By Joey Valenti
The Nashville rental market is still going strong, with demand showing no signs of slowing down. The current vacancy rate is holding steady at 3.5% to 4%, though that rate is a bit of a misnomer, as the space that is actually usable has a more aggressive vacancy rate around 2%.
While in a market such as Nashville there are always new projects in the works, including power centers and great spaces for small retail businesses, most in the local pipeline are currently are about two years from completion. There’s been a slowdown of office and mixed-use construction, with projects that were previously slated now on hold. Projected urban, downtown supply of retail is much further off than anticipated.
The basic law of supply and demand continues to shape our marketplace. Construction costs were relatively stable for twenty years until supply chain issues affected the market during the Covid years. Unfortunately, once costs went up, they stayed there. Labor and materials costs remain high, with long-term repercussions in commercial real estate. When it costs more to develop than tenants can afford to pay in rent, there’s no point in building. And in a desirable market like Nashville, we already have outsized demand. Pricing is further driven by too many players vying for every available space.
20+ years ago, when I started in the business, leases were signed at between $25 to $28 per square foot for premiere locations. Compare that to today, when these same and comparable spaces go for $55 to $60 per square foot. For those who signed a five-to-ten-year lease agreement during or post-pandemic, the big question is whether those leases roll over or there be a flush of potential vacancies if building costs continue to remain high.
Additional Covid aftershocks will start in the next year or two as the impact unfolds for those with five-year mortgages who will need re-finance. Will owners put in the cash needed, or will we see a new influx of bank owned properties? Will tenants be able to absorb the increased rent charged by owners to pay their higher mortgage rates?
Corrections in the real estate market are anticipated- and needed- but hopefully with as little damage as possible for smaller businesses. No one is hoping for disaster, but the retail market has some adjustments to make over the next several years.
There are fewer corporate restaurants and entities that are expanding at a large clip. Larger corporations have responded to the new realities by considering alternate strategies – prioritizing different markets altogether, looking at locations in emerging sub-markets outside of Nashville proper, sitting patiently on the sidelines until the right location is available.
Smaller franchisees have been taking a closer look at their single store spaces, often slowing their projected growth and using marketing to expand the radius they serve from each location. Counterbalancing rising costs by increasing sales isn’t always a viable solution as in the current ecosystem, additional rent doesn’t mean additional profit.
The ability of an established broker to navigate local landlord relationships for securing space in this competitive landscape cannot be overstated. Much of the future in the small restaurant retail world (2,500 sf and smaller) will depend on franchisees. Landlords prefer credit tenants. While there are a handful of credit franchisees who own 300-500 restaurants, the vast majority are not in this category.
How the process usually works: a franchisor reaches out to a broker to help their franchisee find a good location, as there is an increase in new franchisees in the market. That engagement starts before the broker is made privy to the quality or profitability of the franchisee. Especially in the food industry this can be very interesting, as operating a restaurant is a very different experience than other franchise models.
In Nashville, the main reason for the slowdown in this industry is the lack of available space rather than business failures. The only reason we don’t see more market entrants is because they can’t find space. So what do we do?
· We educate our clients on the market realities.
· We watch for concepts that can have been around for decades that are slowly dying off. In those situations, an opportunity to backfill space can emerge.
· We apply the evolution in office structure (Highwoods has led some innovation here, selling office suites in office buildings with full scale common area amenities access), exploring correlative ways for retail to evolve. On occasion, an office conversion can offer some space alternatives to non-traditional retail.
· We stay abreast of national and local retailer health, and drive markets. Every shift in the marketplace can present an opportunity for our clients.
· We maintain relationships with owners, developers and governmental leaders – and set the groundwork for moving forward when the right space opens up for our clients.
As we prepare for adjustments in the retail real estate landscape over the next several years, our team at Centennial Retail Services is already working to prepare clients for what may come. If this sounds like the insight and attentiveness you’d like to see from your broker, give us a call.
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