Nashville’s office market is still hot like its hockey – though we lost a couple points

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  • The office vacancy increased slightly for the third consecutive quarter – by 50 basis points.
  • The office market is currently tied with San Francisco for the second most occupied market in the country.
  • Rent declined marginally at 1.2 percent, landing at $25.46.
  • 7 million square feet of new product is projected to deliver by Q4 2017; 73.0 percent of this product is already pre-leased.

Smashville’s score shows that tenants want new Class A space in the urban core. As new buildings come online with high pre-leased percentages, around 67.5, second generation space is not absorbing as quickly. As a result, Nashville vacancy has increased for the third consecutive quarter, witnessing a marginal 50-basis-point increase between Q1 and Q2. Midway through 2017, Nashville vacancy sits at 8.6 percent, which is 100 basis points below the city’s near-term historical average. Nashville’s vacancy has averaged around 9.7 percent over the past 10 years.

Demand for new construction will continue to make the score of this real estate cycle. Class B space in the urban core (Downtown and Midtown submarkets) holds the highest class vacancy in the market – at 12.0 percent – compared to a suburban Class B vacancy of 9.6 percent. Meanwhile, urban Class A vacancy continues to decline, sitting at 5.1 percent, and Class A suburban vacancy rose slightly to 7.8 percent. As a by product of shrinking urban Class A vacancy and growing Class B vacancy, Q2 2017 witnessed a minor rental decline of 1.2 percent. Market rents now sit at $25.46. Markets with small inventories and vacancies, such as Nashville, tend to have rents that react more sharply to fluctuations in vacancy. Over the course of the next couple quarters, rental trends will help forecast where the market is headed.

Outlook

Vacancy is the highest it has been in 2.5 years, which will usher the market into a more neutral stage. Leasing activity for the remainder of the year looks active; however, the sheer number of deals in the market is shrinking. A couple of large tenants are circling the market, so even with a reduced number of deals, the square footage may keep up with leasing over the past two years. Hopefully, Smashville will hook them with our team spirit!

“We have “smashed” records in Nashville this real estate cycle – just as our Predators have. Music City ranks in the top 3 most occupied office markets in the country. While we can’t know with certainty how much longer we will be in high growth mode, nationally a shift is occurring. Vacancy has risen for 3 consecutive quarters across the country, and this same thing has happened in Nashville. Currently, Smashville remains Landlord favorable, but as we move into 2018, we may shift to a more neutral position. ” Hensley Loeb, Research Analyst, TN Markets

Visit our Nashville Research Group page for additional market insight: http://www.us.jll.com/united-states/en-us/Research/US-Nashville-Office-Insight-Q2-2017-JLL.pdf?1bb1092f-9492-43cb-9d47-6b2e67509e2d

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