The second quarter, 2018, was a season of great excitement across the USA and here in Nashville. The summer wedding season was kicked off as the nation watched on in support of the Royal Wedding between the UK’s Prince Harry and his now wife, Meghan Markle. In the final weeks of the quarter, offices across the US took lunch in the conference room in order to watch and cheer for the 2018 FIFA World Cup. At home in Music City, we enjoyed the opening of the Five Points Pizza on Charlotte, Bonnaroo Music Festival, and the opening of the newest bar in East Nashville -- Walden.
The National Economy
Quarter 2 saw strong US job growth. 2014 was the last peak for job growth, with 1.53 million jobs added; by the end of Q2, 2018 has seen 1.45 million jobs added so far. Additionally, it was a strong run for employment gains. National unemployment reached as high as 10% in 2009. Currently, unemployment is at 4% -- a 17-year low for our nation. Analysts predict unemployment will continue to move down below 4% in the next couple of years. Q2 was characterized by lots of growth in the leisure/hospitality and transportation/logistics sectors.
The National Market
Housing prices are increasing across the real estate market with large increases in home price to income ratios. Analysts are seeing similar increases as 2009, but not as high yet.
The industrial real estate market is running strong… Q2 saw only a 2% increase in supply, whereas office and retail saw a 20% increase in supply. Couple with the small increase in supply was a continually strong demand for industrial in Q2. Together, these trends affected a decrease in total national vacancies for industrial. Pretty much all development and market deliveries of industrial space are aimed at logistics, as this is the highest-growing market demand for industrial sites. Flex space saw rent gains of 4.7%, while overall industrial saw +5.8% and logistics lead with 5.9% rent gains.
The Nashville Market
The Nashville industrial real estate market was consistent with the nation -- showing decreasing vacancy rates and high demand for logistics space. Nashville is actually in the top 10 cities in the nation in demand for industrial logistics space. Nashville saw a slow-down in absorption of the “specialized” industrial subcategory; in the same period, Music City saw faster absorption in the “flex” industrial subcategory.
As of Q2, Nashville has one of the top 5 lowest unemployment rates in the country at 2.6%. Many sectors, including job growth, saw a slowdown in growth… but this is explained by the fact that Nashville has had huge growth across the board for so long now that we are seeing a relative slowdown in the rate of growth -- but growth is still positive. Nashville income growth has outpaced the US average. Companies are expanding, with our Downtown city core attracting many companies to the area. The I-24 corridor is picking up several expansions for companies and has become a strong industrial corridor.
Relative affordability of living and home prices (when compared to other metros like NY, LA, Austin, Chicago, etc) is a huge factor driving company relocation to Nashville, which has driven industrial demand.
Q2 was strong over last year for the Nashville industrial real estate market. We saw positive net absorption (2.45M sf), negative completions (down 837k sf), and an increase in square feet in construction (up 586k sf). Vacancy is down by 0.8%, rent growth is up by 1.2%, and total sales volume is up by $21.47 million.
Logistics is a huge focus for inventory. 64% of current inventory is in logistics and 28% of inventory under-construction is focused on logistics, with future construction even more focused on logistics. Over the quarter, Music City saw vacancy compression among all types, but the largest in specialized… mostly because new space was not delivered in specialized, whereas new space was delivered in flex/logistics. Flex/logistics also saw strong vacancy compression.
Industrial rent growth stayed strong in Q2 as well. We saw 11.1% year-over-year growth from Q2 2017 to Q2 2018 -- exceeding the national average by nearly 2x. In Q2, Nashville was the No. 1 leader in the country for overall industrial rent growth. This rent growth was strong among all subtypes: logistics was high but flat, meaning consistent with past quarters, specialized was up relative to past quarters, and flex rent growth slowed down a bit but is still strong. Nashville industrial real estate's rent growth in Q2 outpaced office and multifamily by 5x.
Q2 saw the benefits of a strong year in 2017 for industrial investments. Nearly $900 million traded, priced at about $70-$80/sf. By submarket, the strongest pricing was in Franklin/Brentwood, with the lowest in West Nash. The southeast US saw the most industrial sales volume in the nation at $230 million. The Skyline District Park ($26.9 million) and the Aspen Park ($15.8 million) sales were the largest recent transactions for Nashville industrial real estate.
Q2 Industrial Market Growth Drivers: Logistics & eCommerce
Space needs for eCommerce has been a big gift for the industrial CRE market. eCommerce has seen $469.4 billion in sales in the last 12 months. Amazon was a big contributor to that figure and other companies are fighting to gain competitive traffic. Walmart is greatly scaling up their eCommerce capabilities. Strong eCommerce sales translates to increased need for industrial space for eCommerce sites to run their behind-the-scenes order fulfillment tasks. This has lead to increased demand from eCommerce companies for industrial space including distribution and warehouse sites across the nation.. Nashville is a well-recognized transport hub, so Music City’s industrial market has captured the benefits of expanding eCommerce space needs. Physical stores are seeing 1/7th the growth of eCommerce.
As noted previously, logistics is a huge growth driver for the current national and Nashville industrial CRE markets. All major, new industrial development is aimed at logistics. Nashville is a top 10 city/submarket for logistics growth and logistics demand for industrial CRE. Nashville has absorbed over 2.4 billion SF of industrial space in logistics since 2001 and it is still on the rise. Moreover, Q2 saw 95% absorption of logistics space nationally with Nashville being a top market. Logistics also saw the highest national industrial CRE rent gains in Q2 at 5.9%.
Industrial Power Player Highlight: Amazon
Amazon is growing significantly in Tennessee. The eCommerce-giant occupies 5 million square-feet in greater Nashville, Chattanooga, and Memphis. Remember, also, that Amazon’s sales are a large fraction of the $469.4 billion in eCommerce.
Availability Report: New Construction
Nashville was leader for construction this cycle in the country. Music City’s building is high as a percentage of inventory (nearly 10% in Q2). New deliveries are leasing very well -- including nearly all deliveries since 2015. The largest projects have been Commerce Farms 5 and Park 840. The largest projects currently under construction are the Lowes Fulfillment Center, Cedar Farms, and the new Dorman Products campus.
Interested in other types of commercial product? Take a look at our 18Q2 office report, multifamily report, retail report.
Data courtesy of Costar.