Commercial real estate prices have skyrocketed in Nashville over the last decade.
Average sales prices per square foot in office space have nearly doubled, from $120 to over $220 per square foot, during this economic upswing. While that’s certainly a benefit to seasoned real estate investors, it’s created a new problem for Nashville’s small business community.
Rising values, alongside higher costs of new construction, lead to not only higher sales prices, but also an increase in commercial rents. Business owners have seen their rents increase from an average of $18.67/sf in 2009 to $27.62/sf in 2019. There’s certainly an office affordability crisis forming within our city – so how can we keep from pushing out the entrepreneurs that have helped make Nashville great?
The answer, I’m beginning to think, is commercial condominiums.
What Is A Commercial Condo?
Condominiums are a grouping of individually owned units that jointly own common area. This type of unit is most commonly found in residential high rises (such as Nashville’s 12|12) or townhomes, but can also be found in commercial office buildings and shopping centers. Since these units share walls, parking lots, common areas, and more, the costs of construction tend to be lower per unit, allowing the developer to pass on those savings to a potential buyer.
Why Commercial Condos Are Growing in Popularity
Commercial condos are not a typical product in the Nashville market. For decades, we’ve been developing primarily in the suburbs where land was cheap and there was an abundance of space. Now that development has creeped back toward the urban core, developers are finding that land prices are higher and lots are often much smaller. For this reason, developers have been focused on smaller, mixed-use low-rises in neighborhoods and along major thoroughfares.
Mixed-use projects are wonderful for the community. They provide built-in amenities for both the commercial and residential tenants while cutting back on the amount of parking necessary and traffic generated (due to fewer trips). These buildings are very often ground-floor retail with apartments on the upper floors, but can be any mix of retail, office, hotel, or residential units.
When Nashville experienced a massive delivery of new apartment units in 2017, the multifamily market took a hit and began offering, in some cases, over 18% in concessions. Smaller mixed-use apartment complexes, such as East Nashville’s The Edison, were unable to compete with the massive amount of concessions and the developers decided to pivot. Instead of delivering an apartment complex with ground floor retail, they converted the units to for-sale condominiums – including the commercial portion of the building.
Although many apartment complexes have been delivered over this economic cycle, for-sale condo buildings seem to have been forgotten, leading to high demand for new product. Residential and commercial condos, alike, are flying off the shelf due to affordability and location.
Case Study: The Edison
At the end of last year, The Cauble Group listed and sold an approximately 5,000 square foot, ground-floor commercial condo at 1077 East Trinity Lane.
The developers had intended to lease out the entire building – retail on the ground floor and two stories of apartments above. When they made the decision to change the direction they were headed in with the apartment units, they decided to sell the ground floor commercial as well.
This commercial condo unit featured 14’ ceilings, abundant natural light with windows and doors on three sides, high visibility on East Trinity Lane near Gallatin Pike, and the ability to easily demise the space for multiple tenants.
While the space was unfinished, with all MEP stubbed into the suite, it commanded a $260 per square foot price for a total of $1,300,000. Although one investor purchased the entire condo, it could have been split up into three individual units. A 1,700 square foot ground-floor unit, which could easily accommodate any tenant from a law firm to a dessert shop, would have sold for $430,000 at the same price per square foot as above.
The unit, of course, would have to be finished out at an estimated cost of $50.00 per square foot or $85,000, but the affordability for new construction for a small business is undeniable.
Using our commercial calculators, here’s a breakdown of the cost to rent that same space versus purchasing:
Yes, the business owner will have to come out of pocket for a down payment in a purchase scenario, but if you amortize the $78,000 down payment over the same 5 year term as a lease, you’d see the purchase scenario still makes more sense:
$78,000 down payment / 60 month (5-year) term = $1,300 per month
$1,300 per month + $3,000 per month mortgage = $4,300 per month
That $4,300 per month payment is still less than leasing!
Small Business Owners Take Control of Their Destiny
When leasing space, commercial tenants are at the mercy of their landlords.
While the lease will govern base and additional rents during the term, once it comes up for renewal or expiration, new costs are up to the landlord. If market rents have increased significantly increased since the initial lease term, the landlord will want to capture that and pass it on to the tenant.
Land values could also have risen, leading the landlord to sell the property to a developer. We’ve seen this happen quite a bit in Nashville over the last few years as our city continues to grow.
By purchasing their own space, business owners take control of their destiny. They are the sole decision makers on whether or not their plan for the business and property changes, giving them much more certainty in the future of their endeavors.
The affordability of commercial condos in Nashville is giving entrepreneurs a new, secure option in the market.