Job growth that surpasses all U.S. counties illuminates office demand
Nashville’s Williamson County, home to the submarkets with the consistently lowest vacancy rates, witnessed a 6.5 percent increase in job growth in 2015, outstripping the largest counties in the country, which averaged an increase of 1.9 percent in employment growth. The sector with the largest employment increase in Williamson County occurred in professional and business services, which bodes well for office leasing. Davidson County and Rutherford County were also above the national average increasing employment by 3.3 and 3.9 percent, respectively. According to the Tennessean, new business filings increased by 7.2 percent, marking it the 17th consecutive quarter for business growth. As employment growth continues in Nashville, new office options become few and far between. The overall market vacancy rate at the end of Q1 2016 is 6.3 percent, down from last quarter’s 6.7 percent. As expansions, relocations and subsequent job growth continue leasing activity will continue to rise, so long as office space can accommodate the stunning growth trends.
Nashville to grow more than any other office market in the country
With 3,371,446 square feet of office under construction, Nashville has the most construction underway in the United States as a percentage of its inventory. For the six U.S. markets with inventories between 30 to 40 million square feet, the average construction as a percentage of inventory is roughly 2.5 percent. Nearly a dozen other markets also have greater than 3 million square feet under construction; however, Nashville’s projects represents 10 percent of its inventory, positioning Nashville to grow more than any other office market in the country. Two buildings delivered this quarter: 35 Music Square East (95,000 square feet) and Mallory Park Phase I (39,333 of 87,101 square feet complete). 35 MSE came to market 81.5 percent leased upon delivery and Mallory Park Phase I was 100 percent leased upon delivery. The 17,911 square feet remaining from these deliveries will not add sufficient relief for demand.
Spec development signals positive market outlook
Nashville has not traditionally been a market to build speculative buildings. Historically, projects have required preleasing before construction begins; however, Nashville’s construction trends are changing. 7 of 16 projects are speculative developments in Nashville. This upward trend in speculative development can be attributed to developers’ positive outlook on the market. Economic expansion is lending itself towards increased rental rates and a vacancy that is nearing a cyclical low. Rental growth has continued at 5.0 percent over the past 12 months. Rent landed at $21.68 this quarter, and even more appealing to landlords, the rental rate average for new product is $33.88. The increasingly less vacant market has created a sufficient supply-demand imbalance. With only 1,271,035 of the 3,371,446 square feet under construction available for deliveries through 2018, speculative developments are coming online to meet market demand.