Beretta, Nissan, General Motors, Electrolux and Hankook Tire are a few manufacturing giants that call Middle Tennessee home. Expanding the manufacturing presence throughout 2015, 29 advanced manufacturing companies announced relocations or expansions in Middle Tennessee. Of that total, six companies revealed plans to create a combined 710 jobs and occupy more than 1 million square feet during the fourth quarter of 2015 alone. Nashville’s central location, skilled workforce and labor cost advantages continue to make the market a magnet for manufacturing companies.
Unsurprisingly, in its Emerging Trends in Real Estate 2016 report, Urban Land Institute named Nashville the “No. 7 U.S. Market to Watch for 2016” and an “18-Hour City.” Additionally, Nashville’s low cost of doing business and consistent job and population growth favor the industrial market, and the pipeline for talent across all multiple industries remains full.
Nashville’s industrial market is firing on all cylinders — with record low vacancy rates and historically high rents, which is driving robust speculative warehouse development. Interestingly, a new trend is occurring that is breaking the paradigms of traditional industrial space use — the appearance of the maker economy. These “makers” are modern, small-scale manufacturers that “are emerging as a revitalizing force in urban neighborhoods with empty factories and older commercial properties in need of adaptive use,” according to Ilana Preuss, founder of ReCast City. Nashville’s major industrial companies will remain a dominant economic and commercial real estate force in the region, and the maker economy will enhance the vitality of the industrial market.
Katie Barton, Colliers International
NAIOP defines an industrial space as a facility in which the space is used primarily for research, development, service, production, storage or distribution of goods and which may also include some office space. Though spaces vary in size, the traditional larger manufacturing tenants in Middle Tennessee occupy large spaces including Nissan (4.4 million square feet), Bridgestone (1.6 million square feet), and General Motors (5.5 million square feet). These industry goliaths are located in close proximity to interstates in the Southeast submarket, where multiple manufacturing companies in the Nashville region are clustered.
In the maker economy, these makers are expanding the definition of manufacturing to include creative sectors including art and design, 3-D printing and food and beverage production. Contrary to preferring a suburban location in a large warehouse, small “makers” are searching for empty factories and older warehouses in an urban setting.
Many “makers” are optimizing industrial space with lower clear height for manufacturing, R&D or production space while other groups are optimizing cubic square feet.
One such maker includes the emergence of craft breweries. Nashville boasts 19 craft breweries exceeding 320,000 square feet, with more than a dozen at the planning stage.
This trend, coinciding with Nashville’s record low vacancy rate of 5.3 percent, has resulted in historically high rental rate of $6.59 per square foot (small/mid-range space). The vacancy rate for smaller warehouse space is at an all-time low of 2.4 percent in the region and sub 1 percent in the downtown business district. The rental rate for warehouse space under 50,000 square feet in the urban core now exceeds $8.00 per square foot, and demand is likely to drive rents even higher throughout 2016.
Nashville continues to be a hot market for investors nationwide, with the total volume of industrial sales nearly doubling in size from 2014 to 2015. Total 2015 investment volume in the industrial market reached more than $635 million, with more than $153 million in deals during the fourth quarter with an average cap rate of 7.8 percent. The Wilson Commerce Center, a 556,000-square-foot, Class A facility located along the I-840 corridor, just recently set the bar for industrial investment sales with a sub 6 percent cap rate and a value of $52 per square foot during the third quarter of 2015.
According to Real Capital Analytics’ latest U.S. Industrial Report, Nashville’s industrial investment sales through the third quarter were higher than Tampa, Raleigh and Jacksonville. Nearly 85 percent of industrial space that traded during this time frame in the Nashville market was bulk warehouse space, totaling $532 million.
Based on market performance in 2015, Nashville is poised for growth in 2016 as interest in the market continues to grow at a record pace. Nashville is a strong secondary market, with a lower cost of doing business than the “gateway” cities like San Francisco, New York and Los Angeles. Cap rates and sales price per square foot are trending in a manner proving that Nashville is a primary market for industrial users and investors. ULI’s Emerging Trend report notes that industrial is considered to be the top commercial real estate sector for development and investment in 2016, and the momentum of investment and growth that Nashville’s industrial market is experiencing is expected to continue two-fold in 2016.
— By Katie Barton, Director of Research, Colliers International Nashville. This article originally appeared in the February 2016 issue of Southeast Real Estate Business.