Construction cannot keep pace with increasing demand
The third quarter is another that weighs in favor of Nashville landlords. For the fourth-consecutive quarter, office market vacancy rates have continued to decline at a steady 10.3 percent per quarter. The market hit yet another historic low, landing at an overall 7.3 percent and at 2.8 percent for Class A, compared to last quarter’s 8.5 percent and 3.3 percent. Vacancy rates are expected to continue falling until enough product comes online; however, as fast as new buildings come on the market, they are leased. MarketStreets’ 205,000-square-foot, Class A office building, Gulch Crossing, has been the only delivery this year, and despite its historic, high-market price tag of $37.50 per square foot, the building is already 86 percent leased. The Gulch Crossing story demonstrates the height of demand in the Nashville market.
New product provides a silver lining
To the relief of the office market, there are ten buildings and a total of 2,035,446 square feet under construction. Nashville has not seen this sort of construction activity in its history. With an average $34.65 per square foot for new office space, rental rates for these buildings will lead the way for Nashville’s Class A rental rates to surpass those of larger markets. Product is already 81.9 percent preleased. Downtown will see the largest growth, gaining 1,274,000 square feet. The next closest submarket, Brentwood, will gain 487,902 square feet. Next quarter, Midtown will receive the first of these deliveries with the completion of oneC1TY Building 6, which will add 110,000 square feet of Class A office space to the market. It is already 97 percent preleased.
The elephant in the room: parking
With an average of 80 people moving to Nashville per day, parking is a central barrier to Nashville’s growth. According to the Nashville Business Journal, there are 35,000 people working downtown – where there are only 20,000 available spaces. Annual tourism has reached roughly 12 million visitors per year. While this is a powerful sign for economic development, tourism adds to the downtown parking disparity. Developers are faced with the dilemma: parking structures vs. office buildings. The metro government and the Metropolitan Development and Housing Agency have committed to a combined $45.5 million in parking improvements. By early 2017, the Nashville Public Library garage will create 350 more spaces, and the parking garage development at the intersection of 5th Avenue North and Church Street will add another 1,010 spaces. These improvements will provide a strong start to confronting the parking problem by increasing volume by roughly 6.8 percent. In the suburban market, parking is equally as challenging. Existing buildings are no longer capable of meeting tenant parking demands for higher density options. It is time to address the elephant in the room.