Q2, 2018 saw a lot of change and growth for the nation and Nashville. Starbucks made a commitment to completely eliminate the use of plastic straws in their locations by 2020. Here at home, Cushman & Wakefield brokered the Regions/WeWork deal, leading to the building’s closing for $139.5 million in the fall of 2018.
The National Economy
The last few years have been a strong economic expansion period. National income has seen strong gains and consumption growth has been sustainable. GDP has grown by about 200 basis points a quarter. We have seen an increase in net exports, but this is expected to decrease some due to tariff policy. A high concentration of our current imports (especially clothing and textiles) are sourced from China. A high amount of food imports come from Mexico.
The National Retail Market
Retail construction has slowed down considerably, with significantly less inventory being built now than last cycle. We are seeing a trend of a lot of “big box” retailers closing as shopping trends shift to online e-commerce. Demand is healthy, however. The adjustment in construction has just matched shifting demand, allowing vacancies to decompress to 4.5% across the country.
2018 set retail closure records with 111 million square feet closed. Toys R Us was the brand with the most sq. ft. shut down, followed by Bon Ton and Sam’s Club. Consequently, tenant leasing activity has been more diverse. General retail and apparel has decreased from 61% of retail space to 47% in the last 10 years. Health/Fitness, however, has increased from 8.3% to 16.8%. Discounters, also, increased from 14.1% to 18% over the same period. We are also seeing a trend of malls closing, with vacant mall space turned to other uses, such as gyms or office space.
National power centers are also seeing vacancy increases as a result of closures from major retail brands. Power center vacancy has creeped closer to 5% as of the end of Q1 2016. Neighborhood centers, however, remain strong, with vacancies currently at 7% and expected to continue declining.
The grocery market is deeper than ever before, fueled by alternative grocers like Target and Walmart. Dense areas have seen more openings, particularly from high-end grocers. Grocer footprints define distinct consumer targets and brand value (think Kroger vs Trader Joe's vs Whole Foods).
Despite closures and vacancies, rent growth stays strong and consistent, unlike the office market this quarter.
The Nashville Retail Market
Nashville is seeing the strongest rent growth in the country for retail space (+7%). This is largely fueled by our high population growth and job growth, which yields higher consumption. We have seen a large dip in sales volume, however (20%). Despite this, prices continue to rise with cap rates rising also.
Nashville’s population growth rate quadrupled the national average this quarter. As featured in our multifamily market report, affordability has caused companies to relocate or expand to nashville, yielding strong income growth and an influx of millenials and baby boomers.
Nashville retail net absorption this quarter was down 199,011 sf; completions were down 68,594 sf from last quarter, too. In Q2 ‘18, Music City’s retail vacancy rate increased from 2.9% to 3%. Retail under construction, however, is up 338,000 sq ft for us. Rent growth is up 3.3% and sales volume increased by $88.8 million, while the US as a whole saw a 20% decline. All that to say, the Nashville retail market is strong.
Out of all commercial real estate product types, Nashville retail is seeing the tightest vacancy rates, followed closely by industrial. Retail vacancies are 3% right now, making Nashville the city with the 2nd lowest retail vacancy rate in the country, second only to Honolulu.
The largest move-ins recently have been Lifetime Fitness in Franklin and Knowledge Academies in Antioch. Overall, we are building less retail than other sunbelt metros, but still higher than the national average. This quarter, we had the sharpest decline in development cycle over cycle than other metros. The retail development that is occurring has been strongest in Rutherford country, followed by Bellevue and Cool Springs. The largest deliveries are One Bellevue (400,000 sq ft) and the Green Hills Mall Extension (180,000 sq ft).
Along with limited development, we have seen high demolitions, which has been a major contributing factor to low vacancy rates. Bellevue demolished 900k sq. ft. while the Southeast corridor demolished about 400k sq. ft. In addition to demolitions, we are seeing a lot of conversion of retail space -- with retail becoming office, hotels, and gyms.
As stated, construction has slowed, with us building more than the national average but only about 0.8% of our inventory. The most development has taken place in Rutherford (220k sf), Downtown (277k sf), and Cool Springs (107k sf). The largest retail developments going on right now in Nashville are the Fifth and Broadway development, which is set to add 180k sf and the Marketplace at Savannah Ridge project, set to add 125k sf.
Rent growth has continued to grow, significantly outpacing the national average. This quarter, our rent growth was 4.1%, compared to the national average, at 0.5%. Forecasts are still strong, estimated to reach 5.5% by the end of 2018 and close to 6% in 2019. After that, however, analysts estimate that rent growth will stabilize and decline.
The strongest rent growth has been seen in Green Hills, Vandy, Cool Springs, and Downtown. However, industrial space has seen the highest rent growth of all product types.
Special Report: Retail Investments
2016 was the most recent retail investment peak year for Nashville, at $900 million. So far, just with Q1 and Q2 in the books, 2018 has seen nearly $600 million in retail investment already. Pricing is around $225/sf.
The strongest retail pricing is in the Southside areas of Nashville: Murfreesboro, Brentwood, and Cool Springs. Rutherford has had the most sales volume, at $150 million. Cool Springs & Franklin collectively saw $113 million, and the Southeast Corridor saw $110 million in transactions.
The largest individual sales this quarter were::
305/311 Broadway: $32 million, at $800/sf
Maple Shopping Center: $27 million, $637/sf
Merchant Pointe - $28.3 million
Interested in other types of commercial product? Take a look at our 18Q2 office report, multifamily report, industrial report.
Data courtesy of Costar.