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.

Office

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, Inc.

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 required.

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.

Industrial

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.

Multifamily

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).

Investment Report

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 private buyers.

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.