In its 2018 Emerging Trends in Real Estate survey, Urban Land Institute (ULI) named Nashville the No. 9 U.S. market to watch. Factors contributing to Nashville’s appearance as a top 10 market in ULI’s report for the past three years include a re-emergent downtown, strong population growth, market attractiveness to millennials and a low cost of living. These factors — along with game-changing urban retail developments and the creativity of its culinary scene — have elevated Nashville’s retail market over the last few years.
As in its 2015 and 2016 reports, ULI once again refers to Nashville as an “18-hour city.” A defining element of an 18-hour city is a vibrant urban core with entertainment and dining attractions bustling between 7 a.m. and 2 a.m., well beyond the traditional business hours of 8 a.m. to 5 p.m.
Katie Barton, Colliers International
Downtown Nashville is a hotspot for retail development, as the area continues to draw record-breaking numbers of crowds from tourists and locals alike to events, restaurants and conventions. From the Predators’ historic run in the 2017 Stanley Cup Finals to the 46th annual CMA Music Festival that brought $57.7 million in direct visitor spending to the nightly concerts at Ryman Auditorium, downtown is arguably the economic engine of the entire MSA.
Multiple new hotel and office towers joined the downtown skyline in the past two years, and major skyline-altering developments are underway. In 2017, Spectrum | Emery broke ground on the $430 million Fifth + Broadway mixed-use project, the site of the former Nashville Convention Center. Fifth + Broadway will encompass retail and entertainment (235,000 square feet), apartments (over 350 units), Class A office (385,000 square feet) and the National Museum of African-American Music. International fashion retailer H&M will occupy 27,000 square feet at this location, with a scheduled fall 2019 opening.
The Nashville Yards project, a $1 billion development positioned at the gateway of downtown, is a 15-acre site formerly occupied by Lifeway Christian Resources. Draper Tower was recently imploded to make way for the project. Nashville Yards is a multiphase office, retail, hospitality, entertainment and residential project that will be environmentally sustainable, technologically advanced and service-oriented. In June last year AEG signed a deal to open a Regal movie theater, a bowling club and a concert venue at the site.
Nashville’s hotel and retail scene is exploding with older generation office space being converted to boutique hotels. Projects including the Bobby and Noelle will revitalize the area surrounding 4th Avenue North. Nashville currently has 3,109 hotel rooms under construction, with an additional 3,733 hotel rooms planned. Most of these hotels contain a retail component. According to Nashville Downtown Partnership’s 2017 annual report, 64 new retail businesses opened or announced opening plans in 2017. Notably, Whole Foods Market will anchor Endeavor Real Estate’s new mixed-use building that is currently under construction at 1200 Broadway. That project is scheduled for delivery in the fourth quarter of 2019.
Investor interest remains strong due to the city’s “hip” factor and a diverse economy driven by healthcare, technology, tourism and education. The Nashville Area Chamber of Commerce reports 3 percent year-over-year job growth, equating to about 39 jobs added per day. Nashville has transitioned to an upper-tier secondary market, and economic indicators favor Music City’s retail market in 2018.
Influx of Millennials
Strong population and favorable demographics have favored the Nashville market during this run. ULI credits strong population growth as a key contributor to Nashville’s real estate investment attractiveness. According to population estimates from the U.S. Census Bureau, the Nashville MSA added an average of 100 people per day in year-ending July 2016. Nashville currently has a population of 1.9 million. Over 1 million more residents are projected for the region by 2040.
Additionally, ULI notes that Nashville’s attractiveness of the market to millennials has been key to the region’s economic growth. Most recently, Nashville ranked as the third-most attractive city for college graduates according to an annual study by SmartAsset. Nashville’s affordability, job opportunities and concentration of dining and entertainment factors were weighted into this ranking.
Market Fundamentals
Strong demand for retail space throughout the Middle Tennessee retail market continues to result in declining vacancy (currently at 3.6 percent), increased competition for space and new construction activity. These trends have culminated in historically high rental rates. Asking rates are reaching upwards of $40 per square feet for new urban retail, and these rates have trended upward since third-quarter 2015.
Investor interest in the market remained solid in 2017, as retail investment topped $391 million. This is a modest decrease compared to the record sales in 2016 totaling $600 million, but still exceeding 2015’s total of $350 million. One such explanation of this slight decline is that there is increased risk in retail investment deals at this point in the real estate cycle. The lending market is becoming more critical in the underwriting of retail.
Fundamentals have favored the Nashville market in this real estate cycle, attracting investors across all property types and setting new records with historically high rental rates and unprecedented low vacancy rates that led to a development boom over the last few years. The question of whether Middle Tennessee can sustain this strong activity is at the forefront of developers and decision makers’ minds. However, Nashville’s core strengths should lend support to it’s long-term growth, national trends permitting.
— By Katie Barton, Director of Research, Colliers International. This article originally appeared in the February 2018 issue of Southeast Real Estate Business.