Music to Our Ears: Nashville’s Office Sector Continues to Soar

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Fueled by a fast-growing economy, Nashville’s office sector once again sizzled in the third quarter, and the market for high-end space in the city’s booming Downtown grew tighter than ever. The vacancy rate for Class A office space in the metro area continued its steady drop, reaching 3.7 percent, down from 4.4 percent in the second quarter and 5.4 percent six months earlier, according to JLL’s Nashville Office Insight Q3 2014 report. The rate represents an especially stark contrast to the same period in 2013, when Class A vacancies stood at 6.5 percent.

Key Market Indicators

Downtown remains the focal point of the Nashville office market, and its Class A vacancy rate reached an all-time low of 4.6 percent in the third quarter, a nearly full-percentage-point decrease from the second quarter mark of 5.5 percent. The number of large blocks (25,000 square feet and above) of quality space in Downtown continues to decrease.

Underpinning the ongoing improvement of Nashville’s office sector is the area’s growing economy. Unemployment in metro Nashville currently stands at 5.3 percent, an improvement of 1.4 percentage points from one year ago. Furthermore, Forbes named the area’s economy as one of the 10 fastest-growing in the country.

As for investment sales, Nashville continues to attract the attention of global investors as a result of cap rate compression in other markets.

“Class A space is at a premium, and we are trending towards an even tighter market,” said Bo Tyler, Vice President of Office Leasing in JLL’s Nashville office. “Because of this, we are working with clients about making strategic growth decisions that extend further out into the future in order to stay ahead of the market.”

Market Rates and New Developments

In general, rents are increasing across the metro area, with the strongest postings in the Class A market. The West End, Green Hills/Music Row, Cool Springs, Brentwood and Airport North submarkets all posted rate increases in the third quarter.

As a result of the white-hot demand in Nashville, many of the new Class A, multi-tenant office buildings in the city already have signed major leases at substantial rates. The asking rent at 1201 Demonbreun – Eakin Partners’ new Class A office building in the Gulch that is slated for completion in 2016 – is $35 per square foot. The Neal & Harwell law firm, William Morris Endeavor and Sony Music are among the companies that have signed leases at the building, bringing its leased rate to almost 40 percent two years before it opens.

Market Street Management is asking for $35 per square foot at Gulch Crossing, which the firm is developing in the Gulch, and Spectrum Properties is asking for $28 per square foot at its One Franklin Park, located in the Cool Springs submarket. In the third quarter, Acadia Healthcare became the first tenant to sign a lease at One Franklin Park when it inked a deal for 54,000 square feet.

For more exclusive JLL research, visit the JLL Tennessee website and follow @JLLNashville on Twitter.

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