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CITY HIGHLIGHT, JANUARY 2005
MUSIC CITY FAVORABLE FOR NEW BUSINESS
The Nashville, Tennessee, metropolitan statistical area, which
includes 10 counties, has grown to an estimated 1.28 million
people and remains ranked among the nation’s best places
to work and live. Aptly named Music City USA, Nashville is
also a regional center for insurance and banking, a national
center for healthcare and car manufacturing, as well as printing
and publishing. The tax environment is favorable, attracting
Louisiana Pacific, Nissan and Bridgestone APM in 2004, along
with the planned expansion of many businesses through the
first part of 2005, including Hot Topics and Ray-O-Vac. With
the unemployment rate well below the national average at 3.5
percent and low interest rates, Nashville’s housing market
has seen record home sales.
Conservative growth, continued consumer spending and job creation
have led to more sublease burn off and a positive net absorption
(more than 500,000 square feet) in 2004. The office market
has seen steady growth with the overall vacancy rate down
by almost 1.5 percent from third quarter 2003, partially due
to the new Tennessee Lottery, which took up over half of that
net absorption for the year. Due to the increased activity,
rates are stable and landlords are giving fewer concessions.
Nashville weathered the national recession better than other
MSAs economically, partially due to its industrial diversity.
Because of its location at the intersection of interstates
24, 40 and 65, Nashville has long been a desirable distribution
point, with regional and national distribution centers for
Bridgestone-Firestone, Dell and Toshiba. Industrial occupancy
is increasing, with landlords beginning to raise their rates,
even if only by a few cents. The predicted upswing seems to
have hit earlier than anticipated as a result of higher traffic
in the market.
— NAI Mathews Partners
Industrial
Class A bulk facilities led the industrial market resurgence
throughout 2004 while reducing vacancy rates from 16.4 percent
to a year-end rate of 10 percent. In addition to improving
occupancy, net positive absorption was almost 2.75 million
square feet for 2004 while sublease availability remained
in the 1.4 million-square-foot range.
Other bulk facilities posted 500,000 square feet of positive
net absorption for 2004, thereby reducing vacancy rates from
17.1 percent to 15 percent for year-end.
Viewing bulk facilities in their entirety results in a 3.5
percentage point reduction in vacancy rates from year-end
2003 to the same period 2004 and almost 3.25 million square
feet of positive net absorption achieved for the past 12 months.
Both the manufacturing and warehouse sectors in Nashville
experienced a moderate decrease in vacancy rates from year-end
2003 in addition to posting positive net absorption. Manufacturing
and warehousing each reduced their vacancy rate by .1 percentage
point with manufacturing and warehousing posting 220,000 and
550,000 square feet of positive net absorption, respectively.
Last year’s outstanding results will have some short-term
ramifications, specifically hampering a continuation of deal
velocity in the short run since there’s a shortage of
big box space. It will be short term, however, as developers
move forward with new projects.
Duke Realty Corporation has started construction on Nashville
Business Center II, a 500,000-square-foot building in the
North submarket. In the East submarket, development and sales
of industrial tracts along Interstate 840 are strong led by
First Industrial’s new Couchville Pike Distribution Center.
The first building is now under construction and will contain
300,000 square feet expandable to 800,000 square feet. The
planned 180-acre Elam Road project by Panattoni Development
Company will be one of the next industrial developments in
the Southeast submarket. Additionally, Crescent Resources’
CenterPoint development represents another significant development.
CenterPoint employs a new strategy and site layout for “big
box” buildings, with plans for up to five cross-dock
distribution centers ranging from 200,000 to 800,000 square
feet.
As the economy improves, national and regional economic indicators
continue to point to an expansion. Corporations increased
productivity and cut costs by eliminating excess capacity
during the recent economic downturn, and they are finally
in an expansionary mode. Interest continues in single tenant
facilities in the 22,000- to 30,000-square-foot range and
build-to-suit facilities are still needed to meet market-specific
needs. We look for sustained periods of industrial growth
and anticipate absorption in the 2.5 million-square-foot range
for 2005.
— Whitfield Hamilton, managing principal, and David
McGahren, industrial division leader, Colliers Turley Martin
Tucker-Nashville
Industrial Investment
The Nashville market continues to see some impressive investment
activity. Some of the more significant deals that occurred
during 2004 include:
• Panattoni Development Company sold Southpark Buildings
B, C and E (1.24 million square feet) to Southpark Warehouse
II Acquisition Corporation for more than $45 million.
• Ozburn Hessey Properties sold the MidSouth Logistics
VI building, a 770,000-square-foot facility occupied by Cinram,
to US Industrial REIT for $30.4 million.
• Eastgate Distribution II, a 403,750-square-foot distribution
center, was sold by the KFH Fund to Lebanon NI Industrial
LLC for approximately $17.4 million.
• American Real Estate Partners sold the 520,000-square-foot
Mid South V building to Dividend Capital for $19.5 million.
• Ingram Book Group vacated its 530,000-square-foot building
on Heil Quaker Boulevard and sold it to First Industrial Realty
Trust for approximately $21 per square foot.
• The 423,000-square-foot Class A Eastgate Distribution
III facility was sold by First Industrial Realty Trust to
Dividend Capital Trust for approximately $14.3 million.
• Lord Baltimore Properties sold three business centers
totaling 336,000 square feet and an additional 7.6 acres of
land in the Grassmere Business Park to Talcott Realty Investors
LLC for an estimated $30.5 million or $90 per square foot.
• Nashville Joint Venture LLC sold the 315,000-square-foot
AmSouth Bank operations center on Metroplex Drive in the Airport
submarket to Delpres Nashville LLC for $33.33 million in May;
Delpres Nashville LLC then sold this facility to Benderson
Development for $39.7 million in September.
The recovery in the corporate economy and the increasing likelihood
of higher interest rates should help close the wide gap between
the real estate capital markets and physical space market
fundamentals. Vacancy rates should continue to fall as tenant
demand recovers and new supply remains modest, while rising
interest rates and an improving outlook for other asset classes
diminish the appeal of real estate yields. For investors,
these events signal a shift in investment strategy from the
credit-driven investing that has dominated the market in recent
years to strategies that focus on the opportunities created
by the recovery in demand and, eventually, rents.
— Whitfield Hamilton, managing principal, and David
McGahren, industrial division leader, Colliers Turley Martin
Tucker-Nashville
Office
How big is your footprint? That was the question on the minds
of many Nashville Class A tenants in 2004. Eakin Partners
responded in a big way, with its 205,000-square-foot Midtown/
Music Row crown jewel, Roundabout Plaza. The largest broker-represented
tenant that made the move to Roundabout Plaza was represented
by John Gifford of NAI Mathews Partners. With a floor plate
of 28,000 square feet, Roundabout Plaza highlights the emerging
trend in office development in Nashville — more square
feet per floor.
Looking forward, developers owning prominent parcels in Downtown
and Midtown locations have either already been holding extensive
discussions with prospective tenants or are attempting to
expeditiously progress toward this consummative stage. And,
once again, what seems to be driving some of these discussions
is the increased demand for larger floorplates.
Some developers are recognizing the benefits of multi-use,
whether it is on a limited basis, such as Tony Giarratana’s
Viridian Tower, which is now under construction, or on a more
expansive basis, such as The Hill Center, the multi-use marvel
that broke ground in Green Hills in June. When completed,
The Hill Center, a heavily conceptualized lifestyle center,
will feature a multitude of retail options and some very appealing
Class A office space.
Much has been made of the impending vacancies over the next
few years should dozer-happy developers cause a rise in office
vacancies. But, for now, the overall vacancy rate for Nashville
office space is a mere 16.5 percent, and as long as corporations
such as Caremark and Louisiana-Pacific continue to migrate
to Nashville, fundamentals will continue to improve.
— Wilson Rogers, NAI Mathews Partners
Retail
The biggest deal of the year in Nashville’s retail market
involved the acquisition of 7044 Charlotte Pike. Macquire
Bank Limited purchased the 199,365-square-foot building for
$20.2 million.
Other major deals include Carolina Holdings’ acquisition
in Mt. Juliet (103 acres for $6.5 million) and the Indian
Lake Development (approximately $11.5 million for 83 acres)
in the Hendersonville area, which will sport The Home Depot
and Wal-Mart Supercenter.
While the Nashville retail market is heavily reliant upon
its suburban submarkets (outside Davidson County) and has
been for the past few years, there is also a new trend emerging
downtown.
The continuing trend is the development of the Cool Springs,
Hendersonville, Gallatin, Murfreesboro, Smyrna and Mt. Juliet
areas as the desired properties in town are simply not available.
With the “tax-cut-improved” economy, there is no
stopping big box retailers such as Wal-Mart, Publix, Kroger,
The Home Depot and Lowe’s, not to mention the smaller
ones expanding including freestanding pad users Chick-fil-A,
Zaxby’s, Panera Bread and multiple banks. The city of
Gallatin recently annexed 800 acres next to Hendersonville
and a developer has already signed a letter of intent for
120 of that 800 to build an open-air mall. There is an urgency
on the part of Sumner County to attract large retail development
in anticipation of the population boom predicted for the next
20 years.
The new trend for Nashville is the very encouraging rehabilitation
and development of some downtown buildings, making proposed
new and old space mixed-use for a segment of the population
looking to relocate to the central business district. Church
Street will soon be a bustling center of activity again with
several adaptive reuse projects being developed by Tony Giarantana:
The Veridian, a residential condominium with a grocery store
and Signature Tower, a multi-use skyscraper that offers office,
residential and retail spaces.
The completion of the renovated Metro Courthouse will directly
impact the neighboring retailers as more than 300 metro employees
resume their positions downtown. Along its boundary is the
soon-to-be renovated Stahlman Building, an historic landmark
that will be developed by The Mathews Company as retail and
residential apartments sharing underground parking (under
a public green space) with the Metro Courthouse across the
street.
In keeping with the mixed-use trend, the exciting sports news
for downtown is the announcement that the Nashville Sounds
(AAA Baseball) have their financing to build a new stadium
on 16 acres of city-owned property at the site of the former
Thermal Plant. The ballpark will include a privately financed
$40 million residential and retail development from Baltimore-based
Struever Bros. Eccles & Rouse.
— NAI Mathews Partners
2005 Forecast
The office market in Nashville is promising for 2005. There
are plans for new office developments in the Brentwood, Green
Hills, West End (300,000 square feet of Class A space proposed)
and Downtown submarkets. The Green Hills development centers
around 126,000 square feet of Class A office space surrounded
by a retail avenue of shops and restaurants and will significantly
impact the office activity in that submarket, due to the excellent
location and quality of the project.
The next few years should show the kind of growth that Nashville
saw in the 1990s, without the tech bubble that led to excessive
expansion. Nashville will see a more sustainable market and
steady growth of both white and blue collar jobs and will
expect the market absorption to follow the trend from 2004
at roughly 700,000 square feet by year’s end.
— NAI Mathews Partners
©2005 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.
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