Tennessee's commercial real estate sector experiences a moderate version of a
national squeeze
By Alexei Smirnov
Commercial real estate developers may have a reputation as the most egocentric of business folk, but
ego does not take one as far as it used to in conversations with bankers this year. With subprime
residential mortgage woes spreading pessimism nearly everywhere you look, it's hard not to take a
new commercial development prospect, or even a fresh hole in the ground, with a grain of salt.
"The bankers are going to get much more like bankers—tough on their standards," says Keith
Simmons, managing partner of Bass Berry & Sims. "Projects that could be financed 18 months ago with
a flip of the switch may not be done in the current environment. We may not see as many cranes go up
in Nashville in the next year." That says a lot about the whole state, since Nashville, twice the
winner of Expansion Management magazine's top accolades in the corporate relocation department, is a
reliable barometer of Tennessee's commercial activity.
Take the most ambitious Tennessee developer, Tony Giarratana. His Chicago-based financial backer
Bill Waldrop once conservatively expected to finalize financing for the proposed 70-story, $225
million Signature Tower by August 2007. But in the current environment, the "Burj Dubai" of the
Southeast faces further delays. Even putting a hot-air balloon in the sky last year didn't
adequately elevate sales for the hotel-slash-luxury-condo tower. Further south from Giarratana's
parking lot, developer Alex S. Palmer is digging a hole for the West End Summit—still without
an announced commitment from a major office tenant.
Elsewhere in the state, industrial developers are reporting the easing off of demand for their
big-box projects, a trend that puts further speculative development on the backburner. David
McGahren of commercial brokerage firm Colliers Turley Martin Tucker also laments the tightening of
lenders' underwriting standards, while observing the unfavorable movement of cap rates, particularly
on assets that have more risk associated with them, such as potential vacancy, tenant credit risk
and building design. Even so, provided the tenants have a good rating, in Class-A office space
"you're going to see as much demand as in years past," McGahren says. Having heard plenty of
warnings of recession, he is not prepared to join that chorus just yet. "People are paying very
close attention to that, the Fed is reacting. I don't see a major slide occurring, but it's an
election year, so people tend to sit on the sidelines and see how things shake out. If things slow
down, it could be attributed partly to that."
While we may not see as many cranes pop up across the state as we did in years past, things in
Tennessee aren't as dire as they are, say, in Miami, Fla. The recent study by University of
Tennessee researchers found that, overall, economic conditions will soften in 2008, but the state's
economy "will avert an outright economic contraction by a significant margin."
Regulation Refresher
Legislation is not like wine—too often, it sours unpleasantly with age. That's why developers
this year are interested in changing the state's condominium regulations. "We're sponsoring a
rewrite of the Horizontal Property Act, which regulates condominium development in Tennessee," says
Allan Ramsaur, executive director of the Tennessee Bar Association. "It was adopted in 1963 and
hasn't kept up to date." The idea is to adopt a set of default provisions that come into effect if
the issues faced by developers today are not covered in existing rules. For instance, mixed-use
developments are presently not covered in the old act. "How do you reconcile the interests of a
retailer and residential owners?" Ramsaur wonders. "The new act will address that."
