Q3 2018 was an incredible time to be in Nashville. Pearl Diver restaurant and bar opened in East Nashville. Attaboy, a speakeasy-style bar, opened in East Nashville. The Fox Bar & Cocktail Club also hit the ground running this quarter with a feature in Nashville Guru.
The National Economy
As of Q3, the US national economy is booming. Unemployment is at a 40-year low -- less than 4%. On average, 3 million jobs are being created each year, representing a 2% year-over-year growth in job creation.
The National Industrial Commercial Real Estate Market
National industrial development is heavily skewed towards meeting logistics demand, representing 90% of total industrial inventory under development. The biggest national driver for industrial demand is warehouse and distribution space for eCommerce.
While we are building a lot of industrial space this cycle, we are at about half what was built last cycle: 200 million sf (last cycle) vs 100 million sf (this cycle). National demand for industrial is well above the annual average with almost double the amount of absorption from last cycle. Nationally, the industrial market is enjoying strong vacancy compression. Typically, we see this at 7.5%, but as of Q3, we are at just over 4% vacancy compression across the country. This is mostly driven by strong demand and insufficient construction to outstrip or even match demand.
Speculative construction is picking up as occupancy is at around 95% of inventory. Vacancies are forecasted to stay below historical averages.
Rent growth in Q3 is solid nationally, at 6% year over year. Historically, this figure is 2%. Evidently, industrial is one of the hottest property types in the nation right now. Rent growth is forecasted to slow down from 6% to 3% in 2020, but that is still very strong. The industrial market has sustained strong national price gains, trading on average at $90/sf vs just over $50/sf in 2009.
Amazon and eCommerce are the major drivers of industrial demand in 2018. eCommerce accounts for 50% of industrial absorption, with a large portion of that accounted for by Amazon.
The online retailing giant, Amazon, is locating distribution centers in areas with fast-growing populations and easy access to interstates. California has seen the biggest expansion, but Tennessee and the South has also seen a lot of expansion. Amazon is predicted to add another 60 million sf in distribution sites over the next four years. They are dominating the industrial real estate market and are close to announcing their HQ2 expansion. California is the state with the largest Amazon footprint. Tennessee ranks #10, with 4% of our industrial inventory, 4.9 million sf, occupied by Amazon.
Nashville CRE Market Figures
Although Nashville’s employment growth is slowing, employment growth in the logistics sector remains strong at 3%. Both income growth and population growth are slowing.
2018 Q3’s year-over-year industrial statistics compared to Q2 2018 read as follows. This quarter has seen a drop in absorption of 1.4 million sf. Completions are down 4.3 million sf. Vacancy is also down 0.4%. Construction is down 4.1 million sf. Rent growth is up 1.2%. Sales volume is up $18 million.
Overall, building and new construction of industrial space is down this cycle. 2018 has been underwhelming compared to 2017, but on par with the rest of the cycle. However, demand is stronger this cycle. Vacancy rates have remained flat, at a little less than 4% (compared to a 7% historical average). Logistics is seeing vacancies increase due to speculative construction delivered recently.
New space is leasing well. Well over 90% of inventory delivered since 2015 is leased. A large amount of space in underway that needs to be pre-leased, particularly lead by Wilson County and Southeast.
The largest industrial projects under construction in Nashville are: Beckwith Farms Building 7 (1 million sf), Cedar Farms (902 k sf), Dorman Products (815k sf), Building 1 at Speedway Industrial Park (690k sf).
Rent growth in Nashville continues to outpace that national average. We have seen a 10% average rent growth compared to a historical 2%. We see this across most industrial subtypes. Logistics has slowed a bit but rent growth has remained high, same with Flex space. Specialized Industrial have had marked increases in rent growth.
Nashville is the #1 market in the country for year-over-year growth in industrial rent growth, followed by Sacramento and Cincinatti.
Prices continue to soar. In 2010, Nashville industrial traded at $40/sf. Today in 2018, we sit at $80/sf on average. In 2017, $900 million was traded and 2018 is on track to be in line with that. The strongest pricing is in the downtown area, followed by Southeast and East Nashville.
Looking ahead, growth in employment is forecasted to continue to slow until 2020. However, fundamentals of our current industrial situation should stay consistent. Vacancies may increase slightly but are predicted to stay much lower than historical averages. Rent growth is also forecasted to slow down to as low as 5% growth -- which is objectively still very high rent growth and well above the historical average.
Nashville is forecasted to have the strongest gains in industrial rent growth in the country.
Interested in other types of commercial product? Take a look at our 18Q3 office report, multifamily report, retail report.
Data courtesy of Costar.