| 2002 LOOKS PROMISING FOR NASHVILLE
These are trying times. Despite the unforeseen shocks dealt to the nation's
economy in the last several months, there is a bright side, especially
in Nashville, Tennessee. This area will continue to grow faster than most
regions of the country because of the climate and resources.
Lack of adequate power is not an issue in the Nashville area. Borrowing
costs are low, inflation is not a threat, sellers of property are becoming
more motivated and prices are realistic. Therefore, plenty of space will
be available at reasonable rents for business expansion and corporate
relocation when the cycle turns.
Nashville is the right match for businesses looking for a consistent,
predictable and aggressively pro-business climate where they can grow
and be profitable. Nashville topped the charts on two recent polls conducted
by Expansion Management, a site selector industry publication. Nashville
ranked third in the magazine's poll that rated the "100 Most Logistics
Friendly Cities" and 16th on its list of "Top 40 Hottest Real Estate Markets."
This tells companies considering relocating to this region that Nashville
is a good place to start. For expanding or relocating companies, real
estate availability and price, as well as costs for new construction,
are extremely important site selection considerations.
The Nashville office market has approximately 350 buildings, 10,000 square
feet or larger, totaling nearly 25 million square feet of multi-tenant
office space. The area continues to show the effect of market adjustments
with increases in vacancy rates and sublease availability. Attesting to
a general slowdown in the economy, Nashville had only 50,000 square feet
of positive absorption through the first three quarters of 2001, down
dramatically from the 1.6 million square feet of positive absorption for
the same period in 2000. Vacancy rates in 2000 averaged almost 10.8 percent
and market adjustments have trended these upward to almost 13.5 percent
through the third quarter of 2001. Approximately 715,000 square feet of
sublease space is currently available market-wide; this space is not counted
as vacant nor as negative absorption, but it will impact direct availability
and could mitigate direct asking lease rates.
The current market-wide asking rate of $17.09 is down from the previous
quarter and continues a downward trend from the last five quarters. These
lower rates afford potential clients excellent opportunities to acquire
quality facilities at reduced rates.
Although recent headlines have predicted a difficult future for the office
market in Nashville's CBD, One Nashville Place is bucking the trend. One
Nashville Place is a 416,083-rentable-square-foot building that was developed
in 1986 by DeBartolo Property Company. The building is currently owned
by TIAA-CREF and is exclusively leased and managed by CB Richard Ellis,
CB Richard Ellis, Inc. realized early on with the economic challenges
lying before Nashville, as well as the country, that a more creative approach
to marketing office space in the One Nashville Place building would be
CB Richard Ellis and TIAA-CREF "view the circumstances from a different
perspective," according to Bill Neill of CB Richard Ellis, Inc. This new
approach attempts to aggressively answer prospects' concerns regarding
rental rate, parking costs and tenant improvement allowances. This creative
approach has led to the recent lease renewals with IBM (±16,500 square
feet), Morgan Keegan (±8,000 square feet), Firstar US Bank Corporation
(±40,270 square feet) and a local law firm Miller Martin (±6,500 square
feet) as well as expansion and new lease deals with MGLA Inc. (±4,400
square feet) out of New York and local law firm Lassiter Tidwell & Hildebrand
(±8,566 square feet). "The interest level in One Nashville Place is the
best it's been since our association with the building," says Neill. "We
have a quality product in One Nashville Place and we place great importance
on tenant satisfaction and retention."
Alex S. Palmer & Company is underway with the six-story Burton Hills
IV project, a 138,000-square-foot building located on the last remaining
commercial site in the Burton Hills office park. The site is located on
Hillsboro Road at the entrance to the Burton Hills development, providing
convenient vehicular access and prominent exposure to the surrounding
community. Because of the highly visible location of this site and its
proximity to premium residential neighborhoods and nearby Class A office
buildings, an extensive effort has been given to the architectural proportions,
massing, coloration and detailing of materials. The building is due for
completion in October.
Speculative construction remains strong with the vast majority focused
in the Cool Springs area. Crescent Resources LLC is currently developing
Corporate Centre at Cool Springs. Crescent's commitment to well-planned
sites is clearly evident in this development of nearly 3.5 million square
feet of Class A space. Seven Corporate Centre was recently completed,
bringing completions in Corporate Centre to a total of 1 million square
feet built to date. The office market through the first three quarters
of 2001 had six completions totaling 639,394 square feet and has six buildings
totaling 419,514 square feet under construction. Ten more buildings, totaling
833,000 square feet, are in the planning stages.
The Nashville industrial market contains nearly 142 million square feet
of existing marketable industrial space in buildings of 10,000 square
feet or larger.
Nashville has been losing manufacturing jobs for some time, but there
is some good news forthcoming: Saturn and Nissan have committed to capital
expansion programs totaling $2.5 billion. These expansion programs will
create desirable jobs, and the city's economy will benefit immediately.
In time, the impact of the multiplier effect should cause vendors, suppliers
and distribution facilities to expand in order to support the growth of
Saturn and Nissan.
Current absorption rates have moderated but remain positive while vacancy
rates have increased to almost 10 percent. Speculative construction continues
at a brisk pace with almost 460,000 square feet underway and approximately
4.4 million square feet planned. Of the 460,000 square feet under construction,
approximately 46 percent has been leased. The market will continue to
grow with the Crescent Resources' CentrePointe Distribution Park, which
is expected to add almost 3.9 million square feet in 16 buildings.
The Nashville industrial market average asking gross lease rate for industrial
space, excluding R&D/flex, has remained stable for the last seven quarters
in spite of substantial new product being added to the market. R&D/flex
facilities have been excluded from the rate analysis because these facilities
have a disproportionately higher lease rate and skew the lease rate averages
for traditional industrial facilities. The largest appreciation in rates
occurs within the R&D/flex facilities; these facilities are often located
within higher-end, mixed-use parks, and offer user flexibility, excellent
facilities and ample parking, all at a fraction of the rate charged for
conventional office facilities.
Although the Nashville economy has shown signs of continued softening
throughout 2001, Nashville's multifamily market appears to be surviving
the current slowdown relatively unscathed, placing it in a healthy position
to benefit from early signs of recovery expected by second quarter.
Citywide occupancy rates are approximately 93.4 percent, up slightly
from 93 percent at mid-year. Market rents also increased slightly during
2001 and average between $671 and $676, depending on the submarket. Both
the occupancy rate and rent rate increases for communities built before
1990 are slightly higher than rate increases for the newer properties
that must compete with single-family home buying (fueled by the lowest
mortgage rates of the past decade).
Two factors positively influencing the Nashville multifamily market are
the area's response to current economic conditions and an outward shift
in new construction. While unemployment nationally exceeds 5 percent,
Nashville holds at 3 percent, demonstrating the resiliency of the metropolitan
statistical area (MSA) in weathering a major economic slowdown. Nashville's
stability can be credited to a diverse job base, which is not heavily
dependent on any one sector.
Nissan's recent decision to relocate the popular Altima vehicle line
to its Nashville MSA facility in Smyrna will add up to 2,000 jobs to the
workforce, continuing the job growth started by Dell Computer Corporation
2 years ago and ensuring a steady need for both single-family and multifamily
housing. Another factor altering the multifamily outlook is the shift
in new construction to the periphery of the MSA, including Murfreesboro,
Lebanon, Gallatin and Smyrna. This continuing trend is in response to
a shortage of available sites (limited by both zoning and topography)
within Metropolitan Nashville/Davidson County.
Multifamily sales in the Nashville market in 2001 indicate significant
interest in the area and span all submarkets and community types. Post
mid-year sales include Waterford Crossings (Hickory Hollow), Brentwood
Oaks (Nolensville Road), Wyndchase Bellevue (Bellevue), Berkley Ridge
(Briley Parkway) and Bristol Park at Riverchase (Rivergate).
The combination of quality of living and recent corporate expansions,
including Dell Computers, Caterpillar Financial and Hewlett-Packard, make
Nashville a favorite secondary market destination for investors in the
office and industrial sectors. Throughout 2001, local real estate investment
trusts (REITs) such as Highwoods Properties, Duke Realty Corporation,
ProLogis and First Industrial Realty Trust have continued to build market
share position creating higher yields through development versus acquisition.
Predictions are that institutional acquisitions will continue to be soft
through 2002, going with higher up-front yield expectations to compensate
for lower rental growth expectations.
Private capital groups appear to be the best source of acquisition activities
for the next 12 to 18 months. With the most recent elimination of the
30-year Treasury Bond by the Federal Reserve Bank and the resulting capital
market shocks from September 11th, 10-year treasuries have plummeted to
the 4.25 percent range. Resulting historically low rates in the 7 percent
range have created an attractive opportunity for leveraged returns for
Investment activity in the office sector has seen a precipitous falloff
from prior years' highs due to the softening of the national economy,
resulting in a slowdown of job growth (which impacts the demand for space).
Another factor that impacted certain submarkets was an increase of sublease
space to 715,000 square feet or 17 percent of the total available space.
In 2001, the total MSA acquisition activity of institutional grade properties
was in excess of $250 million. Notable sales in 2001 included the sale
of the 125,000-square-foot Belle Meade Office Park for $14.7 million and
the sale of the 105,000-square-foot Horizon Center in Brentwood for $13
million. The West End and Brentwood/Cool Springs submarkets continue to
be the favored locations for investors due to a combination of higher
stabilized occupancies and a lack of future mass development opportunities.
The industrial investment sector in Nashville continues to grow with
recent relocations and expansions by Hewlett-Packard, Irish Express and
Nissan Motors. While Dell Computers was announcing a major lay-off in
Austin, Texas, local employment incentives resulted in a stabilized employment
in the new Nashville plant. Interest by institutional clients and private
buyers appears strong; however, acquisitions have been selective and strategic
in nature. The most prominent institutional transaction was the First
Industrial sale of the 400,000-square-foot EastGate Center to G.E. Capital
for $12.6 million. The AMB sale of the 375,000-square-foot Interchange
City Industrial Center to ProLogis is another notable sale.
Nick Minadeo is the information management coordinator for CB Richard
Ellis in Nashville, Tennessee.
©2002 France Publications, Inc. Duplication
or reproduction of this article not permitted without authorization
from France Publications, Inc. For information on reprints of
this article contact Barbara
Sherer at (630) 554-6054.