With Nashville's courtship of the National Football League's Houston Oilers now complete, the city will become a major league sports town in 1998. But a healthy economy that has attracted business and spawned tremendous job growth already has the local real estate markets performing at major league levels.
Both rents and occupancies continue to rise in the office, industrial and hospitality sectors; retail sales were up 5% this past holiday season over last, while vacancy rates dropped dramatically during the same period. And multifamily is experiencing its largest development phase since the late 1980s.
The diverse Nashville economy, which features major employers in automobile manufacturing, tourism, hospitality and entertainment, as well as publishing, has proven attractive to relocating businesses. In 1995 alone, the city became the new home to 30 companies and, over the past three years, the Nashville Chamber of Commerce reports that more than 102,000 jobs have been brought to the metropolitan area.
"Nashville has become a city where companies want a presence," says Robert Mandelbaum, director of research with PKF Consulting, a San Francisco-based hospitality industry consulting firm.
Transportation has been another business advantage for Nashville. Service by four new air carriers was added in 1995, and five others increased flights and destinations served from Nashville International Airport. Although the city lost its direct London air route late last year, local officials blame cutbacks in the number of connecting flights by carriers, not lack of business from Nashville travelers. "The flights exceeded all of the load percentages American Airlines projected, but they were not selling enough first-class tickets," says Janet Miller, senior marketing manager with the economic development division of the Nashville Chamber of Commerce.
The Nashville highway system, which includes several major arteries such as Interstates 24, 65 and 40, is being augmented by a new perimeter highway. The completed loop, which is scheduled to be finished the turn of the Century is expected to have a major impact on local development. "If you don't have perimeter roads, you stifle your growth," says Tim Lehning, a developer with Nashville-based Taylor-Vaughn-Greene.
The growing job market has been a lure for new residents as well. The population of the Nashville metropolitan statistical area (MSA) has grown 9% since 1990 to just over 1 million people. The move to Nashville has been so extensive that, last August, Ryder Truck Rental named the city its most popular destination. The city also ranked No. 1 in a relocation survey published by Fortune magazine.
But the local economy has been able to handle the growth. For the past 36 months, unemployment has remained around 3%, half the national average. In fact if anything, the city needs a larger work force. A report by the Nashville Chamber states that "many local firms are operating below their optimal employment range." On the positive side, this need for workers means that any unexpected lay-offs could be absorbed by other industry.
But significant lay-offs are not likely in Nashville. The new firms and expansions of established employers have pushed the limits of existing space in every sector. The office market has vacancies of less than 2% in some submarkets, while multifamily has had occupancy levels above 97% for several years.
Conservative lending practices are the main reason for the imbalance of supply and demand, but developers are in no hurry to flood the markets with space either.
"Caution is the order of the day for both developers and lenders," says Jim Webb, co-owner of Freeman Webb, a Nashville real estate investment firm. "Banks are requiring 50%, 60%, 70% preleasing, but that is a good thing. If their caution continues, the market should maintain its strength."
Although building has increased, finding quality industrial space remains a problem in Nashville. "We have lost some corporations to Memphis, because they had warehouse space sitting vacant and we did not," Morse says.
Indeed industrial space is scarce. CB Commercial reports an overall vacancy rate of 5.08% for the Nashville industrial market which includes approximately 110 million sq. ft. Interchange City and Allied Drive/I-65 South are the tightest submarkets at 3.40% and 3.24%, respectively. Not surprisingly, these submarkets are also seeing the most new construction - 845,000 sq. ft. in Interchange City, site of a 900-acre industrial park, and almost 400,000 sq. ft. in the Allied Drive area.
Taylor-Vaughn-Greene reports industrial rents at between $2.20 and $3.10 per sq. ft. for bulk warehouse space; between $2.50 and $4.00 per sq. ft. for manufacturing space; and from $3.00 to $4.50 per sq. ft. for flex space. Centennial Inc. estimates that the Nashville industrial market absorbed more than 1.1 million sq. ft. of space during the last eight months of 1995.
This year has seen the development of more speculative space. Nashville-based Buckley Industrial Real Estate Inc. has five buildings comprising approximately 1 million sq. ft. currently under construction, and all of them are speculative projects. "We are building in the Air Park, I-440 and Aspen Grove areas," says A1 Buckley, the company's president.
Security Capital Industrial Trust, Denver, is building a 178,000 sq. ft. speculative building in Interchange City, southeast of the city, to open in October. A second, 162,000 sq. ft. speculative structure will begin construction after the first is leased, reports Buster Weber, leasing manager in Security Capital's Nashville office.
Miller says Walter Knestrick Co. and Trammell Crow Co. also have speculative industrial projects currently under way.
"The demand for quality space is certainly there," says Morse, "but finding quality, appropriately zoned land to build on is difficult."
Locating sites and the expense, both in purchase price and construction costs, are two factors driving industrial development to the surrounding counties.
Miller says land prices for industrial use are about $75,000 per acre in Davidson County (Nashville), while the same type land sells for about $45,000 per acre in adjacent counties, such as Rutherford County, to the southeast.
"Davidson County is just running out of land," says Taylor-Vaughn-Greene's Lehning, adding that the rocky terrain makes construction excavation more expensive.
The new 1-840 perimeter highway also appears to be an important factor in industry's interest in the outlying counties.
Wilson County, located east of Davidson County, is the site of the first leg of I-840 and could be a major beneficiary of the new roadway. "Last year, Famous Footwear was the first distribution center for a company outside of the area to locate here," says Patrick Lyle, executive director of the joint Economic and Community Development Board of Wilson County. "Currently we are in various stages of negotiations for six more corporate distribution centers, and they all have cited I-840 as their reason for considering our county."
"(I-840) will open up thousands of acres for development that were inaccessible," says Learning. "Farms that were hours away from Nashville will now be only 40 minutes away."
The perimeter is expected to have a future impact on retail development, but currently, the retail story begins downtown where Hard Rock Cafe, Planet Hollywood and BB King's Blues Club and Restaurant have all opened or are about to open in the second avenue area of the city, called "The District," near the new 20,000 sq. ft. Nashville Arena, which is scheduled to be completed this fall.
Events such as the World Figure Skating Championships scheduled for the arena in February 1997 are expected to keep both people and retail development active in the central business district. In addition, the opening of a Country Music Hall of Fame; the renovation of the Ryman Auditorium by Gaylord Entertainment, owners of Opryland; and water-taxi service between Opryland; and downtown will be further draws to the area.
Downtown, the biggest impact will be from the new $300 million stadium project to house the Oilers, approved by the public May 7. Proposed for the East side of the Cumberland River in a predominantly industrial part of the city, the stadium is expected to have a major impact on the look of the area. "It will draw retail, but mainly it will change the face of the area and make it more attractive," says Miller.
In the suburbs, neighborhood and community space experienced a dramatic drop in vacancy from 9.1% to 6.5% during the 12 months ending with the first quarter of this year. Average rent for this space was $10.41 per sq. ft., according to Centennial Inc.
The biggest impact on the Nashville retail vacancy rate is due to Memphisbased Belz Enterprises' rejuvenation of 100 Oaks Mall. Located off Interstate 440 on the city's southwest side, the mall has been turned into a 750,000 sq. ft. value-oriented center attracting such names as Sak's Off Fifth, Media Play and Conipusa. Opening its final stores earlier this year, the center has enjoyed good traffic counts to this point, Miller says.
South of the city in the Brentwood/Franklin submarket, Nashvillebased Hines Interest's CoolSprings Galleria development is continuing to flourish as the first choice of expanding big-box retailers.
CoolSprings Market, a 280,000 sq. ft. development, opened last October with Kroger, HomePlace and Mediaplay as anchors. A Staples is currently being added to the center, says David Wilson, project manager for Hines. In addition, Birmingham-based A.B. Real Estate has purchased two tracts in the area for a 250,000 sq. ft. power center, and Atlanta-based Crown Capital Corp. has acquired a 25-acre site for a future property.
"This market is continuing to show its strength," says Wilson. He adds that land for the development's planned 1,250 multifamily units has been sold with the first 790 units currently completing construction. In addition, building is to begin this summer on 350 single-family homes in the development, and three limited-service hotel projects are also completing construction.
Big-box retailers prefer to enter a market with multiple stores but are being hampered in Nashville by a limited number of locations in prime markets. The activity in the Coolsprings Galleria area makes it an obvious first choice, but space is difficult to find in the Rivergate and Hickory Hollow mall areas, two strong, mature Nashville retail markets.
"Retailers want to be in these markets, but there is very little area for growth," says Morse. But she adds that population and personal income growth are quickly creating other viable retail locations.
In any case, the retail projects that get built are attracting buyer interest. "Investors like the demographics and the high occupancy rates in Nashville," says Bruce Nelson, with Nashville-based BVT Equity Holdings. "New neighborhood centers are selling in the 9% to 9.5% cap range."
In the office market, demand continues to exceed supply leading to lower vacancies and higher rents. The overall office vacancy rate dropped to 8.44% during the first quarter down from 10.48% at year-end 1994, reports Centennial's Morse.
Class-A vacancy stood at 6.22% at the end of 1995 with vacancies in Class-B at 8.91%, according to a Centennial survey. Webb says the markets sublet space has been absorbed, which should result in less of a drag on rents and more absorption in Class-B and -C space.
Through the first quarter of the year, CB Commercial reports 8.6% vacancy in the suburbs and 13.6% downtown, with most of the activity in buildings constructed between 1980 and 1990, says Kay H. Barry, a vice president with CB Commercial. While the suburbs were stronger than downtown, the gap may be closing as companies look for better rates in the city. "Rents along West End and in some other suburban submarkets are higher than downtown," says Webb.
Centennial reports the CBD experienced a positive net absorption of 44,000 sq. ft. during the first quarter. First American Center benefited most with 23,000 sq. ft. of new leases.
New tenants to the CBD include Green Springs Health Services, Acme Boot Co. and Trans Financial Bancorp. The retail development in the area and the new arena and stadium are all factors expected to draw companies back to downtown in the future.
Rents ranged from $16 to $18 per sq. ft. for Class-a space in the airport and downtown submarkets where double-digit vacancies remain, and from $17.50 to $19.50 per sq. ft. in the tighter suburban submarkets.
New speculative development was limited to the Brentwood/CoolSprings submarket. Gateway Office Building, an 89,182 sq. ft project, is being developed by Nashville-based Alex Palmer & Co.; Koger Real Estate Services Inc. has the 72,155 sq. ft. Shiloh Building under construction with one floor already leased to GMAC. And Eakin & Smith, a local firm recently acquired by Highwood Properties, a real estate investment trust, has signed a 50,000 sq. ft. lease with T.C.S. Management group, a computer software firm, for its 103,000 sq. ft. Maryland Way Plaza Phase I, which is scheduled to open in November. A second identical building will begin construction as soon as Phase I is leased, says Brian Reames vice president of Highwood Properties.
The airport submarket saw some of 1995's largest transactions. Centennial reports that The Willis Corroon Co. leased 130,000 sq. ft. in one of its recently vacated office towers to Chicago-based CNA Insurance, and then in the market's largest transaction in 1995, sold the building to San Francisco-based Shorenstein Realty Investors for $52.4 million. The tight Green Hills/Music Row submarket, which has not had Class-A office space available for two years, also was the target of investors with seven sales exceeding $1 million.
Interest in acquiring office properties in the Nashville market has definitely increased. "1995 was a good year, and business in 1996 figures to be at least as good," says William T. Bozeman, vice president and state manager with Old Republic National Title. "The area of our business with the largest increase has been office."
Rumors of a new office building for the West End submarket have failed to show any substance, says Centennial's Morse, although most market observers believe a 150,000 sq. ft. building would lease well. She adds that Columbia/HCA is currently adding 150,000 sq. ft. to its existing 400,000 sq. ft. headquarters.
The Nashville real estate-sector that is seeing substantial construction is multifamily. New development got a jump start last year with 1,500 new units built, and another 4,000 are expected in 1996, says Morse.
Kent Burns, senior vice president of business development in the Nashville office of SPL Corp., a Memphis, Tenn.-based investment firm specializing in multifamily real estate, believes 1996-97 will see the construction of about 7,000 units.
"The strength of the Nashville apartment market is that from 1990 to 1994 nothing was built," says Bums.
SPL lists 25 starts or potential starts of new multifamily projects in Nashville. Burns says most of the new apartment construction will take place in the areas of the CoolSprings and Hickory Hollow malls.
Downtown, a 23-story, high-rise apartment project has also been proposed by local developer Anthony D. Giarrantana and Atlanta-based Julian LeCraw & Co. If built, the project, located at Church Street and Sixth Avenue, would include 290 units along with service retail and below-grade parking.
Morse says the lack of new product has kept apartment occupancy figures around 99% for several years, but she adds that 1995's new construction has affected the market. An SPL survey shows occupancy down to 95.5% in Nashville with submarket averages ranging from 93.7% to 97.4%
However, Burns does not expect an oversupply of apartment units. "In the immediate submarkets there will be some softening, but the supply and demand was so out of balance that I think the overall market will whether this storm of new development better than other areas could," says Burns. He does not expect overall occupancy to drop below 90%.
SPL figures indicate rent increases dropped to 6.6% in 1995 compared to 9.5% in 1994. Highest average rents were for the newer West End/Downtown apartments ($863), while the lowest average rents were for older buildings in the Briley Parkway area, southeast of the city ($482).
High occupancy figures also drew the interest of investors. Twelve properties of 50 or more units each were sold in 1995 at an average price of $39,095 per unit. However, the seven new construction properties (built since 1983) that were sold brought $46,130 per unit, and the five old construction properties (built before 1983) sold for $22,130 per unit. Two-thirds of the purchasers were real estate investment trusts.
In January, Nashboro Village, a 994-unit complex, was acquired by Nashboro Village LLC, Nashville, for an estimated $45 million. The conglomeration of five apartment developments on 315 acres includes an 18-hole golf course and indoor and outdoor tennis courts. Future plans for the project could include 1,100 additional apartment units and 150,000 sq. ft. of retail.
The hospitality industry is going to feel right at home in any market that draws 7 million tourists and an additional 1 million conventioneers every year, as Nashville does.
In 1995, the local market's occupancy rate rose nine-tenths of a percentage point to 79.9%,while average daily rents rose from $93.47 to $96.86, says PKF Consulting's Mandelbaum. He credits convention business, the recent rise in the popularity of country music and the boom in business travel as reasons for the strength of the Nashville hospitality market. "All three are kicking in right now," he says.
This month, the convention and tourism business should get a boost from "The Delta," a $175 million expansion at Opryland, featuring 979 rooms (bringing the total to 2,870), more than 300,000 sq. ft. of additional exhibit space for conventions (doubling it previous amount), retail and restaurants.
Mandelbaum says Opryland's size tends to skew the market's statistics, but he doesn't feel the additional rooms will do serious damage to other competitors. "Historically, expansion of the Opryland Hotel has increased demand in the marketplace rather than dilute the tourist business for competitors," he says.
Several national chains agree, having added several properties in Nashville. Hampton Inns has added two 120-room properties into the market, and Hilton is looking at an airport location.
Downtown, Marriott has announced plans to renovate the Old Third National Bank Building at Fourth and Church streets into its Courtyard by Marriott concept.
Mandelbaum says the suburban Brentwood area is seeing most of the limited service activity, but he adds the chains could be looking at several locations. "There are five or six distinct sectors of the city where hotel chains might consider locating. In the short term, it appears the market will be able to withstand the new construction."