Robust population and job growth are fueling a resurgence across all sectors of Nashville’s commercial real estate market, pushing vacancies lower, boosting rental rates and attracting strong interest from investors. With increasing demand for office space in the central business district (CBD), a rush of both in- and out-of-state developers and equity have descended on Nashville to deliver Class A product.
That delivery timeline has subsequently pushed the demand for existing space to the adjacent Midtown, Wedgewood-Houston and MetroCenter submarkets. These satellite areas are benefiting from the positive absorption with existing space back-filled in record time, and some deliveries of conversions of older warehouses to hip office and retail space.
Billy Lyell, Avison Young
Melissa Liles, Avison Young
CBD Construction
Perhaps predictably, after the city climbed higher among the nation’s top job markets, (ranking third on NerdWallet’s list based on top cities’ unemployment rates and increase in working-age population between 2010- 2015), Nashville ranked sixth among the nation’s top cities for real estate investing in 2017, one spot higher than last year, in the annual Emerging Trends in Real Estate report put together by PricewaterhouseCooper and the Urban Land Institute. These accolades are a testament to Nashville’s crane-filled skyline, confirming that new construction is the dominant force in the office market. Developers are bullish on Nashville office space, with the current development cycle representing the most construction deliveries since 2008.
Fourth-quarter 2016 brought the completion of multiple developments, adding over 1 million square feet of office product to the Nashville market. Notable completions during the quarter in the CBD include HCA Capitol View, a 498,000-square-foot build-to-suit office building housing the Sarah Cannon and Parallon divisions of the company, and 1201 Demonbreun, a 285,000-square-foot, multi-tenant office building. The 2.4 million square feet of office development scheduled to be delivered by year-end 2017 is approximately 77 percent preleased, easing some concerns of oversupply.
Rental Rates Climb
Declining vacancies, coupled with the high demand for office space, have pushed rental rates to unprecedented levels for the Nashville market. New product asking rates remain considerably higher than existing product, mandated by construction, labor, land and infrastructure costs that continue to rise.
Historically, the average price per square foot in Nashville had stayed under $20 per square foot for a decade, until 2013. Now, some new construction has broken the $40 per square foot barrier, putting Nashville at a competitive rate to that of many major markets. The direct asking rate for the overall market was $24.19 per square foot at the end of 2016, a nearly 16 percent increase year-over-year.
Comparatively, average rates in MetroCenter are still hovering at $20 per square foot, with Midtown/West End significantly higher at $31.64 per square foot. Asking rates in Wedgewood-Houston start at $25 per square foot.
The Beneficiaries
In addition to the construction and high rates in the CBD, other post recessionary trends are contributing to the growth of neighborhoods outside the downtown radius. Tenant densification around urban areas and a strong preference for live-work-play communities are further increasing the demand for office product in adjacent satellite markets. Urban accessibility with cheaper housing rents is also driving the younger demographic to these submarkets and helping with the recruiting of companies that lease office space in those areas.
In recent years, MetroCenter has seen multifamily developments such as One MetroCenter successfully delivered to accommodate demand for desirable rental product. Addressing the housing demand, combined with the relocation of longstanding local tenants such as United Methodist Publishing, which sold its downtown headquarters and selected the submarket for its accessibility and lower costs, is changing the perception of MetroCenter.
Another emerging neighborhood within a five-minute drive of the CBD is Wedgewood-Houston, which is experiencing numerous deliveries of mixed-use, warehouse conversion, multifamily, single-family and retail developments. Notably, A.J. Capital’s redevelopment of the May Hosiery warehouse will deliver five office buildings totaling approximately 115,000 square feet at the end of the year.
In Midtown/West End, the delivery of new multifamily developments has not only helped accommodate the growth of medical office around St. Thomas – Midtown (formerly Baptist Hospital), but is also attracting newcomers to the market from other areas of the country looking for apartments near the city center.
This is encouraging retailers and spurring developers including Eakin Partners and Panattoni Development, which have proposed additional new office product in Midtown with Vanderbilt Place (130,000 square feet) and One Music Circle (100,000 square feet). The last significant office development along the West End Corridor was 2525 West End, completed in 2000.
Corridor Connections
In addition to the satellite neighborhoods mentioned, Nashville’s growth will continue to generate denser infill between its traditional submarkets, as seen by the heightened activity along the Charlotte Avenue, 12 South and Eighth Avenue corridors. More broadly, this infill is reflected in the extension of development throughout the MSA, from Spring Hill in the south to Murfreesboro in the southeast.
What used to be considered “far away” commuter neighborhoods are now realistically becoming the new normal with the help of the corridor connections, which will continue to generate infill retail, multifamily and office deliveries over the next few years.
Overall, the effects of Nashville’s growth cannot be attributed to just the downtown area. The low vacancies of the CBD, as well as demand in multiple neighborhoods, have stimulated Nashville’s growth radius to these satellite submarkets, thus creating demand for both traditional and redeveloped office space in multiple neighborhoods. With corporate relocations, incentives and no state income tax, these areas, as well as the broader Nashville market, will see similar momentum through 2017 and into 2018.
— By Billy Lyell, Principal and Melissa Liles, Vice President, Avison Young. This article was originally published in the February 2017 issue of Southeast Real Estate Business.