CRE Market Update: State of the Nashville Office Real Estate Market Q2 2018


The second quarter, 2018, saw some exciting moments. Incredibles 2 was released -- 14 years after the original. The Rare Bird rooftop bar saw its opening week, located atop the Noelle Hotel on 4th and Church St. The Big Band Dance in Centennial Park saw another phenomenal season, made possible by local bands and dance instructors.  

The National Economy

The national economy is strong as of the second quarter of 2018. We are below full-employment (considered 5%) -- that is to say unemployment is very low, at 4%. Meanwhile, job openings are still nearly 11%.


The National Office Market

Net office absorption across the country is down about 25%. Occupancy is at about 90%. Rental growth is down 0.5%. Deliveries, however, increased 2% this quarter (83 million sf). Office space under construction is down 7% but still strong at 141 million sf over Q2 last year. Sales volume is down by 15%, at $125 billion.

All that being said, vacancies are still below historical averages; supply is outpacing demand. Rent growth, however, is in slow decline since Q2 2016 (although still positive). Nashville, in particular, has seen a decreased demand for office space.

Still, there is an increase in speculative office construction, with about 60% of upcoming space preleased. Contrary to the overall market trend, new construction and 4 & 5-star space is seeing skyrocketing rents, high demand, and tight vacancies.

Older buildings are now at a spot where they must renovate or face obsolescence and being forced to continually decrease rent to compete with newer spaces. 30% of 1970s buildings have been renovated but are still facing high vacancies.

Overall, the commercial office market is recording a declining sales volume, partly the result of decreasing foreign purchasing.


The Nashville Office Market

Companies native to Music City are growing and expanding, while many other companies are relocating from other metros to Nashville. Nashville is currently enjoying one of the tightest job markets in the country. Professional services saw 5% growth this quarter, outpacing every other sector. Additionally, Nashville has a very high concentration of college graduates -- especially in Downtown and Brentwood.

Nashville’s net office absorption decreased by 1.1 million sf this semester. Completions, however, are up by 1.16 million sf. Vacancy is down by 0.8%. Square feet under construction is up 248,189 sf over last quarter. Rental growth is down 2.5%. Sales volume is up over last quarter by $61 million.

Nashville office vacancies are actually increasing -- approaching the national average, but staying slightly below (at just over 6%). The Music City office market is seeing a flight to quality -- tenants are giving up their leases on older product and moving to newly constructed space. Class A product has seen slow and steady increases in absorption, while Class B, C, and D have seen steady declines.

There has also been an increase in sublet space -- 1.5% of available inventory is sublet. 34% of sublet inventory is in Cool Springs (3% of Cool Springs’ total inventory), 18% in Brentwood (2.5% of Brentwood’s total inventory), and 17% downtown (2% of downtown’s total inventory).

Still, Nashville is a leader for office growth (since 2016). We are building more office space than the national average; our inventory has increased 16% over last year. As stated, new construction is leasing well. We are one of the country’s top leaders in inventory under construction, at 3% of our total inventory under construction.

Vacancies are highest in Brentwood and Cool Springs. Downtown still has relatively low vacancies.

Large and notable projects downtown include 501 Commerce, Capitol View, and Peabody Plaza. Vacancies are predicted to stay elevated.

Rental growth has declined, mirroring a nationwide trend. Rental growth is strongest in West End ($29.32/sf), Green Hills ($29.29/sf), Downtown ($28.85). We have seen a drastic slowdown in the leasing of Class B product -- due to the flight to higher quality.


Special Report: Office Investments

While sales volume of commercial office investments is decreasing, $450 million has been traded in 2018, so far (at approximately $200/sf). Price/sf doubled in pricing during this cycle.

From an investment standpoint, 2018 is off to a great start for Nashville. 1st quarter 2018 investment outpaced every year in this cycle. We saw strong gains in the mid-low year, with Class B investment up by 180%, while Class A investment was up by 60%.

Sales volume by submarket:

  • Downtown: $260 million

  • West End: $153 million

  • Airport North $128 million

The top office transactions were the Caterpillar building deal, $90.9 million; Service Source, $43.9 million; and One Greenway Centre, $42.5 million.

In contrast to other commercial markets, native Tennessee buyers are still dominating investment purchases, followed by investors from California and Texas.

Interested in other types of commercial product? Take a look at our 18Q2 industrial report, multifamily report, retail report.

Data courtesy of Costar.