Nashville's commercial real estate market is riding high on Nissan North America's November announcement that it will relocate its headquarters from Gardena, Calif., to the Country Music Capital by the end of 2007.
Nissan's impending move is just the latest in a string of high-profile relocations that have led prominent site location consultants to select Nashville as the No. 1 city in Expansion Management's annual “America's 50 Hottest Cities” ranking for the second year in a row. The city was selected based on business climate, work force quality, operating costs, incentive programs and ease of working with the local political and economic development establishment.
The automaker's planned relocation — the largest such announcement nationally in 2005 — involved a record-breaking $200 million in state and local tax breaks and other incentives.
“Nissan is one of eight major headquarters relocations that we've seen in the last 36 months among corporations with $100 million-plus in revenues,” says Janet Miller, senior vice president of economic development for the Nashville Area Chamber of Commerce. “These corporations have added 4,000 jobs and 1.2 million sq. ft. of space.”
Among those relocations, Louisiana Pacific brought 200 jobs and took 90,000 sq. ft. of space in the central business district and another 67,000 sq. ft. of research space in Williamson County when it came to town in 2004.
That same year, CareMark, with 450 employees, took 25,000 sq. ft. in the CBD and another 94,000 sq. ft. for a customer care center in Nashville's MetroCenter.
What makes Nashville so popular with corporations? There are several factors, but in general the Music City has a pro-business climate. There is no state income tax, for example. Other factors include competitive labor and housing markets, strong tenant demand and a balanced, diversified economy.
When Triple Net Properties LLC entered Nashville's investment scene in 2003 with the purchase of Parkway Towers, it was because of the market's low vacancy rate and “great economic indicators all around,” according to Louis Rogers, company president.
Triple Net's 2004 purchase of River Rock Business Center in Murfreesboro and its acquisition of One Nashville Place — at $78 million, the top office transaction last year — raises its Nashville portfolio to three properties.
“We are committed to the market and would like to continue to be a buyer when appropriate opportunities present themselves,” says Rogers.
After three years of negotiations, however, it is the Nissanthat is top-of-mind with almost everyone in commercial real estate and economic development circles in Nashville.
The deal is expected to have a far greater cumulative impact than the $70 million, 450,000 sq. ft. headquarters building (to be completed in 2008) and the 1,300 jobs it will initially bring to the Cool Springs submarket south of Nashville in Franklin, Tenn.
“The decision to relocate was a strategic business decision that was made after extensive study,” says Jim Morton, senior vice president of finance and administration with Nissan North America Inc. “This move should provide opportunities to realize long-term operational benefits and support our ongoing efforts to create synergies and improve performance.”
In the short term, Nissan will lease 240,000 sq. ft. of Class-A office space in the CBD's BellSouth Tower beginning in June. There are currently no available blocks of space that big, so BellSouth — which had offered 100,000 sq. ft. for lease — worked to shift some of its operations to accommodate Nissan.
Cool Springs heats up
Crescent Resources, the landlord for Nissan's development, was one of the first companies to undertake major speculative office development in the Cool Springs submarket, which was farmland 15 years ago. Crescent has now developed seven buildings totaling more than 1 million sq. ft. since 1996, and construction is under way on two new spec buildings.
In 2005, the Nashville office market absorbed 738,356 sq. ft., the highest total since 2000 and a big increase from 2002, when absorption was a negative 23,422 sq. ft. Sublease space dropped from nearly 1 million sq. ft. at year-end 2002 to 495,162 sq. ft. at the end of last year.
Overall vacancy rates declined 300 basis points, from 12.78% at year-end 2001 to 9.7% at year-end 2005. Meanwhile, Class-A rental rates increased to $20.06 per sq. ft. at year-end 2005 compared with $19.77 at the end of 2004.
A number of other companies have also announced plans to relocate their headquarters to Cool Springs from other submarkets, including Community Health Systems (December 2006) and Healthways (September 2007), two of the area's largest publicly traded health care companies. Both of those transactions constitute expansions and will create new jobs.
This submarket now has more than 2.4 million sq. ft. of office inventory, with an overall vacancy rate of 2.5%. Cool Springs also had the highest level of absorption in the market last year at 336,782 sq. ft.
The area is expected to remain a major hot spot in 2006, with more than 300,000 sq. ft. of Class-A space coming on line by mid-year. Experts predict that the new space will account for the majority of 2006 office absorption within the city.
All sectors go
Sales transactions across the retail, office, multifamily and industrial sectors in Nashville during 2005 totaled $1.1 billion, up nearly 9% from 2004's figure of $1.01 billion. That's more than double 2003's total of $512 million, according to Real Capital Analytics, which tracks deals above $5 million.
David McGahren, managing principal for Colliers Turley Martin Tucker, attributes rising demand to a number of factors. “As primary markets are becoming maxed out on available properties, investors are looking more to second-tier cities, and Nashville's market fundamentals — the economy, job growth, rental rates, replacement costs and tenant activity — are all strong,” says McGahren.
Triple Net's Rogers says that relatively low vacancy rates make Nashville properties a magnet for investors. Property & Portfolio Research (PPR) predicts further tightening in Nashville's space markets.
“We anticipate further declines in the office vacancy rates over the next year but they should flatten out after that, as demand moderates and construction picks up,” says Kevin White, senior real estate economist with the firm.
White also notes that development, which virtually shut down in 2002 in response to rising vacancy rates, is starting to resurface with no signs of out-of-control construction levels.
There's an incredible amount of capital in the market, much of it from out-of-state players such as pension funds and foreign capital investors, says Douglass Johnson, first vice president of investment properties with CB Richard Ellis (CBRE). Those players, he says, are accustomed to higher prices per square foot and are willing to pay more than local investors.
Signs of life
Last year's biggest investment deal by far was Duke Realty Corp.'s sale of more than 30 Nashville-area buildings to a joint venture between First Industrial Realty Trust Inc. and theState Teachers Retirement System.
The $200 million transaction included 2.6 million sq. ft. of flex-industrial space, much of it in the airport subsector's Airpark Business Center and Haywood Oaks TechneCenter, a 53-acre campus at Interstate 24 and Haywood Lane. The deal was part of Duke's much larger divestiture of 200 properties in eight cities valued at more than $1 billion.
Besides the Duke portfolio sale, the market's biggest industrial transaction was December's sale of the 325,000 sq. ft. Rockdale Distribution Center by First Industrial to Dividend Capital for $15 million. Also notable was Crescent Resources' sale of the 300,000 sq. ft. Centrepointe Distribution Park No. 6 in La Vergne to Hot Topic Tennessee for $14.3 million.
In addition to an influx of capital, steady leasing activity is fueling speculative office development that the market hasn't experienced recently. Because no large blocks of space are available, developers are working to bring product on line to fill the void.
Cushman & Wakefield's Nashville affiliate, Nashville Commercial Real Estate Services, reports that more than 1 million sq. ft. of office space will come on line in Nashville this year, with 35% of it pre-leased.
Among significant office transactions last year was Alex S. Palmer & Co.'s sale of Burton Hills IV in the high-end suburban Green Hills submarket to Archerd-Bell Investment Group. At $29 million and more than $215 per sq. ft., it was the highest transaction per sq. ft. last year.
There is substantial building activity downtown, anchored by Eakin Partners' development of the 13-story, 338,000 sq. ft. SunTrust Plaza and Tony Giarratana's planned 65-story Signature Tower residential and retail complex.
Other high-profile projects helping to fuel renewed downtown interest include a $150 million, state-of-the-art symphony hall, which will bring many more Nashvillians into the revitalized development district south of Broadway, and a renovated metro courthouse and public square, which will provide a striking focal point for those looking north down Deaderick Street from Legislative Plaza.
In addition, a much-debated baseball stadium for the AAA Nashville Sounds has been approved for a coveted 16-acre riverfront parcel. Also under serious consideration is a proposed $455 million convention center south of the Gaylord Entertainment Center.
Spurred at least in part by these projects, downtown residential development is flourishing. Nearly 1,000 units of residential housing — both condominiums and apartments — are under construction there. White of PPR says that Nashville's apartment market is transitioning from recovery to expansion.
Significant apartment transactions in 2005 included the September purchase of the 598-unit Lexington Apartment complex for $44 million by Virginia's Harbor Group International and the 366-unit Cove at Priest Lake by Lincoln Property Group for $30.4 million.
CBRE Executive Vice President Steve Massey notes that developers seeking property for new multifamily projects continue to wrestle with the area's rocky topography and neighborhood group challenges to rezoning efforts. As a result, occupancy and rental rates are creeping up and concessions are declining.
Although the pipeline is somewhat slow, new condominium construction is occurring in the higher-end mixed-use areas, largely around Vanderbilt University in the southwest part of Davidson County.
Several condominium conversions, however, marked 2005 including the 102-unit Buckhead Place. In April, local developer Giarratana and Novare Group purchased downtown's 86-unit Post Bennie Dillon for $10.3 million.
As Nashville's population continues to grow at 1.8% annually, all those relocating residents need groceries, clothing, electronics and all the other accoutrements of modern life, so Nashville's growing population and increasing incomes have led to increased demand for retail offerings.
“We've seen incredible growth in the past two years,” says David Baker, principal at Nashville-based Baker Storey McDonald Properties, which specializes in retail real estate. He notes that Publix grocery stores have made significant inroads into the market since the company purchased seven Albertson's supermarkets in 2002. It now owns 11 Nashville-area stores.
Especially active are the big-box and lifestyle projects. Two power centers include the 850,000 sq. ft. open- air Providence Marketplace opening in Mt. Juliet anchored by Consolidated Theaters, Target, Belk and JC Penney; and the 600,000 sq. ft. Nashville West, anchored by Costco, Best Buy and PetSmart, currently under construction.
Nashville is still missing the bigger high-end luxury players like Neiman Marcus and Saks, but smaller retailers like Tiffany and Cole Haan have jumped into the fray with stores in the newly renovated Green Hills Mall.
CBRE figures show retail vacancy rates decreasing significantly to 4.84% at the end of 2005 from 7.3% at year-end 2004. It reports that cap rates broke 7% for the first time in this market in 2005, with virtually every asset class seeing increased pricing, and grocery-anchored retail seeing the highest demand.
The purchase of Stones River Mall in Murfreesboro for $47 million by Transwestern Investment Co. was the top retail transaction of 2005.
Market-wide asking rents — in a city which can be challenging for new retailers, due to limited availability in the most popular submarkets — averaged $13.35 per sq. ft. in 2005. More than 2.4 million sq. ft. of new space came on line, with another 2 million sq. ft. under construction.
Baker predicts Nashville will start to see entertainment- and service-oriented urban retail coming on line in the next two years to service the new residential influx downtown.
Clear weather ahead
CBRE's Johnson is very bullish on Nashville in 2006, and expects to see continued strong investment interest. He singled out the 520,000 sq. ft. Primus/Ford Motor Credit Service Center in Cool Springs, which is newly listed for lease and sale as a result of recent downsizing activity and a decision to shrink the company's portfolio.
Primus will continue to occupy around 280,000 sq. ft. of the facility, with the balance being offered on the market. CBRE leasing agents are already reporting brisk interest in the space.
Colliers' McGahren agrees that the market will stay strong. “We expect to see some key industrial and office properties change hands this year, including the Mason Road Distribution Center and the PRI building, both in La Vergne,” he predicts.
McGahren emphasizes that the continuing challenge will be to find suitable properties for all the interested investors who are looking at this market.
Don Albright, senior associate with CBRE, says that this situation should bode well for existing property owners, since current supply and demand will mean owners could benefit from any rent spikes.
— Laura Ellis is a Nashville writer
NASHVILLE - BY THE NUMBERS
POPULATION OF METRO AREA:
Source: Nashville Area Chamber of Commerce
UNEMPLOYMENT RATE: 4.1%
Source: Tennessee Department of Labor and Workforce Development
Vanderbilt University and Medical Center
Saint Thomas Health Services
Nissan North America Inc.
Source: Nashville Area Chamber of Commerce
METRO AREA VITAL SIGNS
9.7% vacancy, 4Q 2005
13.2% vacancy, 4Q 2004
$17.50 rent per sq. ft., 4Q 2005
$17.10 rent per sq. ft., 4Q 2004
Source: Grubb & Ellis/Centennial
6.49% vacancy, 4Q 2005
7.33% vacancy, 4Q 2004
$700 avg. effective rent, 4Q 2005
$696 avg. effective rent, 4Q 2004
Source: CB Richard Ellis
4.58% vacancy, 4Q 2005
6.9% vacancy, 4Q 2004
$13.48 rent per sq. ft., 4Q 2005
$12.09 rent per sq. ft., 4Q 2004
Source: CB Richard Ellis
6.75% vacancy, 4Q 2005
8.5% vacancy, 4Q 2004
$4.09 rent per sq. ft., 4Q 2005
$3.84 rent per sq. ft., 4Q 2004
Source: CB Richard Ellis
60.6% occupancy, 4Q 2005
57.4% occupancy, 4Q 2004
$81.60 average daily rate, 2005
$76.53 average daily rate, 2004
Source: Smith Travel Research
A 13-story, 338,000 sq. ft. office building in the central business district, approximately 55% pre-leased. Tenants include SunTrust Bank and the law firm of Stites & Harbison PLLC.
Cost: $60 million
Developer: Eakin Partners
Completion: December 2007
A 65-story residential, retail and hotel tower. Current plans call for 400 condominiums.
Cost: $200 million
Developer: Tony Giarratana
Completion: December 2009
Nissan North America
A 450,000 sq. ft. corporate headquarters in Cool Springs.
Cost: $70 million
Developer: Crescent Resources