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


The third quarter, 2018 was epic in Nashville. NoBaked Cookie Dough launched their Germantown location. Bourbon Steak opened on the 34th floor of the newly opened JW Marriott at 201 8th Avenue South. Finally, Luke Bryan fulfilled his dream of opening a bar in Downtown Nashville with Luke’s 32 Bridge Food + Drink. Located at 301 Broadway, his new concept occupies 30,000 feet on six-stories featuring six bars, four stages, and two restaurants.

The National Economy

Unemployment this quarter hit a 40-year low at less than 4%. Companies are still trying to hire but are experiencing a labor shortage. National job creation is at a rate of about 3 million jobs each year, representing a 2% year over year growth from 2017.

The National Retail Market

In 2006-2009, the national retail market saw 189 million sf per year occupied. Quarter 3, 2018 averaged 50 million sf per year occupied. This massive national drop in occupied retail square footage is largely thanks to a series of big box retailers including Toys-R-Us, Bon Ton, Sears, K-Mart, and Sam’s Club. Toys-R-Us closures alone accounted for 40 million sf in vacancies.

Nevertheless, the commercial market is still showing a strong demand for retail space. Buying power in the market has increased significantly, which leads to spending in the market. Demand continues to outpace supply (although demand is down from last cycle). Overall, real estate analysts are seeing retail demand shift toward diversified tenant bases taking down large spaces instead of big box retailers. Discount retailers are growing significantly; Homesense alone opened 8 million square feet in 2018. Health and fitness centers have also grown significantly.

Vacancy rates are forecasted to remain flay and below historical averages over the next few years. Average growth in the national retail rental rate has been less than 3% year over year for the last few years. Retail rental rate increases are forecasted to slow with the minor recession predicted in 2020. Finally, national retail sales volume slowed. Compared to a peak of $225 million traded in 2015, $150 million traded this year with an average Price/sf around $200/sf.

The Nashville Retail Market

Nashville was one of the fastest cities to recover after the recession. Now, in Q3 2018, we are seeing employment growth slowing. A little less than 20k jobs have been added in 2018 so far. Early in the cycle, Nashville job growth doubled the US average, but we are currently more inline with the rest of the country.

That being said, Nashville unemployment is less than 3%, while the national average is closer to 4%. We are also seeing our income growth slowing -- Music City benefitted earlier in the year from some of the strongest office use growth in the country, which brought income growth as high paying jobs increased parallel to the office-use growth. However, income growth is again slowing to closer to the national average.

Our strong employment growth has caused a lot of people to move to Nashville, resulting in strong population growth. Nashville’s population growth averaged around 2% this cycle, more than double the national average (about 0.5%). This has mostly been fueled by net migration -- people moving to Nashville from other cities.

Comparing retail year/year statistics from Q2 2018 to Q3, 2018: the retail market saw an increase in absorption of 543k sf, an increase in completions by 245k sf, vacancies flat at 0.1%, construction slowed by 432k sf, and rent growth is up 1.1%.

Behind only Austin, Raleigh, and San Francisco, Nashville has seen the strongest growth in buying power in the nation, a phenomenon that attracts retailers. Buying power is strongest in Franklin, Brentwood, and the Urban Core as we see a trend of empty-nesters moving downtown for the walkability and experience.

Nashville retail market demand is healthy, staying strong relative to supply. Further, Q3 saw a strong vacancy compression. Retail market vacancy peaked at 8% in 2010 and is currently sitting at around 3% (as opposed to a historical 5%). Music City currently has one of the lowest retail vacancy rates in the country due to the lack of building and strong demand.

The tightest vacancies occur in the urban core, Franklin, and Brentwood submarkets.

Nashville retail construction is slowing. 2018 has seen slightly over 800k sf, half of construction volume in 2016. A decent number of new-construction space is available, however. Most projects focus on mixed use, with 250k sf under construction in Downtown, 225k sf under construction in Rutherford County, and 150k sf under construction in Cool Springs/Franklin.

Rent growth has been driven up by tight vacancies and vacancy compression. Our retail rent growth this quarter was over 6%. Rents are about 50% higher than last cycle! Nashville has the strongest rent growth in the country at 6.7%. Aside from Austin, Nashville is the strongest-performing city in the country for above-average national retail rents.

Q3 pricing gains are solid. Downtown has experienced the most, trading at $800/sf… a 600% increase since 2010. Green Hills is trading just under $700/sf and Vanderbilt is trading around $400/sf. The top retail transactions this year have been 305 Broadway ($32 million), Maples Shopping Center ($27 million), and Merchant Point at Indian Lake ($28.3 million).

Forecasts show a slowdown in employment growth until 2020, after which point employment growth is predicted to speed up again. Forecasters predict that vacancy rates in Nashville should remain intact at around 4% (below historic averages). Rent growth is expected to slow, but still remain stronger than most metropolitan areas across the country.

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

Data courtesy of Costar.