The recession has not dampened retailers' appetite for space in Nashville. In fact, one of the biggest hurdles to growth is finding land for new development. Many close-in sites have been devoured, while zoning and neighborhood opposition slow new construction.

On the bright side, for retailers at least, the land shortage has helped keep the Nashville market on an even keel in a slumping economy. “The retail market has been very stable over the last year, although some submarkets are stronger than others,” says Carnell Scruggs, a retail broker at NAI Mathews Partners in Nashville. Overall, retail vacancy totaled 6.3 percent mid-year, a decrease of 0.4 percent from the second quarter of 2002, according to NAI Mathews Partners. Asking rental rates averaged $16.66 per square foot at mid-year, up 62 cents from the second quarter a year earlier.

“We are very bullish on the Nashville market,” says Michael Johnson, regional manager of the Nashville region for Chattanooga, Tenn.-based CBL & Associates Properties. CBL owns more than 4.5 million square feet of retail space in Nashville, including three enclosed regional malls — CoolSprings Galleria, Hickory Hollow Mall and RiverGate Mall. “The great thing about the Nashville market is that it is very diversified,” Johnson says. Nashville is a regional center for banking and insurance, as well as a strong hub for auto manufacturing, healthcare, music recording and printing and publishing. That diversity has helped Nashville weather the economic storm that has hit the rest of the country.

Another factor that has buoyed the retail market is continued population growth, and unemployment levels that remain below the national average. As of July, the Nashville unemployment rate was 3.8 percent, well below the national average of 6.2 percent.

“The housing market is hitting all-time highs with record home sales and starts,” Johnson says. Last year, the Nashville MSA, which includes eight counties, has grown to an estimated 1.27 million people, or more than 29 percent, since 1990. Rutherford and Williamson counties saw the highest growth rate, both expanding by more than 60 percent. Rutherford County also ranks as the second-fastest growing county in Tennessee.

NEW DEVELOPMENT

Despite the challenges of finding land, new development is moving forward at a steady pace. “Overall, the retail market here is good with several new projects that are coming into the marketplace,” says David McDowell, a senior associate at Grubb & Ellis/Centennial in Nashville.

Grocery stores and big box retailers continue to drive much of the construction. Big boxes such as Staples, Petco, Home Depot, Lowe's, Target and Bed Bath & Beyond continue to expand. Ross Dress for Less has announced plans to enter the Nashville market, and the retailer is currently securing sites.

In addition, restaurants, banks and discount retailers are fueling demand for land. That activity is driving up the cost of land with prices for raw land at $12 to $14 per square foot, Scruggs notes. An estimated 73,200 square feet was added to the total retail market in the second quarter, according to NAI Mathews Partners. New buildings include a Walgreen's in Hendersonville, the Otey Center in Parkway Center and an addition to Jackson Downs.

Competition is heating up in the grocery sector. Publix Super Markets Inc. entered the Nashville market by acquiring seven Albertson's stores last year; it has plans for 30. Publix' biggest challenge will be finding suitable sites. “It is hard to find good developable land that is zoned for retail,” McDowell says. “A lot of the available land has been picked through.”

Publix competes head-to-head with Kroger, which has been expanding and upgrading existing stores. Kroger is anchoring a $10 million retail center on Briley Parkway being built by St. Louis-based Midland Development Group. Wal-Mart also represents stiff competition with several local superstores. This fall, Wal-Mart will open the first of its local neighborhood supermarkets in the Nipper's Corner area of southeast Nashville.

Phoenix & Associates broke ground this spring on the new 250,000-square-foot Oaks Shopping Center in Murfreesboro. Signed tenants include Ross Dress for Less, Marshall's, Bed, Bath & Beyond and Ashley Furniture. The first stores will open in November, with additional stores planned for April 2004.

Murfreesboro, in Rutherford County, has doubled in size in 13 years. “Over the next five years, you're going to see a new 250-bed hospital, new convention center and new office park,” says Bob Martin, president of Phoenix & Associates in Murfreesboro. “And the city has spent $40 million in new infrastructure.”

Brentwood, Tenn.-based GBT Realty Corp. is in the process of pre-leasing two new developments. One is the Target-anchored Shoppes of Brentwood Hills, expected to open in July 2005; the second is Shoppes of Stones River in Murfreesboro. GBT is fishing for tenants interested in leasing space at the center, which is expected to be a soft goods-oriented power center.

SALES ACTIVITY

Nashville is not known for its active investment sales market. Sales transactions, among larger retail centers in particular, are typically low. “It is a hard market to get into,” says Allen McDonald, a principal at Baker, Storey, McDonald Properties in Nashville. “People just don't want to sell, mainly because there is no place to reinvest income in opportunities that can provide the same return.”

The only sizable property to trade hands this year has been Bell Forge Square in Antioch, which sold for $11.3 million and a cap rate of 9.35 percent. Tarrytown, N.Y.-based DLC Management Corp. closed on its purchase of Bell Forge Square in August. The 130,475-square-foot neighborhood shopping center is 89 percent leased, featuring tenants such as TJ Maxx, Michaels, Shoe Carnival and Blockbuster, among others.

“Part of what drew our attention is it is a very difficult market to get into and it has good job growth,” says Daniel Taub, a senior vice president at DLC Management. The land shortage and a challenging approval process are barriers to entry. A few players control the existing land, and development costs are often higher because of the hilly, rocky terrain.

The suburb of Bell Forge is located 12 miles southeast of the CBD, and is immediately adjacent to the 1.1 million-square-foot Hickory Hollow Mall. “We had very high confidence in Bell Forge because of CBL & Associates purchase of the Hickory Hollow Mall a couple of years ago,” Taub says.

Although only a handful of shopping centers larger than 50,000 square feet are sold each year, smaller, specialty retail centers still frequently change hands. 1031 Exchange buyers have an appetite for newer, well-located 3,000-to 4,000-square-foot retail spaces that are occupied by three or four tenants such as a drycleaners or bagel shop.

“That sector has been fairly active because you have more private investors that are developing those properties and then looking to sell and roll equity into other projects,” McDonald says. Those smaller, specialty centers have been selling for cap rates ranging from 7.5 percent to 8.5 percent, he adds.

Looking ahead to 2004, the Nashville retail market is expected to continue along the same solid path with moderate development and healthy occupancy levels. “We're somewhat reflective of the national economy, and if it keeps picking up pace like it seems to be, Nashville will enjoy the fruits of that,” Johnson says.

Market Profile/Nashville

DEMOGRAPHIC OVERVIEW

  • Total Population: 1.27 million

  • Population Growth Rate Through 2007: 9.07%

  • Unemployment Rate: 3.8%

  • Median Household Income: $44,223

  • Median Home Price: $146,000 (+6% YOY)

Source: Economy.com; NAI

RETAIL OVERVIEW

  • Overall Retail Vacancy Rate: 6.3%

  • Average Rent Per Sq. Ft. Downtown Retail: $10

Source: NAI Mathews Partners

  • Average Rent Per Sq. Ft. Grocery-Anchored Centers: $12

Average Rent Per Sq. Ft. Community Centers: $13

Average Rent Per Sq. Ft. Regional Malls: $24