Q4 2015 Office Insight

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A historic quarter for a historic year: sales prices, sales transactions, rental rates, vacancy rates, construction levels, commute time

q4 15 overview table

Property sales soar past the crane-filled horizon

Over $820 million in office investment transactions closed in Nashville in 2015, making it the most active year ever and representing a 35.4 percent increase from last year. In this 18-hour city, outside investors are driving local real estate investment base prices upward. Prices per square foot are also hitting new highs, which is pricing local investors out of the market. During the fourth quarter a historical investment was made by San Diego-based Southwest Value Partners: the purchase of the nearly 15-acre, one million-square-foot, Downtown Lifeway campus for $125 million. These high price tags, combined with historically low vacancy rates, have pushed rental rates to unforeseen highs. Citywide, investment base prices have increased and rents have been pushed upwards with no relief in sight.

Traffic congestion, a marker for population and economic growth

As a commuter, congestion usually lends itself to large scale frustration. According to the U.S. Census Bureau, the average commuter in Nashville spends over 26 minutes en route to and from work. Reframe those minutes and that frustration: congestion as tight as Nashville is experiencing affirms its place as a NERDS city. Nashville’s population growth is well above national average, and it’s vacancy rates and rental rates are well below. In the short term, congestion speaks to the fact that Nashville is rapidly growing. In fact, by 2040, over one million people will move to the area. Music City’s population expansion drives the economy upward. Congestion in this sense can be termed a positive marker for growth. If transportation challenges are not addressed now, tenants will face a long-term tradeoff between amenities usually associated with the Downtown submarket or the convenience usually associated with the suburban markets. Mobility is critical for ensuring Nashville’s future.

2017 leasing activity may be the barometer for market outlook

For the fifth consecutive quarter, vacancy rates hit an all time low, landing at 6.7 percent compared to last quarter’s 7.3 percent. Vacancy rates are expected to continue declining until new product arrives in 2017. With over 2.5 million square feet of office under construction, Nashville is experiencing a building boom. Product delivering in 2016 is 73.4 percent preleased, whereas product delivering in 2017 is roughly 41.3 percent preleased. Over the course of the next year, 2017 preleasing activity will be indicative of what Nashville can expect for the future growth of the market. If leasing activity in new construction stays as tight as it currently is, vacancy rates will most likely continue to decline, despite the arrival of new product to the market.

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