems for 47,000 square feet at McEwen Northside and JE Dunn for 41,000 square feet at Neuhoff.
In the urban core, two of the most high-profile new developments are Neuhoff (Germantown) and Nashville Yards (Downtown), both of which are elevating the tenant experience by delivering best-in-class office space along with carefully curated retail offerings, abundant amenities and activated outdoor space, all in walkable, mixed-use settings.
Continued flight-to-quality, demand for top-tier buildings and elevated construction costs have led to sustained rent growth across the market. In 2023, overall rent growth across the Nashville market was 3.56 percent. Broken down by asset tier, rent growth was 8.26 percent for Class A Tier I buildings, 5 percent for Class A Tier II buildings and 0.6 percent for the Class B supply. While the top end of the market has led the way in rent growth, it has allowed lower-class buildings to draft off of record-high rates and experience rent growth as well, although to a lesser extent.
The weaker absorption performance in the Class A Tier II and Class B buildings must be viewed on an asset-by-asset basis, as not all are created equal. Lower-tier buildings that are well-located offer in-demand amenities and provide a walkable environment are still garnering their fair share of demand. Leasing activity in 2023 in these buildings included Iron Galaxy for 26,000 square feet at 333 Commerce, First Trust Portfolios for 22,000 square feet at 5000 Meridian and TransCore for 18,000 square feet at One Nashville. With no new construction starts in the immediate future, Class A Tier II and Class B buildings should see more leasing velocity as space in new construction becomes less available.
Turning to investment sales, it’s no surprise that velocity has slowed drastically, given the recent interest rate environment. While that situation has left many large institutional investors on the sidelines, it has opened the door for local and regional landlords to pursue some of the few buildings that have hit the market. In the second half of 2023, The Mathews Co. purchased The Ramparts of Brentwood from Highwoods for just under $29 million, or $217 per square foot. We also witnessed the $75 million sale of 211 Commerce in Downtown to an affiliate of Dollywood, Dolly Parton’s company, which plans to convert the 11-story office building into a hotel.
Looking ahead to 2024, there is reason for cautious optimism. Fundamentals in Nashville remain healthy, and while population growth may not reach the unprecedented levels experienced during the past decade, the city remains a sought-after destination for people to live and work.
— Stewart Lyman and Robby Davis are managing directors at Stream Realty Partners’ Nashville office. This article was originally published in the February 2024 issue of Southeast Real Estate Business.