Nashville’s sizzling office market showed no signs of slowing down in the first three months of 2015, ending the first quarter with a 7.5 percent overall vacancy rate, a near-historic low, according to JLL’s new Nashville Office Insight Q1 2015 report. The overall average direct asking rent climbed slightly from the preceding quarter, to $22.35 per square foot, still well below the national average.
In particular, Nashville’s Class A office market is thriving. The market ended the first quarter with an all-time low vacancy rate of 3.3 percent. The intense demand for the properties pushed the average Class A asking rent to $25.26 per square foot, up from $24.66 per square foot in fourth-quarter 2014.
“The office market in Nashville has enjoyed an extremely strong stretch and is poised to continue to thrive in the months and years ahead,” said Bill Adair, Vice President of Office leasing in JLL’s Nashville office. “It remains one of the fastest-growing cities in the U.S., and with its low cost of living and abundance of skilled millennial talent, the city’s tech, music, healthcare and education industries should continue to expand and increase demand for office space.”
Landlords are benefitting from the lack of new supply. No new office space was delivered in the first quarter, and total office inventory in Nashville remained at 33 million square feet. On the other hand, investors are repositioning several existing buildings to Class A standards for well below the cost of new construction. One prime example is Elmington Capital’s more than $2 million investment in the office space above the Renaissance Hotel in downtown Nashville. The 100,000-square-foot office property has been rebranded as CitySpace and will feature upgrades to all common areas, including elevators and restrooms. UBS Tower, L&C Tower, the Bank of America building and Palmer Plaza are undergoing similar renovations.
The positive dynamics of Nashville’s office market earned it a place in JLL’s recent “Office Perspective: The NERDS” report, which spotlights five U.S. office markets poised to grab the attention of investors and occupiers from across the nation because of their below-average vacancy and rental rates as well as their above-average job growth.
On the investment sales front, Chicago-based Vanderbilt Partners highlighted the first quarter with its $50 million purchase of the 243,000-square-foot Palmer Plaza in the West End submarket and the announcement that it’s under contract to purchase Duke Realty’s Nashville office portfolio, which totals 14 buildings and more than 1 million square feet.
Looking ahead, the outlook for Nashville’s office real estate market remains bright. Nashville remains in the top fastest growing cities in the U.S. for 2015 and the population for the metropolitan area is expected to reach 2 million by the next census in 2020. The technology, music, healthcare and education industries will continue to thrive and draw new talent to the city. The technology sector alone has grown over 43 percent over the last ten years in Nashville, according to Forbes.
The way Nashville has grabbed the attention of the U.S. tech community bodes particularly well for the future of its office sector. The city is recruiting and training tech talent though initiatives like the Nashville Software School and WorkIt. According to a Fortune magazine report on study from tech job site Dice.com, Nashville is the second fastest-growing tech job market, having experienced a 24 percent increase in tech jobs last year.
Furthermore, Google has selected Nashville as one of seven inaugural cities to participate in its Google for Entrepreneurs Tech Hub Network, which will help emerging local tech scenes across the country better connect with each other and resources at Google. The company also named Nashville one of four metro areas to get the ultra-high-speed Internet service known as Google Fiber, which will further establish Nashville as an advanced tech city.
While the pipeline of future projects continues to grow, no new immediate inventory will continue to amplify the shortage of quality space options. The joint venture between developers Hines and CB Ragland announced their plan to add 350,000 square feet of Class A office space in the SoBro area of Downtown. Developers Oliver McMillan and Spectrum Emery Inc. are moving forward with plans to redevelop the Nashville Convention Center which is expected to include 250,000 square feet of office space in the Downtown submarket. While these projects will help balance supply and demand in the long-term, Gulch Crossing’s delivery of 205,000 square feet of Class A office space later in 2015 will be the only answer for the immediate need of supply.