Jobs are plentiful these days in Nashville. Just look at a recent study by Headlight Data: The research company found that 2015 to 2016, no other large metropolitan area in the country saw a more significant increase in employment.
Not surprisingly, the job growth here has resulted in a particularly strong commercial real estate market in this bustling Tennessee city.
And the good news? The brokers working this market say that Nashville’s commercial real estate hot streak isn’t about to end.
“Nashville is a very strong market compared to a lot of our peer cities,” said Doug Brandon, managing principal with Cushman & Wakefield’s Nashville office. “I visit a lot of cities that are similar in size to Nashville, everywhere from Austin to Raleigh to Birmingham. And we are in the top tier of commercial activity of all these cities.”
Why? For Brandon, it comes down to growth. Nashville is hot now, whether in the eyes of the tourists who are visiting its hotels or the people who are moving into its multifamily buildings and taking jobs in its downtown central business district.
“The growth of the city, whether it is from tourism or from companies moving here, is really driving the commercial real estate business to levels we never expected,” Brandon said. “We surprise ourselves sometimes with how well things are going.”
Portrait of a boom town
There’s more than just anecdotal evidence to support Brandon’s theory.
Just look at the booming office market in the city. Avison Young, in its third-quarter market report, said that the Nashville office market is now in the largest construction cycle in the city’s history.
According to Avison Young, at the end of the third quarter, the office market had nearly 1.7 million square feet under construction, with Nashville’s central business district accounting for 42 percent of this figure.
An example of new office construction here was Hines’ 222 Second Avenue, a 361,000-square-foot, 25-story multi-tenant office building in the CBD. Another key office project, Ovation, started its first phase of construction with the Mars Petcare headquarters build-to-suit breaking ground in the third quarter.
The 224,000-square-foot office building is kicking off the planned 1.4 million square feet of office space in the 68-acre mixed-use development in Nashville’s Cool Springs submarket.
Avison Young reported, too, that as of the end of the third quarter, more than 1 million square feet of office space had been absorbed in the Nashville market.
“Rental rates, growth rates and everything that goes with it has been strong in Nashville,” Brandon said. “I wish I could say we are all just that smart. But I think we’re pretty lucky to live in a good city in a good location with great metrics.”
Plenty of good news
It’s not just the office market that is thriving in Nashville. According to its third quarter research report, Nashville’s industrial sector is booming, too.
JLL reported that in the third quarter of the year, industrial absorption hit 1.7 million square feet, doubling the amount reached in the first half of the year. That means that as of the end of the third quarter, Nashville’s year-to-date absorption had hit 2.9 million square feet.
Rental rates are rising, too, with JLL reporting that industrial rental rates are now at $4.66 a square foot. Vacancy rates in this sector fell 30 basis points to an impressively low 3.8 percent by the end of the third quarter. As JLL says, with 1.2 million square feet of new industrial space delivered in the quarter, that drop of 30 basis points looks even stronger.
And in more good news for Nashville, it appears that investors have discovered just how attractive its commercial real estate is. The city ranked ninth overall on the top 10 markets list compiled in late October in the Emerging Trends in Real Estate list released by PwC US and the Urban Land Institute.
“The trend of smaller markets displacing larger ones as investment hubs is setting a new course for urban development that is reshaping cities across the nation,” said ULI Global Chief Executive Officer Patrick Phillips. “These cities are positioning themselves as highly competitive, in terms of livability, employment offerings, and recreational and cultural amenities.”
What makes Nashville so attractive for businesses and investors? Brandon said that the city is in a great location in the center of the country. It also has a favorable tax situation, lacking a state income tax.
There’s also a strong workforce here and plenty of amenities to attract people who become long-term residents of the area.
Brandon said that about 80,000 students graduate from area universities here every year. That potential workforce is attractive to companies, and accounts for some of the big victories the city has celebrated as it attracts new companies to the area.
The diversity of the city’s business landscape helps protect Nashville, too, from the ups and downs of the economy, Brandon said.
“We have state government here, healthcare and a huge hospitality industry,” he said. “I wish I could put our success on one factor. But it’s a combination. When things go well with the national economy, Nashville climbs. When things slow down, Nashville doesn’t get beat up as much as a lot of other cities.”
In most Midwest markets today, it’s the retail sector that is experiencing the greatest struggles. In Nashville, though, the retail market is a complicated one today.
Brandon said that for the most part, retail is “holding its own.” He said that high-end retail is doing particularly well. High-end retail malls, he said, can’t expand quickly enough for the retailers who want to gobble up space in them.
But suburban middle-of-the-road malls aren’t doing quite as well, Brandon said. Those malls are struggling to fill space, and many are on the verge of closing.
“As with everywhere else, the whole Amazon effect is creating issues in Nashville,” Brandon said. “But our retail team is staying relatively busy even with this. We have a lot of small, successful niche retailers in Nashville. Nashville is unique because so much of it is built around the entertainment business.”
To prove his point? Brandon said that as he was speaking to Midwest Real Estate News, he was also looking out his office window at a small boot store that is thriving. He could also see a see shop specializing in vintage clothing targeted, perhaps, to Millennial buyers.
“Those kind of shops, with their own personalities, are what is driving Nashville,” Brandon said. “That is the real retail growth here. Growth isn’t coming from the big boxes. It’s not coming from the Best Buys and the Targets. It’s coming from these smaller retailers.”