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Wondering why there's so much talk these days about the developmental viability of the Nashville commercial marketplace? Those with their eyes fixed on this middle Tennessee treasure know why. "Nashville is characterized by a momentum and a resiliency that makes it perfect for new development right now," says David Lawson, vice president and director of commercial development for Dallas-based Archon Group. His company, which also has offices in Washington, D.C., and Los Angeles, has been keeping a close eye on the Nashville market for several years now, and likes what it sees. Archon Group purchased One American Center, located in the city's premier West End market, three years ago, and now has under way the construction of Two American Center. "With the recovery the nation has seen in real estate and escalating rents, we saw property values trending up and proceeded with the design and engineering of Two American Center long before most other developers were even thinking about it," Lawson says.

Nashville is a city worthy of such development, Lawson continues. "Nashville held its own during the real estate recession of the early 1990s," he says. "And its economic backbone, the health care management services industry, is booming. Other industries, such as the city's banking component, give it additional strength and diversity."

The last few years have been bright ones for the Music City. 1997, in particular, was a healthy and vibrant year for the Nashville area, although economic growth slowed in comparison to the last few years, according to Julie Shinabery, marketing analyst with Trammell Crow Co., Brentwood, Tenn. "Population continues to grow, but employment growth and housing starts have tapered off," she says. This economic slowdown has not occurred everywhere in Nashville, however. Specific areas within the Nashville MSA continue to attract attention for their economic vibrancy, according to Shinabery.

"The combination of slower employment growth and an increase in available labor supply should positively impact business relocation," Shinabery says. The trend was evident in Nashville last year, she says. Borders Group, Rayovac, American General Life & Accident Insurance Co., Deloitte & Touche, Nextel Communications and SunTrust Service Corp. were just a few of the many companies that relocated to, or expanded operations in, Nashville."

Construction breaking ground Construction activity continues to rise dramatically in all real estate sectors, too. The value of metro Nashville building permits surpassed $1 billion in 1997 and shattered all records, according to Shinabery. The statistic was due in part to the $185 million permit for the NFL stadium that is to be built in the city, she says. And the $1 billion market is expected to be topped again in 1998 with the help of Gaylord Entertainment's new $200 million megamall. "Such vast construction, which is occurring in all commercial segments, could result in overbuilding, and thus potentially produce higher vacancy rates and lower average quoted rental rates," Shinabery predicts.

Opportunities in the Nashville area still exist, but developers now are showing signs of caution. "We are optimistic that the local real estate markets will continue to stabilize over the next few years, barring significant overbuilding, drastic changes in lender behavior, increases in interest rates or a national recession," Shinabery says.

Development appeared to be the new trend for the Nashville MSA in 1997 and has continued throughout the first half of 1998, according to Cindy C. Morse, CCIM with the Investment Services Group of Centennial Inc., Nashville. More than 600,000 sq. ft. of new office space was completed by year-end 1997 and a proposed 1.13 million sq. ft. is planned for 1998 through 1999. Most new office construction, a whopping 70%, has been concentrated in the Brentwood/Cool Springs submarket, reports Morse, with the exception of the aforementioned Two American Center being developed by Archon Group.

"The Brentwood/Cool Springs submarket will more than likely continue to lead the Nashville MSA in absorption throughout 1998," Morse says. She does, however, expect investors and developers to exercise some caution since annual absorption for the entire Nashville MSA has been declining slightly since 1995. As of March 31, 1998, the overall vacancy rate for the Nashville office market was just 5.9% . A softer market may result, too, Morse says. "With the rate of construction as high as it is now, particularly in the Brentwood/Cool Springs submarket, there is a possibility of a softening in the market by year-end 1998," she says.

Industrial market on a steady rise Like the city's office market, Nashville's industrial market is breaking records for new development and absorption. For the fifth consecutive year, the market for leaseable industrial space in metropolitan Nashville posted strong growth during 1997, and 1998 already looks like an equally banner year. Occupancy increased last year by 800,000 sq. ft. and new buildings completed totaled more than 1.8 million sq. ft., according to Martin Meyer, industrial specialist with Colliers Turley Martin Smith & Co., Nashville.

"For the last two years, however, new construction and conversions of owner-user buildings to multitenant use have outpaced occupancy growth, and market vacancy rates for leaseable space have increased," Meyer says. Overall, the vacancy rate at year-end 1997 was 12.5%, according to Meyer, an increase that was due primarily to vacancies in newly completed bulk construction. However, the space requirements of firms still seeking new locations in the market suggest that much of this space will be filled during 1998. Companies such as Kaman Music Group, which signed a lease for 100,500 sq. ft. earlier this year, and Nortel and Unisource, both seeking expansion space, will help to reduce this statistic.

New construction in the city's industrial market accounts for the growth in the supply of industrial space. "Although the 1.8 million sq. ft. of new buildings constructed in 1997 was less than the 2.3 million sq. ft. total of 1996, construction activity, especially in the vibrant southeast quadrant, has increased steadily during the last five years," Meyer says.

Retail market consistently developing New construction also continues in Nashville's retail market, where the delivery of new speculative space exceeded 400,000 sq. ft. in 1997, according to Shinabery. "Based on current and expected projects, delivery for 1998 is even stronger, as we expect it to total at least 900,000 sq. ft. by year's end," she says. A vacancy rate of less than 6% reflects the absorption of new construction as it is completed, too.

National trends in retail real estate are prevalent here, according to Shinabery. The growth of big box retailers, for instance, reflects national trends as Target, Rooms To Go and Home Depot all have recently opened stores here. Competition also is heating up among grocers with the entry of two new upscale chains to the Nashville grocery market: Harris Teeter opened its first Nashville location last year and Bruno's Inc. opened its first four concept stores between 1997 and the first half of 1998.

Among new retail projects are: Peartree Village, Shops of Maryland Way, Harpeth Village and Cool Springs Festival, all in the Brentwood/Franklin submarket. Significant new construction also is occurring in the Smyrna/Murfreesboro submarket, which is part of the fastest growing county in Tennessee.

"With new construction centered on nonspeculative national tenants, vacancy rates for small shop space should continue to hold at current levels and rental rates should continue to rise," Shinabery predicts.

Multihousing market softens The Nashville apartment market, which peaked in the summer of 1995, is softening somewhat as it begins a descent into the next market trough, according to Brennon A. Fitzpatrick of First Management Services, Nashville. "Nashville's job growth began slowing in 1995 at the same time that an increasing number of new apartment units began entering the market," Fitzpatrick says. Showing strong demand despite lackluster job growth, the market held a 94% to 95% occupancy rate through September 1997, and the fourth quarter proved to be a watershed quarter, with occupancies falling into the low 90th percentile, according to Fitzpatrick. "While street rents are relatively flat, the effect of concessions adds another three to five percentage points of economic vacancy loss on top of the market's physical vacancy loss," he says.

The apartment sales market has remained strong, however. Sales in 1997 were at $94 million, while strong interest in Nashville apartments continues through the REITs, pension funds, syndicators and local investors that have created extremely competitive bidding for any property placed on the market. "In spite of soft market conditions, Nashville still is viewed as an attractive place to invest because of its diverse economy and excellent long-term prospects," Fitzpatrick says.

A mixed-use development incorporating office, retail and hotel space is being added to the inventory in Nashville, too. Hines, an international real estate firm based in Houston, is developing the 600,000 sq. ft. 2525 West End at the corner of West End Avenue and Natchez Trace across the street from Centennial Park in Nashville. Construction is expected to begin by year-end 1998, with initial occupancy scheduled for the fourth quarter of 1999, Ann Kifer, vice president of Hines, says.

"The West End corridor is a vibrant, growing area in Nashville, a city which has seen overall growth escalate in the past few years," Kifer says. "New projects such as this renew the commitment developers like Hines have to the area."

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