CITY HIGHLIGHT, JANUARY 2008

NASHVILLE CITY HIGHLIGHTS
David P. McGahren, Cheri Thomas and R. Stephen Prather

Nashville Industrial Market

While developers and investors digest the fallout from the subprime worries in the residential credit market, Nashville’s industrial sector remains strong despite a pullback in the third quarter of 2007. The diversity of industry — auto, technology, retail and healthcare leading the way — coupled with Nashville’s central location and solid transportation infrastructure have tempered some of the residual effects of credit worries in the industrial market.

The area’s balanced and growing  economy, location and quality real estate place Nashville on the radar screen of both investors and users looking to secure positions as the new year begins.

Record absorption of nearly 17 million square feet occurred between 2004 and 2006 so the slowdown in activity during third quarter 2007 ended a solid run. The market still managed to post positive absorption of 2 million-plus square feet last year.

Developers delivered nearly 2.5 million square feet in 2007. As such supply was slightly ahead of demand but the vacancy rate remained in low single digits, a mere 5.4 percent, give or take a tenth of a percent.

Key projects delivered in 2007 included Elam Farms Building 1 in Murfreesboro, a 363,000-square-foot building completed by Panattoni Development Co. This is the first of six buildings planned in the new park at the junction of Interstate 24 and Joe B. Jackson Parkway. When finished, the park in the Southeast submarket will provide more than 2 million square feet of space.

In Portland, which lies in the North submarket, two speculative buildings were completed by local developer Larry Collings, adding 216,000 square feet and 504,000 square feet of inventory.

Development remains robust along Couchville Pike in Wilson County with projects by four developers that will add some 2 million square feet of space in the East submarket. These projects include 840 Business Center, a 436,800-square-foot bulk warehouse/distribution center developed by Verus Partners, a newcomer to Middle Tennessee. First Industrial’s third building in its Rockdale Development will be able to accommodate as much as 900,000 square feet.

Opus Group has plans to establish a foothold in the area as well, with three 700,000-square-foot buildings planned, and IDI will establish a presence with its new 556,000-square-foot building.

While the Southeast submarket has been the dominant submarket for bulk space for years, the North and East areas are emerging as strong competitors. These latter submarkets will continue to drive development since land is more available and affordable.

While developers focus on big-box distribution, there’s been a shortage of space for smaller tenants looking to lease or buy space in the 15,000 to 40,000-square-foot range. Developers have taken notice and are beginning to experiment with smaller product. A key challenge will be convincing smaller tenants that such new construction demands higher rents. This should play out in the coming months, giving developers an opportunity to proceed with caution.

Certainly, the market will take time to absorb the new bulk space coming online. Deal activity did pick up during the fourth quarter of 2007, giving developers and brokers more reasons to be optimistic in the coming year.

As the new year begins, Nashville’s assets will continue to attract industrial users, developers and institutional investors. The pace may slow, especially as the market digests new product, but the strength of our economy and the commitment and ability of both private and public entities to attract business bode well for the greater Nashville area’s industrial market.

— David P. McGahren leads a team of 12 industrial leasing specialists in Colliers Turley Martin Tucker’s regional office in Nashville.

Nashville Retail Market

Nashville’s overall retail market size is 75.9 million square feet, with an additional 3.6 million square feet under construction. More than 1.5 million square feet have been absorbed during the four quarters ending in September 2007.

Nashville’s retail sector continues to be one of the strongest in the nation, with an overall 5.2 percent vacancy. Overall rental rates have significantly increased, with quoted rents averaging $15.27 per square foot, a 14.5 percent increase from a year ago. This is largely attributable to the large amount of newer, more expensive product coming on line.

Several exciting projects have been delivered, or are under construction. The largest is The Avenue in Murfreesboro, weighing in at 811,000 square feet. The Avenue (95 percent leased) opened in mid-October. It boasts more than 100 retailers and restaurants. A joint venture between Cousins Properties and Faison Enterprises, it is the centerpiece of a 400-acre master-planned commercial development which also includes offices, hotels, a convention center, and a new regional hospital. Other large projects include Colonial Town Park (276,00 square feet); Columbia Pike (450,000 square feet); and Streets of Indian Lake (405,000 square feet).

Hill Center at Green Hills, the most upscale of Nashville’s new retail developments, replaced an obsolete eyesore with a 200,000-square-foot lifestyle center comprised of both retail and office space. HG Hill Realty developed the center, which opened to the public in September. The Hill Center provides a village-like open-air experience. The Hill Center specifically sought out upscale retailers, which were new to Nashville, including Whole Foods, Anthropologie, West Elm and California Pizza Kitchen.

From an investment sales perspective, the Nashville retail market has been active, with $486 million in retail transactions reported by RERC and the CCIM Institute between July 2006 and July 2007. Median and average price per square foot were $95 and $123 respectively, while the median and average cap rates were 7.5 percent and 7.3 percent respectively. Cap rates in Nashville were close to 100 basis points above the national average, which has attracted many buyers from low cap rate markets. The cap gap has been steadily closing as a result of this increased interest.

There have been a number of notable sales of retail properties. The most Cinderella story of the year was the sale of 100 Oaks Mall, long chronicled as a “dead mall” and a “creepy place.” An 850,000-square-foot multi-level mall and office mid-rise, it sold for a mere $46 million. Shortly after its purchase by Dallas-based M & R Investments, Vanderbilt University Medical Center leased 436,000 square feet of dark upper floor space and the office building for back office operations.

Other major investment sales include Atlanta-based Jamestown Properties’ sale of the 93,684-square-foot Northside Festival Center for $14.5 million to Roswell, Georgia-based Malon D. Mimms Company; and California-based Crescent Properties’ acquisition of Crescent Plaza from a partnership of Glenn Wilson, Phil McNeill, and King Rogers. Also, California-based Foursquare Properties is purchasing Bellevue Mall from Madison-Marquette, a Washington DC retail owner, pending approval of a $100 million redevelopment plan that will replace 800,000 square feet of aged and struggling enclosed mall with 1.2 million square feet of open-air retail, restaurant, and office space.

— Cheri Thomas, CCIM, is an investment broker with Nashville, Tennessee-based NAI Nashville.

Nashville Multifamily Market

The subprime mortgage crisis is giving many areas the jitters. Multifamily owners don’t know whether to applaud as lending criteria tighten, credit becomes scarce, and more people look to rental housing; or to moan as a torrent of marked down condo and single-family properties flood the market. Nashville stands to weather the subprime tsunami better than most markets, in part because Nashville’s economic fundamentals are strong, and because home prices have risen only slightly more than per capita income. This means less uncertainty for multifamily owners.

While condominium growth has been strong, Nashville still lags behind other comparable cities in downtown residential, even taking into account the projects under way and the potential projects on the drawing boards. The most exciting potential condo project is undoubtedly Signature Tower, the permits for which have been pulled. Signature Tower will be the tallest building in the U.S., outside of Chicago and New York, assuming developer Tony Giaratana can convince the airport that his landmark building will not interfere with flight paths.

American Apartment Finance ranked Nashville 30th in the nation for apartment market performance. The rankings were based on job growth, vacancy rates, rent growth, inventory growth, and housing affordability. Nashville’s apartment stats are impressive:  vacancy of 5.2 percent, rent growth per annum of 2.3 percent, and inventory growth below job growth at 1.2 percent, owners should expect strong performance to continue into the future.

According to the Greater Nashville Apartment Association, overall occupancy was more than 95 percent. Occupancies ranged from a low of 90.9 percent in the Briley Parkway submarket to a high of 98.8 percent in the Mount Juliet-Lebanon submarket.

Average rents range from $0.67 per square foot in the Briley submarket to $1.22 per square foot in the West End-Downtown submarket. Rents have trended steadily upward for the last decade.

Despite strong demand for rental housing and strong performance for apartment owners, new supply has been limited by the scarcity of multifamily land. In 2007, through the third quarter, just 674 new units were delivered, including The Preserve at Metro Center, Woodgate Farms in Murfreesboro, and Aventura at Providence in Mt. Juliet. 2,830 units currently are under construction. All but 468 units are conventional. Potential (speculative) starts total just 1,384 units, only half of which are conventional.

Because development sites are hard to come by, the big story in Nashville multifamily has been investment sales. Through the third quarter, more than 6,000 units changed hands, for total sales of $419 million at an average price/unit of $69,227. Davie, Florida-based New Dawn Companies purchased a 1,593-unit portfolio of four properties from Chicago-based Equity Residential Properties for $141 million. Virginia-based Mission Residential added 900 units to its portfolio in three sales, to add to the five apartment communities it purchased in 2006.

The top per-unit price was paid by Wilshire Holdings for The Pointe at Raiders Campus (student housing) for $131,000 per unit. Wilshire Holdings is a tenant-in-common sponsor. The largest single purchase was Venterra Realty’s purchase of The Landings of Brentwood for $68,500, or $94,600 per unit.

— Cheri Thomas is an investment broker with Nashville, Tennessee-based NAI Nashville.

Nashville Office Market

The Nashville office market had a strong third quarter in 2007. The vacancy rate was 9.1 percent, and the average asking rate was $18.99 per square foot. The market absorbed 473,988 square feet of office space, delivered 17 buildings totaling 417,483 square feet, and has an additional 3,130,984 square feet under construction.1

The vacancy rate at the end of the third quarter of 2006 was 11.1 percent, and the average asking rate was $17.30 per square foot. The market absorbed 14,192 square feet, delivered five buildings totaling 360,405 square feet, and had 2,049,642 square feet under construction.2 In comparison to last year, the market has decreased its vacancy rate by 2 percentage points, absorbed 488,180 more square feet, and increased asking rates by $1.69 per square foot.

Most notable are the absorption numbers for Nashville’s central business district (CBD) and suburban submarkets. In the third quarter of 2006, the CBD absorbed 52,041 square feet compared to 50,234 square feet in the third quarter of 2007. The suburban submarkets absorbed 66,233 square feet in 2006 compared to 524,222 square feet this year. These numbers suggest that Nashville is experiencing the same type of outward growth that cities like Atlanta have experienced for the last decade. In just the third quarter of 2007, the suburban submarkets absorbed more than 500,000 square feet, while the CBD dispersed more than 50,000 square feet.

Companies are moving away from the CBD and developers are seeking opportunities in the suburbs. Examples of significant suburban projects delivered to the market in the third quarter of 2007 include Alex Palmer’s Gateway II, a 120,000-square-foot office building in Brentwood; Duke Realty’s Aspen Corporate Center 400, a 67,617-square-foot office building in Cool Springs; and Boyle Investment’s 2000 Meridian Boulevard, a 40,276-square-foot office building in Cool Springs.

Nashville’s suburbs are aggressively growing because the city has become an attractive place for people to live and work. Nashville’s employment base has grown 11.5 percent over the last five years.3 As demand increases, developers are scouring Nashville’s suburbs for opportunities to increase the supply. For example, Halo Properties is developing a project in Hendersonville with approximately 2.5 million square feet of Class A space, which will nearly double the current total of 2,605,073 square feet of office space in that market.

Though not experiencing the high level of growth or absorption of the suburban markets, the CBD still has some major projects to speak about. More than 900,000 square feet of office space is under construction, including Barry Real Estate’s 500,431-square-foot Pinnacle at Symphony Place, which is nearly 50 percent pre-leased. This project alone could transform rental rates in downtown Nashville. Also under construction is Eakin Partners’ 338,000-square-foot SunTrust Plaza, which is nearly 75 percent pre-leased.

With a market vacancy of less than 10 percent, rents increasing, the market absorbing space, employment growing, and development taking place, the Nashville office market is poised for continued success in both the fourth quarter and in 2008.

— R. Stephen Prather, affiliate broker, and Bruce Reed, MCR, senior vice president, of Chas. Hawkins Company, Inc./CORFAC International.

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