December 2005 Nashville Commercial Real Estate Market Report The future for Nashville’s commercial real estate is looking bright. By Alexei Smirnov
A rendering of the proposed Adelicia Tower
Sitting in a high-rise office suite overlooking his native city, a prominent Memphis lawyer said this past summer: “Man, I used to drive to Nashville decades ago, and there was nothing there. Now, it’s like the Emerald City.” The state’s capital might have a lot more work to do in order to truly merit such a parallel, but there’s no denying that the city doesn’t look bad from surrounding interstates, especially in good weather. And these good looks are due in large part to the efforts of Nashville’s commercial real estate folks.
They labor quietly behind the scenes to find money-making properties, invite new industries to town and build for them. To find out just what’s underway and in store for Nashville, we interviewed several noteworthy players in the city’s commercial real estate market. All those spoken with agree on one thing: the future for Nashville’s commercial real estate is looking bright.
Industrial & Logistics
Terry Smith, partner with NAI Mathews Partners here, who has been focusing on the industrial market during the last 20 years, credits his positive outlook to the fact that in the past couple of years, out-of-town companies discovered Nashville as a major national logistics hub. “Activity is as good as I’ve seen in a long time,” he says.
As one example, major Dell supplier APL Logistics leased 325,000 square feet in early October in First Industrial Realty’s Rockdale Distribution Center. The move demonstrates the success of Nashville’s newest distribution hub on 694 acres along the Wilson/Rutherford county line, where I-40 meets Highway 109 and State Route 840. The lease, which could expand to 500,000 square feet, was a logical decision for APL because Dell’s Dimension desktop operation has been right down the road in Eastgate Business Park, north of I-40, since 1999. Frankly, Dell—not Nissan or Saturn—should be credited with the influx during the last couple of years of higher-paying jobs in the area, says Smith in a side note.
Prime Properties, which developed Eastgate, recently completed Nashville-East Logistics Center in Wilson County, a 500,000-square-foot distribution center for German discount retailer ALDI.
The biggest ongoing industrial construction is north of town, where Duke Realty is finishing 500,000-square-foot Brick Church Industrial Park off Briley Parkway. Crescent Resources is building a similar facility at CentrePointe.
It’s no wonder that there is so much industrial construction going on, says Whitfield Hamilton of Panattoni Development Co. An uptick in the economy in 2004 and 2005 promises even more industrial activity in the coming year, he says. Panattoni’s new project, a 456,500-square-foot speculative facility in Commerce Farms in Lebanon is finished and ready for a tenant.
The company also is expanding Bridgestone’s facility to one million square feet. Moreover, Hamilton says, “we’ve got [some 100 acres] on Elam Farms on I-24 in Murfreesboro, but we haven’t started building on it yet.” Another Panattoni project, a 250,000-square-foot building in South Park in the southeast market on I-24, is ready for occupancy. Hamilton says there is a good mix of local and out-of-town interest.
“That’s what happens when you get vacancies to the single digits and compare it to other markets,” says Smith of NAI Mathews. Looking at the entire industrial market, vacancies are currently holding in the 6%-7% range, which spurs speculative construction. Panattoni, Duke, First Industrial and Hawkins Development, as well as others, are looking for new projects. Smith says that Nashville is undoubtedly ahead of other metropolitan markets in the state in terms of construction activity. “Location, cost of living—everything is going for us. During the last 20-plus years, Nashville has been and continues to be a steady-growth town.”
Office
Indianapolis-based REIT Duke Realty is also active in the office submarket, having sold 31 Nashville properties to First Industrial of Chicago a couple of months ago. The $1 billion deal involved 14 million square feet of flex office space across the Midwest and Southeast. First Industrial plans to lease those properties out and sell them to interested parties. Duke decided to hold on to its Class-A office space in Brentwood and Franklin. At the end of the summer, Duke also started construction of speculative office buildings in Brentwood and Franklin, in competition with Alex S. Palmer Co., Highwoods and Boyle.
After moving to Nashville a year ago, military housing construction giant Actus Lend Lease decided to expand its office space to an additional floor at Palmer Plaza, which is owned by the Alex S. Palmer Co. That 243,000-square-foot office tower on West End was pulled off the market earlier this year after owner Alex Palmer tried to sell it for a couple of months. Instead, the developer decided to market his Burton Hills IV, which he successfully sold to Archerd-Bell Investment Group of North Carolina in early fall. That record-setting deal fetched $29 million, or $215.20 per square foot for the three-year-old office tower. With cash in hand, Palmer seems more prepared to start moving dirt on his massive West End Summit office/retail project. But, “they are still looking for anchor tenants,” says spokeswoman Andrea Lindsley. It is rumored that Palmer has to pre-lease at least 100,000 square feet to a potential tenant before he can start building the complex, slated to include a high-end hotel, 60 condos, shops and a fitness center.
Cool Springs has been the most active market in the office segment,
says Grubb & Ellis|Centennial’s Erin Donahue. Not only is there speculative office construction, but Community Health Services leased 108,000 square feet at Cool Springs Commons One when it decided to consolidate its offices under one roof.
Downtown, CMT expanded to 29,000 square feet in its 220 Commerce headquarters. One Nashville Place and Financial Center absorbed 54,000 square feet. Boyle Investment Co. is slated to start new construction for CHS Community Health Services. One Nashville Place is up for sale.
Also noteworthy is the March sale of the Park Place shopping center and office complex by millionaire investor and political fundraiser Ted Welch. New owner Brookside Properties, which paid some $14 million for the property sitting on 2.6 acres of West End land, has pledged to do some renovations and might even install an elevator. A couple of months later, the legendary L&C Tower downtown was sold by Chicago-based GEM Realty Capital for $21.3 million to Northeastern Security Development Corp. of New York.
Overall, office vacancy rates continued to decline in the third quarter of this year, which is quite an accomplishment since Nashville has not reported a vacancy of 10% or below since 9.96% at the end of 2000, according to Grubb & Ellis|Centennial’s research.
Two Bluegrass Commons added 50,000 square feet of Class A space in the North submarket, as three new buildings were under construction in the third quarter: Belle Meade Centre, Creekside Crossings III and Cool Springs III (all slated to add an additional 298,009 square feet to the Nashville market by the end of next year).
Eakin Partners reported in October that its Roundabout Plaza on Demonbreun Street was now 98% leased a year after it opened for business.
The reported arrival of Nissan North America’s headquarters in 2006 will not only create demand for a new office complex—likely in Cool Springs—but also should mean a temporary boost to existing office space either downtown or near the airport.
Multi-family
Proving that the condo business is a good bet in Nashville, developer Corner Realty Partners, which recently moved its offices into Eakin’s Roundabout Plaza, is gearing up to break ground on its Adelicia project. That 18-story, 211-unit condo building in Midtown had some 200 people on the waiting list in the fall, when it wasn’t even officially open for sales. Construction is slated to be finished in 2007.
In the Gulch, North Carolina-based Crosland’s Tennessee division is planning to build a 17-story, mixed-use development on the corner of 12th Avenue and Division Street.
Looking away from downtown into the suburbs, as far as the eye can see, there is money to be made in multi-family housing. Just ask Steve Massey, senior vice president of CB Richard Ellis, who brokered one of the largest multi-family sales in 2005 with the sale of The Lexington in Bellevue to Virginia-based Harbor International. That $43.8 million sale of the 598-unit property sent happy goose bumps throughout Nashville’s real estate industry. How did Massey pull it off? “It’s a good property built in the nineties, and there is a lot of investor capital looking for such investments,” he says, declining to speculate on what other multi-family properties might change hands in the near future. More recently, Louisville, Ky.-based NTS Realty Holdings bought two apartment complexes in the West End area for more than $90 million.
According to Massey, the condo market is largely concentrated in the downtown and midtown areas of Nashville, and it should remain healthy. Overall in the multi-family segment, supply lessened and occupancies increased, he says, while concessions are decreasing. Due to the lack of sites for new projects, Massey predicts a healthy outlook for apartment owners, though much still depends on the interest rates. “As they ease up, it will slow down home buying,” he says.
How much can Nashville absorb in the way of condos? It’s hard to gauge, says Christie Wilson, president-elect of the Greater Nashville Association of Realtors and owner of The Wilson Group Real Estate Services. She says developers wouldn’t be doing condos without doing their homework first.
Perhaps that’s why Tony Giarratana, in partnership with Novare Group of Atlanta, redesigned his gigantic Signature Tower in August as a 750-unit
residential building slated to include rental units, condos and penthouse suites, with only 50,000 square feet of retail space. The initial concept of the $200 million high-rise presented last November included plans for a hotel. Perhaps Giarratana was inspired by smooth sales of his Viridian, a 31-story
residential tower currently under construction on Church Street. It had 30 of 305 units left unsold at the beginning of October, with prices ranging between $180,000 and $1 million for the two remaining penthouse suites.
With so few worried about rising interest rates in the Nashville market, there are plenty of greenbacks floating around for investment—perhaps enough to give Music City a distinctly emerald hue, after all.
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