Pictured: Korean Veterans Blvd Bridge in Nashville, Tennessee
Nashville, the capital of Tennessee, is currently America’s tightest office market and rental rates are likely to rise further, driven by demand from the technology and healthcare sectors, according to JLL.
Based on JLL’s data, tenants are looking for a total of 2.4 million square feet of space. Meanwhile, 2.6 million square feet of new office space will be available by the fourth quarter of 2017. However, about 64.6 percent of this new office space is pre-leased.
“We’re still at a point in the cycle where Nashville rents have room to grow,” said JLL’s Director of Office Research Scott Homa. “It’s the tightest office market in the country in terms of vacancy, and supply-demand fundamentals suggest landlords can continue to control pricing.”
Rental rates in the area have risen by 9.3 percent quarter-over-quarter. Direct average asking rent this year has increased by 218 basis points, from $23.59 per square foot to $25.78.
Strong overall business growth has helped to boost office demand in the metropolitan area. Tennessee posted an 8.7 percent gain in the number of new business filings in the first quarter of this year, compared to the same period a year ago. The increase marks the 22nd consecutive quarter of growth, according to a report from the Secretary of State’s office. The state’s unemployment rate at 3.6 percent is below the nation’s average of 4.6 percent.
Nashville is among areas that have seen growth in the technology leasing market, according to JLL’s 2016 U.S. Technology Outlook report. Two sectors – the automobile and health care industries – have spurred the city’s tech growth. Across the U.S., the technology sector has captured the largest share of leasing volume in the first quarter of this year at 24.2 percent. The financial sector took the second-largest share at 14.2 percent.
“There is a limited stock of quality product available,” says Homa. “Many tech companies are looking to spaces that aren’t necessarily new. They are often looking for Class B or C buildings that they can convert into creative office space to fit the vibe and culture of their company.”
“With such low vacancy, tenants are becoming more adaptable in their site-selection efforts,” he adds.
Another driver of office demand is the city’s growing healthcare sector. Nashville’s $78 billion healthcare industry is the state’s largest and fastest growing employer. According to Health Care Industry Nashville MSA 2015 report, a total of 15 publicly traded healthcare companies have chosen Nashville as their headquarters in 2014, and seven of the nation’s 13 leading for-profit acute care hospital companies are in Nashville, controlling approximately 40 percent of investor-owned hospitals in the country. In Tennessee, one in every 11 new jobs is projected to be in healthcare by 2022.
Driven by current strong demand, construction of offices in Nashville has gathered pace with office inventory in suburban areas registering at twice the volume of supplies in urban regions.
The uptick in suburban vacancy marks a shift in the marketplace. As a result, suburban and urban vacancies are the closest they’ve been since 2008, sitting respectively at 7.7 percent and 8.9 percent, according to JLL’s latest office report on Nashville.
The overall low vacancy rate has limited location options for corporates looking to expand, resulting in negative absorption rates.
However, Homa noted that Nashville’s rent increases still offer a discount relative to many markets around the country, making even the highest rents in the city affordable to many. For instance, Class A office rent in Nashville compares favorably to Silicon Valley’s $46.19 and San Francisco’s $73.44.