Navigating Nashville’s Unique Commercial Real Estate Market in 2024

I’m often asked, “how are things in the world of commercial real estate?”  My answer is good, but it’s a unique market.  Let me explain.

Traditionally, the real estate market follows four defined market cycles: Recovery, Expansion, Hyper Supply and Recession.  For the past 10 plus years Nashville and middle Tennessee have been in the Expansion cycle.  In this phase, the market sees increased demand, low vacancies and rising rents.  Economic growth is robust, and new construction is strong as developers and lenders respond to the increased demand.  Property values increase and there is positive sentiment in the market.  That definition accurately describes our market.  Even during the covid years, except for office space, the Nashville market continued to expand. Demand stayed strong, rents and property values continued to rise showcasing Nashville’s appeal and its strong diversified economy. 

In November 2022, the Federal Reserve started raising interest rates to curb the out-of-control inflation.  It started with 75 basis points in November 2022, 50 basis points in December 2022 and 25 basis points in February, March, May and July 2023.  The Federal Reserve has held these higher rates level for the past year.  Historically, interest rates and property values have an inverse relationship.  If interest rates go up, prices tend to come down, and conversely if interest rates go down, prices tend to increase.  With the rise in interest rates, we have not seen a corresponding significant decrease in prices and that leads to my “… but’s it’s a unique market.” 

Demand for retail and industrial space remains strong: both leasing and sales to owner users.  Businesses and families continue to relocate to middle Tennessee.  There is enough demand to fill the vacant space as it becomes available.  The vacancy rate for retail is approximately 3%.  Of that 3% at least half of it is obsolete or not well located within the market.  The true vacancy rate for well located class A and class B space is probably 1.5%.  Over the past 24 months, approximately 1.4 million square feet has been added to the market.  This includes the new Tanger Outlet and several new Publix shopping centers in Sumner, Wilson and Rutherford counties. Despite these additions, new retail construction has been relatively modest compared to pre pandemic levels.

Because of the continued demand and the limited amount of new supply, prices have remained strong.  The reason for the lack of supply has been the absence of available and property zoned land, high construction costs and the increased interest rates.  Rents remain steady but have not increased at the level of the past five years.  What we’ve seen throughout 2023 and continuing into 2024 is a slowdown in the volume of transactions.  The slowdown is in both investment sales and leasing. 

The challenge with investment sales is prices remain strong due to the lack of properties available for sale.  Investors holding properties with low-interest rate loans are reluctant to sell due to the disparity in loan rates.  For example, if I own an investment property with a 3.5% loan and it has appreciated in value, if I were to sell it, and attempt to purchase a new property with the proceeds of the sale, I could not get the same return on investment because of the higher interest rates in todays market.  Why would I sell my property that has a loan with an interest rate of 3.5% only to get a new loan at a 7% to 8% interest rate?  I wouldn’t and that is the reason for the lack of supply in investment properties for sale.  As these low-interest rate loans mature over the next few years, the critical question will be whether the properties can maintain their cashflows with the higher interest rates.  That is the million-dollar question that has yet to be answered.  What we do know is billions of dollars are laying in wait should investors choose to sell instead of refinancing when their loans mature. 

So back to my answer, the market is good, but is unique due to continued demand, lack of supply, and higher interest rates.  I’ve watched these cycles for forty years.  We will have a recession at some point where there is too much supply and lack of demand.  There will be a recovery and expansion as the cycle will repeat itself again.