SOUTHEAST SNAPSHOT, APRIL 2007
Nashville, Tennessee Office Market
The Nashville office market posted a banner year in 2006. Nearly 1.5 million square feet of space was absorbed as 1.2 million square feet of new inventory entered the market. Solid activity helped push the area’s vacancy rate down to 10.9 percent by year’s end, more than a full point from the 12.2 percent vacancy rate at the start of 2006.
As economic and market conditions improved throughout last year and into 2007, Class A properties took center stage. In fact, there currently is a limited supply of large contiguous blocks of Class A space in the suburban markets. While Class A inventory increased by 836,000 square feet last year, positive absorption of 886,000 square feet pushed the vacancy rate down to 9 percent by year’s end.
Consequently, builders and developers are busy with both speculative and build-to-suit projects. Nearly one million square feet of space is underway and scheduled for delivery in 2007.
The office market also paced robust investment sales. In fact, the shining star in the investment sales market during the second half of 2006 was the office sector, recording big numbers in both quantity and quality of deals.
During the last six months of 2006, Nashville saw almost $210 million in office investment sales, a 25 percent increase from the previous 6-month period of just more than $168.5 million.
Significant transactions that began at the end of 2005 with the sale of One Nashville Place picked up steam in the last half of 2006. This period saw three major office transactions: Primus Financial Services Center, $69.75 million, Dover Center, $37 million, and Fifth Third Center (formally Financial Center), $62 million.
Nissan’s arrival downtown certainly was a shot in the arm but a number of new leases, along with some expansions, helped the CBD post its best year since 1997. Last year, the downtown office market absorbed 276,000 square feet.
Nissan’s move to its corporate campus in Cool Springs certainly will impact the area’s vacancy rate. Additionally, the new 13-story multitenant SunTrust Plaza now under construction downtown may be a mixed blessing. Scheduled for completion in late 2007, the building will add 338,000 square feet of Class A inventory to the CBD, with around half of that space yet to be leased. There also is some concern with the merger of AT&T/BellSouth, and the possible consolidation that may impact BellSouth’s presence in the CBD.
The area’s new infrastructure has given companies a reason to stay, expand and return downtown. Tenants also may explore the options downtown because of the limited supply of suburban Class A space.
While the downtown office market improves, suburban markets continue to drive Nashville’s growth. In particular, Brentwood and Cool Springs, adjacent submarkets along I-65 South, power the area’s economic engine.
Last year, the Brentwood submarket absorbed 146,000 square feet of space while adding 172,000 square feet of new inventory. The largest addition was Creekside Crossing III, a 128,000 square-foot building by Duke Realty in Maryland Farms.
Brentwood ended the year with only a 6.2 percent vacancy rate, with Alex S. Palmer’s Gateway Plaza II, a 120,000 square-foot Class A building, expected to be completed this fall. Duke also is working out its final building in Maryland Farms, Creekside Crossing IV, a 128,000 square-foot building scheduled for completion by year’s end.
The Cool Springs/Franklin submarket has become Nashville’s premiere office address. Last year, this submarket posted the top absorption at 414,000 square feet. Vacancy rates continue to drop after two Class A buildings – Cool Springs III at 153,000 Square feet and Corporate Center Eight at 156,000 square feet – added to the area’s available space. Large blocks of contiguous space are a hot commodity in this submarket.
Developers have taken notice of the submarket’s rising prominence, especially with the impending opening of Nissan’s corporate campus. Three buildings totaling more than 430,000 square feet are underway in Cool Springs, with two buildings scheduled for completion by the year’s end. Boyle Investment should finish the 175,000 square-foot Meridian II by the end of June, and Community Health Services will occupy the building. Additionally, Highwoods anticipates that Healthways should be able to move into its 255,000 square-foot build-to-suit by the end of the year.
Rental rates vary by market with a low of $15.50 for Class A space in the MetroCenter submarket located just north of the CBD to a high of $27.50 in the Green Hills/Music Row submarket.
Nashville is on the move, attracting several major corporations in the past few years. Developers have noticed the city’s dynamic growth, thanks in large part to Nashville’s ability to attract major corporations such as Nissan, Dell, Caremark, Louisiana-Pacific, Asurion and Clarcor.
Brentwood and Cool Springs/Franklin will remain leading submarkets for new office developments, with several projects nearing completion with significant preleasing.
As construction costs finally began to stabilize, pressure on higher asking rates for new buildings will ease, while demand should allow owners to increase rates on existing buildings as tenants begin to renew their leases.
— Crews Johnston III, SIOR,is a principal in Colliers Turley Martin Tucker’s regional office in Nashville, Tennessee.
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