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Could Nashville become the next Austin — a hip capital city that punches above its weight in the office-sales arena?
Tennessee’s “Music City” is attracting increasing attention from institutional investors. It has a growing population, rising employment and a surging local economy anchored in the healthcare and education sectors. What it hasn’t had historically is an abundance of listings, as long-time local owners have tended to hold on to their properties.
Thinking about investing in commercial real estate? It can certainly be a lucrative venture.
Change Is On The Way
But a fundamental shift could be under way. Market pros point to recent deals at record pricing that could entice more owners to sell, a construction boom that is expanding the city’s institutional-quality supply, and growing demand from buyers seeking better yields than they can find in the biggest cities.
“We call Nashville ‘Austin five years ago,” said Michael McDonald, a senior managing director at Eastdil Secured who oversees investment sales in both cities.
“There is a music scene. It’s a foodie town. It’s a cool place, and millennials want to be there. Investors buy into that.”
McDonald added,
“The problem is, it is a tough market to get into. It doesn’t have the deal flow. But we’ve seen in these other markets, sometimes it takes one or two deals to tip the scales.”
One recent trade and another in the works have raised eyebrows — both with prices above $300 per square foot, a level never before seen in Nashville.
In recent weeks, bids topped $330/sf, or $28 million, for an 85,000-sf property on Charlotte Avenue, an emerging growth corridor within a mile of Vanderbilt University. Holladay Properties of South Bend, Ind., redeveloped an industrial site into a six-building complex featuring loft-style space catering to “creative” firms. Completed last year, it’s fully leased, with just over half the space occupied by software contractor L3 ForceX — an example of a growing technology presence in Nashville. Indications are that multiple institutional investors put in bids, driving the aggressive pricing, and that an unidentified fund manager has been selected as the buyer. Cushman & Wakefield is advising Holladay.
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The Race to Nashville Real Estate
Sean Bannon, head of U.S. real estate at Zurich, said the firm began chasing deals in Nashville last year as it expanded its list of targeted markets to 22 from 14. He noted that capitalization rates in Nashville can run 150 bp or more above similar trades in New York or San Francisco.
“The gateway markets have gotten super-competitive,”
Bannon said.
“Everybody shows up for the same kinds of deals. We picked some of these secondary markets just so we don’t have to stretch for the Nth deal in a more limited and concentrated set of markets to get money into the ground responsibly.”
He noted the city’s strong demographics and job growth, and the diversity of its economy. “You know it as the home of country music, and that is great. But look at the healthcare companies and white-collar job growth,” Bannon said. “The occupancies have been great, the rents have been great. We’d be happy to grow in Nashville.”
Institutional investment activity has increased in the past two years, according to an analysis of JLL data of office trades worth at least $10 million. From 2010 to 2014, institutional investors accounted for an average of $86.4 million, or just 24%, of Nashville’s annual sales. But in 2015 and 2016, 44% of the total, or $705 million, went to institutional buyers.
The Nashville metropolitan area’s population has grown 12% since 2010 to nearly 1.9 million, according to U.S. Census estimates. Its unemployment rate has dropped seven times faster than the national rate during the recovery, according to JLL, falling to 3.8% at the end of March.
Until recently, Nashville barely registered in the tally of office sales worth at least $25 million. From 2007 through 2011, there was a paltry total of $230.7 million in such trades, an average of $46 million per year. But over the past five years, annual sales have averaged $428 million. Market pros believe Nashville has now reached a tipping point and momentum will build.
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ABOUT AUTHOR
Phillip Harrison
Phillip is an commercial real estate broker specializing in investment sales and leasing in the Nashville market in office and industrial investment sales and leasing. Phillip represents clients in various sectors, including tech, start-up, and not-for-profit. As a commercial real estate advisor, Phillip’s goal is to help his clients find flexible real estate solutions for both their short and long-term needs. His training and experience in property management at CBRE, Inc. in their Asset Management Division ensures his clients interests are protected and that optimal deal terms are achieved. Phillip began his career in real estate as a real estate specialist with the United States Corps of Engineers and now he focuses on office and industrial properties. Check out more of Phillip's content on the MGM Commercial YouTube channel.