Land deals are unique. They take time. However, expectations often are easier to manage. Once you find the property and sign the contract, build-to-suit developers are experienced to take it and run with it. The clarity of the assignment – to find land that meets specifications and criteria, and then execute – is straightforward.
Compared to existing retail shopping center space, pursuing land opportunities can be easier as it is clear what is in place on the property. In a shopping center lease, a tenant must fit in with whatever utilities and restrictions are in place, and possibly accommodate a wide range of exclusions. This makes land deals very attractive.
In addition to the lack of flat land in Nashville, a bedrock of limestone starting 5 feet underground poses quite the challenge for new development. There is no simple way to develop – you need dynamite. Because this barrier to entry is challenging, developers often look for larger parcels with the intention of selling off the additional land area after completing site improvements. Pad-ready sites increase profitability too, and everyone loves that.
Rising interest rates also affect developers as they adjust tenant rental rates. Higher rent does not equal more sales, and the rate has to be a certain level to retain tenants. Building with a six percent construction cost affects every aspect of the deal and drives down land prices, as the easiest metric to change is the price of the physical property. Nashville has had inflated land values, especially in the suburbs, so this adjustment is not a bad thing.
Most land deals start with a tenant, who then brings in a developer. Our tenants are in control of their deal structure. While tenants like Buffalo Wild Wings like to lease their locations, we have other tenants who prefer to purchase. Last year we started working with Raising Canes, who typically buy or ground lease their locations. As we tour the market with Portillo’s, we again are working with a client who prefers to buy.
Our market is in the middle of an adjustment as we see new entrants to the area. National and regional chains are expanding, including Chase, Whataburger, Panda, Portillo’s and Raising Canes, and these are typically pad site buyers. The announcement by In-N-Out Burger to build a 100k SF East Coast Headquarters in Nashville and Franklin, and to open 2 stores, has increased the momentum of other tenants. And 2% overall market vacancy in shopping centers remains a contributing factor to every decision.
While it’s not a land grab, per se, incorporating a land investment strategy into any tenant expansion plan is something to consider. For assistance navigating the Nashville land market, the Centennial team is always here to help. Contact Joey Valenti firstname.lastname@example.org to begin the conversation.