Commercial Real Estate and Office Space Market in Tennessee

Tennessee's thriving economy has been making headlines following 15 consecutive quarters of growth (1). This unparalleled growth rate has brought about resurgence in demand for commercial real estate, as outlined in the market snapshot below.

Office Space Market

A recent US census revealed that Nashville is one of the top three fastest-growing cities in the United States, as its gross metropolitan product has doubled the national average and is projected to exceed $100 billion by the end of the year (2). Economic success in the Nashville metro area is reflected in the expansion of the commercial property market, and especially in the trends evident in the local office market, where increased leasing activity and higher rental rates are the main characteristics. In turn, this has helped create the necessary conditions for a surge in construction activity, and in 2015 there were more than 2 million square feet of office space under construction in downtown Nashville and Brentwood (half of which were 100% pre-leased). Vacancy rates in the metro area continue their steady decline and averaged 6.8 per cent in Q2 2015, although for Class A properties they were at a record low of 3.7 per cent. The office market is particularly tight in areas like Cool Springs, Rivergate, Brentwood, and the West End. Direct asking prices average $20.41 / sq ft and are at their highest in Music Row ($27.82) (3).

In Knoxville, the state's former capital, the office market has benefited from the city's diverse industrial base and from its reputation as one of the best cities to relocate or to expand a business. Leasing activity levels boomed in the city during the first half of 2015, reaching a 90 per cent year-on-year increase. Vacancy rates dropped to 11.9 per cent citywide and were lower in Blout County (6.2 per cent) and in the southern suburbs (6.5 per cent). Rental values have been moderately increasing and average $14.49 / sq ft (4).

The Memphis market has attracted significant investment to the city, creating over 1,600 jobs in just one year. Demand for offices properties continues to grow stronger, causing vacancy rates to drop to 21.7 per cent. Researchers at Cushman and Wakefield report that in mid-2015 demand amounted to approximately 850,000 square feet of office space. Average rental values are also on the rise and currently stand at $17.71 / sq ft (5).

Retail and Industrial Space Markets

The retail market in Tennessee relies in the local visitor economy, as this is one of the most visited states in the country and tourism generated more than $17 billion during 2014 alone (6). Retail properties in Memphis have been in high demand following recent company expansions and the subsequent job gains. The restaurant sector has become one of the most important retail tenants in Memphis, as the city continues to gain recognition as a hotspot for internationally acclaimed southern cuisine. Leasing activity is growing at a fast pace in Charlotte, Wedgewood, and 12th South. Rental rates for general retail properties averaged $13.61, $24.23 for space in malls, and $13.13 in specialty centers (7).

Growth in the industrial property market was mainly fueled by the manufacturing and agricultural sectors, which require large amounts of warehousing and distribution space. In Nashville, demand for this type of space has driven vacancy rates down to 5.3 per cent, whereas vacancy rates for flex space are slightly higher (but considerably lower than in previous years) at 5.5 per cent. Nearly 2.5 million square feet are under construction in this market and are expected to be delivered by the end of 2015. There is also a significant amount of build-to-suit industrial space in Nashville, mainly in the southeastern districts and in Wilson County. Direct asking rates average $3.95 (8).

Tax Breaks, Business Incentives and Support

Long-term economic growth in Tennessee is being fostered thanks to an extensive program of grants and business support, which has made available several tax abatement schemes to local businesses. Some of the programs available include:

- The FastTrack scheme, which consists of several funds and assistance programs that can help cover the costs of temporary office space, relocation, retrofitting, and other capital investments (9).

- The Tennessee Headquarters Tax Credit scheme was developed to attract new business to the state and provides assistance to companies that establish or relocate their headquarters to designated Economic Recovery Zones or Central Business Districts within Tennessee's urban centers. These tax credits can be used in conjunction with the local sales and use tax credits program, which can provide tax relief for the value of 7 per cent (10).

Tax credits are also applicable to data centers, the purchase of industrial machinery, and emerging industries (11).

Sources:

(1) http://www.chattanoogan.com/2015/8/25/306898/Tennessee-Economy-Grows-For-15th.aspx
(2) http://www.tennessean.com/story/money/2014/06/20/nashville-nations-next-billion-city/11097963/
(3) http://www.cushmanwakefield.com/~/media/marketbeat/2015/07/Nashville_Americas_Alliance_MarketBeat_Office_Q22015.pdf
(4) http://www.cushmanwakefield.com/~/media/marketbeat/2015/07/Knoxville_Americas_Alliance_MarketBeat_Office_Q22015.pdf
(5) http://www.cushmanwakefield.com/~/media/marketbeat/2015/07/Memphis_Americas_Alliance_MarketBeat_Office_Q22015.pdf
(6) http://www.wsmv.com/story/29825403/2014-was-best-year-ever-for-tennessee-tourism
(7) http://www.cushmanwakefield.com/~/media/marketbeat/2015/02/Nashville_Americas_Alliance_MarketBeat_Retail_Q42014.pdf
(8) http://www.cushmanwakefield.com/~/media/marketbeat/2015/07/Nashville_Americas_Alliance_MarketBeat_Industrial_Q22015.pdf
(9) http://www.tnecd.com/advantages/incentives-grants
(10) http://growth-engine.org/project-assistance/inventives/headquarters-tax-credit/
(11) http://www.communitylift.org/incentives/print.php?organization=Tennessee Department of Economic and Community Development