FEATURE ARTICLE, DECEMBER 2005

Nashville, Tennessee

The 10-county metropolitan statistical area (MSA) of Nashville, Tennessee, holds its hard-earned success in the balance. Ranked Number 1 for expansion and relocation in 2004, Nashville stays optimistic with a Nissan expansion and potential relocation of its North American headquarters. In all sectors, absorption levels are up and vacancy is down, a three-quarter trend that is encouraging new construction in many submarkets.

This year's investment sales show prices topping out at $215 per square foot with the sale of Burton Hills IV for $29 million and the unemployment rate hovers below the national average at 3.9 percent. The area has lost some manufacturing jobs, but has added more in retail and healthcare since the start of the year.

Nashville's downtown is literally booming with the excavation blasts from SunTrust Plaza, a new 340,000-square-foot office tower next to the historic Ryman Auditorium. The property is 60 percent pre-leased. Eakin Partners, the tower's developer, started construction last quarter in the midst of much activity in the central business district, including the revamped MetroCenter offices, the renovated courthouse, and new condominiums, apartments and retail. Set to explode next year, the downtown submarket will see the completion of many of the residential projects including the Viridian Tower, the Ambrose Lofts, and the renovated Stahlman apartments as well as the impressive new Schermerhorn Symphony Center, and a light rail station.

Nashville's retail market is currently driven by chains and big box tenants who are eager to move into the developing counties on the outer ring of the MSA. Walgreens, JC Penney, Best Buy, Barnes & Noble and multiple banks are moving into the hottest markets in Wilson and Sumner counties, which saw more than 200,000 square feet of absorption in the third quarter. The Mathews Company's Indian Lake development in Hendersonville opened up 233 acres of land for retail, which now boasts a new Home Depot, Wal-Mart Supercenter and Indian Lake Cinemas. In addition, HALO Properties has announced an adjacent 200 acres will be developed as Indian Lake Village, which will include 1 million square feet of retail space. Rental rates are ranging from $9 per square foot for some big box space that has been renovated and occupied to a $40 asking rate for some regional malls. Inside Davidson County, Maggiano's Little Italy and The Cheesecake Factory opened in the fourth quarter in west Nashville, where the rates are highest and the vacancy rates the lowest at less than 2 percent.

Nashville's long-term outlook for the industrial market is very good. The area is now on the radar screen of more distributors looking to serve a multi-state area from one easily accessible location.   Relocations such as MetriCan Stamping (200 new jobs), ALDI (450,000-square-foot distribution center) and Visteon (456,000 square feet in Wilson County) are keeping industrial absorption moving up with more than 2 million square feet year to date. And it should not stop there: Duke's recent $175 million sale of 2.6 million square feet to First Industrial should keep the market moving, as the plans include leasing up the properties and then putting them up for sale.

The overall industrial vacancy rate is hovering at about 10 percent, and with very little available product for users with big needs, developers are making big plans, including a 520,000-square-foot Duke property and Panattoni's 150-acre Elam Farms in Rutherford County, with an expected build out of 2.25 million square feet during the next 5 years. Businesses looking to expand or relocate to Nashville will soon have more choices of ready-for-occupancy inventory, as the MSA will see almost 2 million square feet of deliveries in the next 6 months. Property values have continued to climb, and specific product for-sale is limited. If interest rates climb in late 2005 and 2006, as is widely expected, demand will likely shift from purchasing toward renting, driving up rental rates and causing sales prices to plateau.

— Nate Greene is a managing partner with Nashville-based NAI Matthews Partners.

As the economy gains traction, Nashville's industrial and office sectors are going along for the ride. The industrial market continues to post strong gains, while supply and demand in the office sector have nearly reached a balance.

On the industrial side, Nashville's balanced market has allowed smaller deals to accelerate positive absorption, which will probably exceed 4 million square feet this year, equaling the sector's performance in 2004.

Deals in the 50,000- to 80,000-square-foot range have pushed the market forward. Looking ahead, several deals for 600,000 square feet are under consideration, which further bolsters the city's stature as a major distribution hub.

During 2005, WM Wright & Company, a sewing and craft products supplier, inked the largest deal among new tenants, with a 10-year sublease for 338,700 square feet in the Crossings Distribution Center. Other notable deals: Cinram International, a DVD maker and distributor, expanded its space to 530,000 square feet at 1706 Heil Quaker Boulevard and APL took 300,000 square feet in the new Rockdale Industrial Park. Aaron's Rents also signed a 5-year lease for 100,000 square feet in the Mason Distribution Center.

Nashville's East submarket is commanding attention, with pricing that makes sense for new industrial construction, and should become a focal point for new development.

Duke Realty recently put 230 acres under contract on Route 840 in Lebanon, part of the East submarket. Duke announced plans for a 650,000-square-foot building that can be expanded to 1 million square feet. And the site's size gives substantial future opportunities.

Elsewhere, Crescent Resources reworked its master plan for the 220-acre Centre Pointe project in LaVergne   to include big-box bulk product. Crescent is building a 500,000-square-foot building, and may build up to 1.8 million square feet.

Also in the Southeast submarket, Panattoni is active, controlling nearly 300 acres at the new Joe B. Jackson/ Interstate 24 interchange in Murfreesboro. Panattoni has plans for a 1 million-square-foot building.

Positive forces are helping the office sector as well. Vacancy rates are declining as absorption forges ahead. Sublease space continues to be burned off.

By the end of the third quarter, the overall vacancy rate was 12 percent, dropping 1.5 percent from the previous year. While recent catastrophic events, higher gasoline prices and the Fed's measured rate increases may slow the economic recovery, the office sector stands near equilibrium and landlords are regaining some pricing power.

Of course, activity and prospects vary by submarket. The central business district (CBD) continues to trail suburban markets. The 13-story SunTrust Plaza now under construction downtown, may be a mixed blessing. Scheduled for completion in late 2007, it remains to be seen if the building will attract new tenants or merely steal existing tenants from other downtown buildings.

Class A suburban space has set the pace, with the vacancy rate dropping below 10 percent for the first time since 1988. In all, Class A suburban properties generated more than 1.5 million square feet of positive absorption during the first three quarters of 2005.

With Class A suburban office space at a premium, new construction will be welcomed in Cool Springs, with a 153,000-square-foot building underway, and in Brentwood, with the construction of a 128,000-square-foot building in Maryland Farms.

Brentwood and Cool Springs/ Franklin currently offer little available space, with vacancy rates showing remarkable recovery from 20 percent just 3 years ago to a little more than 7 percent and dropping by year's end.

Moving forward, rental rates should rise as occupancy continues to improve. Look for the Brentwood and Cool Springs/Franklin submarkets to garner interest for speculative construction, as well as in the West End and Green Hills/Music Row submarkets.

— David McGahren, SIOR, is   principal and industrial division leader with Colliers Turley Martin Tucker – Nashville.

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