CRE Market Update: State of the Nashville Office Real Estate Market Q1 2019

Nashville’s Q2 was booming. Like many years before, the Nashville market continues to grow and the economy continues to strengthen.

National Economy

The employment growth was up almost 4% compared to the national economy, which is steady compared to where we were at this time last year.

Our unemployment rate is down to roughly 3%, which is stronger than this time last year where we hovered around 4%.

The National Income growth remains at around 3% nationally.

There is also a continual shift to online shopping sales nationally, but the U.S. is behind other countries.

Nashville’s Office Market

Vacancies in the Office Market have gone up since Q4 of 2018, heading from 5.8% to 6.2%. Net absorption has gone down from 313,000 square feet (sf) to 300,000 sf. Deliveries have increased from 190,200 sf to 413,000 sf. Construction has gone up from 5.65mil sf of space being constructed to 6.72mil sf being constructed. Sales have drastically increased since last quarter, going from $286m ($166/sf) to $599m ($223/sf).

Rent Growth has decreased this quarter from 3.6% last year to 3.3% now but is still out-performing the United States as a whole at 2.1%.

Nashville is firing on all cylinders. We remain above the national average on almost every key metric, i.e. office development, unemployment, and overall growth in our economy.

Some downfalls happen with the supply-and-demand of office space, however. In 2018, there was more demand than supply in office space, but so far in 2019, there is more supply than demand. In this regard, vacancies will continue to tick up because Nashville simply has more space than it currently needs. Vacancies have risen in every rating, from 1-star to 5-star properties.

Nashville has more available office space than it has for the past decade, at more than 12mil sf.

Nashville has been expanding supply more than any other city in the country. The MSA is expanding at 7.0% trailed by Austin (6.0%), San Jose (4.7%) and Charlotte (4.6%).

Our Spec Additions are among the highest in the nation just above 60%. As we at The Cauble Group have stated before, Coworking spaces continue to dominate the market as these spaces continue to rise in our city, with the likes of WeWork occupying over 65,000 sf of space.

Our rent growth has slowed from 3.6% in 2018 to 3.3% so far this year in 2019 but is still much higher than the National Average at 2.1%.

Nashville’s “Flight to Quality” is driving Class A rent growth, as we see Four and Five-Star Class A space at roughly 4%.

Looking Ahead

In the coming years, the projection is that job growth will start to slow, but still be above the National Average at a projected .6% roughly. Unemployment will likely stay around 2%.

Vacancies could rise to roughly 7% over the next few years.

Rent Growth will likely flatten out over the next few years, possibly dipping into the negative come 2023.

All Statistics and Information courtesy of CoStar.