SOUTHEAST SNAPSHOT, NOVEMBER 2008
Nashville Office Market
As all eyes and ears are focused on the nation’s economic turmoil, Nashville feels fortunate to be reasonably insulated from the economic swings. That being said, investment sales have slowed as credit remains tight and the election looms. Companies also are forestalling decisions against some unanswered questions: When will capital flow? Who will lead us?
The drags on the national office market aside, Nashville has a bevy of positive factors to keep the office sector moving forward.
The area’s diversified economy cushions against highs and lows, with healthcare, music, publishing, automotive and insurance companies propping up the office market. Nashville’s largest corporate employers maintain healthy balance sheets. Civic and governmental business groups continue to actively recruit companies to relocate to Nashville, with success in healthcare (Accredo Health Group, Cogent Healthcare) and technology (Bank of New York data center, ServiceSource) in particular. The area’s central location, newly renovated international airport, low cost of living, quality of life and educated workforce garner attention from firms looking to make a move.
These factors have buoyed Nashville’s office market, which remains steady but is off its torrid pace of the previous few years. More than 403,000 square feet of new office space has been delivered to the market since the start of the year, and more than 1 million square feet of headquarters space has come on line in the past year. As for the latter, this includes Nissan’s new North American headquarters corporate campus in Cool Springs that measures 450,000 square feet. Verizon also recently consolidated office space by relocating its regional headquarters into 180,000 square feet in Duke Realty’s Aspen Corporate Center in Cool Springs. Verizon transferred 550 workers to its build-to-suit location and expects to hire as many as 800 additional people over a 3- to 5-year period.
Developers continue with their building plans, too. There is currently 1.4 million square feet of space under construction. The majority of this space is going up in the Cool Springs/Franklin submarket, the city’s most dynamic area for office and retail. Home to many top executives, this submarket is located in Williamson County, the nation’s 27th wealthiest county. Nissan’s recent location here further fuels demand for office space. Cool Springs buildings underway or recently completed include Boyle Investment Co.’s Meridian Cool Springs, with two buildings totaling 153,000 square feet; Crescent Resource’s One Greenway Centre at 164,000 square feet; Duke Realty’s 180,000 square-foot build-to-suit for Verizon; the McEwen Building at 173,000 square feet; Highwood Properties’ Cool Springs IV at 155,000 square feet; and Nissan’s new massive headquarters.
Brentwood, another popular office submarket, recently saw Alex S. Palmer and Duke Realty deliver two new buildings totaling 244,000 square feet in Maryland Farms. About 80 percent of Brentwood’s business district is located in Maryland Farms, a former horse farm that was conceived as an office mecca in the ’70s and has an 8.3 percent vacancy rate. These latest office projects, though, leave minimal land left for future developments in the Brentwood submarket.
The 520,000-square-foot Pinnacle at Symphony Place will rise 29 stories in Nashville, Tennessee.
Limited suburban options for available land, along with rising transportation costs, have developers looking at the urban core for redevelopment opportunities. The CBD and Midtown are gaining momentum as residents move in and city officials work on a $600 million convention center. Barry Real Estate is building its first Nashville project in the CBD. The Pinnacle at Symphony Place, located in the area south of Broadway nicknamed SoBro, will rise 29 stories and include 520,000 square feet of office space along with some high end retail. The law firm of Bass, Berry & Sims has committed to 163,500 square feet, and Pinnacle Financial Partners plans on taking 65,000 square feet in the Pinnacle. Crosland’s Terrazzo luxury condominium complex in the Gulch area will include 75,000 square feet of office space. The Lionstone Group is developing 1515 Demonbreun on the Roundabout at the entrance to the Music Row submarket in Midtown. Scheduled for completion in early 2010, the development will have 250,000 square feet of office space and 25,000 square feet of upscale retail. Earl Swensson Associates, the architectural firm for the building, signed a 60,000 square-foot lease as the development’s anchor tenant.
The CBD faces some serious challenges as these new buildings come online. Nissan’s exodus to its new corporate campus shot up the Class A vacancy rate in the CBD from 9.6 percent to 17.1 percent. Many of the impending moves to The Pinnacle and 1515 Demonbreun Building just shift occupancy within those markets. New tenants to Nashville will continue to be drawn to these submarkets, and existing tenants will need to expand, but that may prove tough in the short term with so much national economic uncertainty.
Landlords also face some tough decisions. They have been able to push up asking rates throughout the Nashville region, but the wealth of space may begin to temper rate increases. Rates range from $29 per square foot for Class A space in Green Hills/Music Row to $17.50 per square foot for similar space in the MetroCenter. The average existing rental rate throughout Nashville is $21.02 per square foot for Class A space and $16.51 per square foot for Class B space. Rates for new CBD and Midtown buildings will be in the low $30s per square foot, which must be achieved, given the rise in costs, for the developer to make a fair return. Tenants will ultimately determine the value they place on new versus existing product.
As for vacancy rates, we look for them to increase as new buildings come on line. It now stands around 11.7 percent, while 10 percent is the historical equilibrium. We expect that developers will begin to pause before moving forward with plans for new buildings not currently underway. This will give the Nashville office market time to catch its breath while the national economy recovers.
— Whit McCrary, IV, is a principal and office division leader in Colliers Turley Martin Tucker’s Nashville office.
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