CRE Market Update: State of the Nashville Office Real Estate Market Q3 2018


Q3 2018 was a great time to be in Nashville. Beyoncé and Jay-Z, Keith Urban, and Taylor Swift all performed concerts in Music City in just one week at the end of August. Pilgrimage Music Festival fans, including some of our team members, got rained out… but that didn’t stop anyone from enjoying the weekend.  As rain continues to persist into mid-November, be sure to keep a list of rainy day activities in Nashville on hand.  

The National Economy

The third quarter 2018 saw another strong period for the US economy. Our unemployment is at a 40-year low -- less than 4%. Most companies across various industries are still trying to hire but are finding a labor shortage.


The National Office Market

This quarter saw a big drop in office development. Consequently, vacancies have continued to compress in the face of strong demand. Demand patterns are strongly shaped by a national flight to quality; there is a marked shift from 3-star demand to preference for 4- and 5-star space. The most absorption this cycle has been accounted for by Class A space.

National rent growth has stayed flat, currently near 2%. The strongest rent growth has occurred in 4- and 5- star space, however 3-star space has also had solid rent growth Analysts are seeing slowing rent growth in most markets, including Nashville, Atlanta, Dallas.

National pricing has also been flay. 2016 was the peak year for pricing at $250/sf. To date in 2018, we’ve had $80 billion traded at around $250/sf.


The Nashville Office Market

Nashville continues to enjoy strong employment growth and below national unemployment. Our office sector continues to show strong performance. As a city, Nashville has had a strong and quick return from the recession, mostly thanks to our office growth. The office market was at one point around 6% annual growth as a result of the high-paying jobs moving to Nashville. Today, we are at around 4% growth for the office sector, still over the US average.

Income growth remains steady as Music City outperforms the nation in this metric also. Our population is still growing also; our population growth rate is double the national average and Nashville is a Top 15 city for total household growth.

Comparing office year/year statistics from Q2 2018 to Q3, 2018: absorption is down by 2.6 million sf. Completions have slowed by 3.3 million sf. Vacancy only increased 70 basis points. Inventory under construction is up 1.2 million. Rent growth slowed 120 basis points. Sales pricing is up $16/sf.

While building is down relative to a peak in 2017, new construction has and continues to lease well since 2015. Almost everything built has been leased. Vacancies have slightly increased since 2015, however we are still in a time of strong vacancy compression.

The flight to quality is very apparent in Nashville. 50% or more of the space absorbed in our market this cycle has been Class A space; around 10 million sq. ft. of Class A has been absorbed since 2010. Downtown has accounted for about half of that absorption alone. Interestingly, sublet space has continued to stay elevated this quarter, accounting for around 900k sf of inventory. Cool Springs currently sees the largest share of sublet space -- just over 250k sq. ft. Downtown follows in this regard. The highest vacancy rates occur in Brentwood and Cool Springs.

Speculative construction is heating up, with a significant share of space underway (65%) not yet leased. Much of this speculative construction is occurring Downtown, followed by West End.  Nashville is a top city for speculative construction, only behind Orange County and Chicago.

Major projects underway this quarter are: 501 Commerce (379k sf), Gulch Union (330k), and Peabody Plaza (280k sf). Nashville has a robust office pipeline under development right now; 4.5% of our total office inventory is under construction. This puts our office under construction as a percentage of current inventory above that of San Francisco and Austin.

Our office  rent growth has continued to slow this quarter. In 2016, we used to be the national leader in this figure. In 2018, our office rent growth has settled at 3% on average, in line with historical averages. Downtown has the strongest rent growth, at 4.3%. 3-star assets, however, are dramatically slowing down, with rent growth at around 2%.

Yet, pricing continues to climb. The average price per square foot for office in Nashville currently sits at $200/sf.  The strongest gains are in the downtown market. Major transactions include One Nashville Place, which sold for $139.5 million ($354/sf), and Service Source Tower, which sold for $43.9 million (representing a 30% gain from its last trade in 2014). Sales in the suburbs have been solid, too. The Caterpillar Financial building sold for $90.9 million at $291/sf and One Greenway Centre sold for $42.5 million.

Growth is forecasted to continue to slow. Vacancies are forecasted to climb in future quarters due to speculative construction and a  forecasted slowdown in the economy. That being said, analysts expect vacancies to still stay below historical averages. Rent growth is forecasted to slow as we approach 2020 also.

Interested in other types of commercial product? Take a look at our 18Q3  industrial report, multifamily report, retail report.

Data courtesy of Costar