Nashville’s economy and office market are among the strongest performing in the nation. Office-using employment growth has been exceptional, averaging about 40 percent higher than it was at the height of the last property price expansion, making for one of the strongest office-job recoveries in the nation. Led by healthcare companies and other professional services firms, white-collar job growth has fueled the robust absorption of office space and pushed building occupancies to high levels.
Strong demand earlier in the post-recession growth allowed Nashville’s vacancy rate to be the lowest in the country in 2016. As developers responded to the pent-up demand with new office construction, vacancies have increased. Even so, at a market average of 6 percent, office vacancy in metropolitan Nashville remains below the market's historical and national average. The next office supply wave set to hit the market over the next few years will further test how much new supply the Nashville office market can handle.
Among the 50 largest metropolitan areas in the country, Nashville has the largest percentage of new office space underway, at 4.5 percent of the total market size. San Francisco is second at 4.4 percent, followed by Austin, Texas with 4.1 percent and San Jose, California, with 3.7 percent.
About half the 4 million square feet under construction in Nashville is located downtown, where high-end buildings have recorded some of the strongest -- and most stable -- rent growth since the recession. Office rents for newly constructed office buildings in downtown Nashville have surpassed $35 per square foot. Other Nashville submarkets seeing a sizable amount of new office construction are the suburban areas of the West End at 750,000 square feet and Cool Springs, with 580,000 square feet.
While demand for new office space in Nashville has been strong throughout most of the cycle, a majority of the new projects underway are being developed on a fully speculative basis with little or no preleasing. Almost 70 percent of the new supply under construction in Nashville has yet to be leased, which is the second-highest as a percent of the total office market size, just behind Orange County, California.
Given the large amount of available office space for a market this size, and a recent slowdown in the pace of job growth, there are some concerns the office market may face elevated vacancy levels. However, given their current level in the single-digits, office vacancies are not expected to increase far above the Nashville market's long-term average and are forecasted to stay below the national average.
CoStar Market Insights provides a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 390 metro areas, with a granular understanding of the projects, players and economic trends that move these markets. |