Office Demand Remains Robust in Nashville as New Projects Continue to Deliver
Perhaps there is no better way to describe the Nashville office market and its progression than to examine the recent transaction history of two of Nashville’s older generation office buildings, Fifth Third Center and Bank of America/Philips Plaza. Both of these office towers are 1980s vintage with significant renovations in the last three to four years. However, no renovation can cure some of the obsolete issues with these buildings: limited parking, inefficient floorplates and old “core” locations. Nevertheless, these buildings have enjoyed rental growth, occupancy strength and consequently excellent sales transaction history.
On a more macroeconomic level, investor activity remained on the rise in 2019 as Nashville has become a global real estate investment target with Nashville being in the top 10 list of markets in Urban Land Institute and PricewaterhouseCooper’s Emerging Trends report for the past five years. Nashville’s presence on this list is supported with its business-friendly environment, population growth, growing IT workforce and appeal as a leisure and meeting destination.
In 2010, Nashville’s overall office vacancy rate was 12.2 percent with its Class A rents averaging $22.41 per square foot. Today, the market’s vacancy rate is 8.4 percent with Class A rents averaging $31.20.
Clearly, the Nashville office market has been remarkably stable and investors have fared exceedingly well. Several factors and developments play a considerable role in the future of the Nashville office market.
New construction in Nashville
Over 3.8 million square feet is under construction and set to deliver over the next three years, placing Nashville among the top office construction markets in the nation. Nashville is not typically a prelease market, with over 70 percent of current construction remaining speculative. Lack of preleasing and elevated construction costs would typically deter investors. However, investment groups have become increasingly comfortable with the risk profile of the Nashville market.
Studies have shown that Nashville is the proverbial “if you build it, they will come” market. One example includes the 222 Building developed by Hines. The Houston-based owner and developer was able to deliver the building in advance of the current wave of delivered space, achieved strong rents and occupancy and is now in the market to sell the building at a record price for Nashville.
Whereas the debacle of WeWork’s corporate maneuvers called many to question the coworking/flexible office market, Avison Young’s 2020 Forecast report asserts that “flexible offices are here to stay and will remain one of real estate’s hottest growth areas in 2020.” Nashville has its fair share of flexible office operators such as WeWork, Industrious and Spaces, not to mention local operator ESpaces. However, these leases have not overly skewed office market absorption and many landlords are embracing the benefits these uses can provide to their respective tenant bases. The corporate struggles with WeWork will help the health of the market as the New York-based firm is not positioned to control its previously stated goal of 10 percent of the Nashville office market share.
Projects on the horizon
Big, urban projects such as Fifth + Broad, Broadwest and Capitol View get most of the press and accolades, but there are some less prominent projects outside the loop that merit attention:
Highland Ridge Tower. Bridgestone Americas previously occupied this office building prior to its relocation to Nashville’s central business district. The building, located in the Airport North market, recently sold on a speculative basis and reportedly there is a major occupant evaluating the property, which would certainly make the buyer look brilliant.
Green Hills. Positioned in the heart of one of Nashville’s most affluent neighborhoods, Green Hills, three recent projects have seen success in arguably the tightest office market in Nashville. Recent mixed-use developments, Belle Grand and Vertis, experienced impressive interest and leasing velocity, and 10 Burton Hills gave new ownership the opportunity to reposition the asset from single- to multi-tenant use.
Brentwood. Historically, strict zoning regulations and limited remaining sites have limited any large-scale development within the suburban submarket. However, recent projects including Hill Center, Virginia Springs I (and II), the expansion of Brentwood Commons and the revamp of the EastPark office campus have virtually built out all remaining office space in Brentwood.
Berry Farms. Williamson County’s new growth corridor, Berry Farms, has seen explosive progress in recent years. The master-planned community, established in 2005, is home to four new corporate headquarters and multiple commercial and residential development, creating a very popular micro submarket south of the city.
The general opinion in Nashville circles is that the relocation efforts of the city and Nashville’s very effective Chamber of Commerce will continue to generate corporate moves that will absorb the large amount of construction delivering over the next three years. Reportedly, there are over 40 relocation projects under negotiation and evaluation in the greater Nashville market. Nashville will continue to demand the well-deserved national attention and accolades throughout 2020.
— By Warren Smith, Principal and Managing Director at Avison Young. This article originally appeared in the February 2020 issue of Southeast Real Estate Business.