Research & Forecast Report NASHVILLE | OFFICE 1st Quarter 2019 Nashville Tops Nation for Economic Strength in 2019 Nashville Market SUMMARY STATISTICS In POLICOM’s annual economic rankings report, Nashville ranked the 1Q 2019 Nashville Office Market Entire Market Downtown Suburban #1 metro in the nation for 2019. The report incorporated 23 different Vacancy Rate 7.6% 5.6% 8.5% economic factors to analyze how well a city has consistently grown in size and quality. Three-hundred-eighty-three metros were ranked Change From 4Q 2018 using data from 2001 through 2017. Seattle, Austin, San Jose and Napa (basis points) -20 -70 +40 followed to round out the top five. 1Q Absorption 97,262 82,776 14,486 Historic job announcement numbers, robust construction, and record investment paved the way for a solid start to 2019. Dominant themes New Construction 1.55M 1.55M 0 of 1Q 2010 were strong leasing demand, more job announcements, Under Construction 2.05M 794,000 1.25M investor interest, and new construction. (Square Feet) AllianceBernstein and Amazon are active in the market and have begun ASKING RENTS to lease sizable blocks of spacet, following their job announcements Per Square Foot Per Year (FSG) last quarter that would bring a combined 6,500 jobs to downtown Nashville. AllianceBernstein has leased space in WeWork at One Market Average $27.28 Market Class A Nashville Place, and is working to lease an additional 51,000 square feet $30.38 within the building. Amazon plans to move into two floors at Suntrust Downtown Class A $34.92 Plaza. Another high profile lease downtown was anchor tenant AT&T’s Suburban Class A $30.27 132,099 square foot renewal at Nashville’s iconic Batman Building this quarter at 333 Commerce. The first few months of 2019 also experienced job announcements NEW SUPPLY, ABSORPTION, & VACANCY by companies that have expanded to Nashville in recent years. Philips 3,000,000 15% announced hiring 700 people at its new office, and SmileDirectClub announced it is adding 2,010 jobs over the next five years. The company 2,500,000 13% has doubled its square footage since moving to Nashville in 2016. Nashville remained attractive to office investors during 1Q with 2,000,000 11% Rate Vacancy transactions totaling $433 million, and two high-rise buildings in downtown Nashville topped the list. The sale of UBS Tower was the Feet Square 1,500,000 9% largest of the quarter, purchased for $135,000,000 at $224 per square foot. Philips Plaza sold to Wheelock Street Capital for $111,500,000 for $256 per square foot. 1,000,000 10-year average absorption 7% Tenant demand and developer confidence continues to fuel construction 500,000 5% throughout the market, as multiple projects totaling 4.95 million square feet are under construction. An additional 6.4 million square feet are 0 3% on the drawing board. Nashville has not slowed down following record 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD construction during 2017, and the previous high in 2016, as developers 2019 work to accommodate future growth and expansion of office users. New Supply Net Absorption Vacancy Nashville’s office market has kept pace with the city’s growth, and will likely continue to benefit from the region’s longtime consistent economic strength throughout the remainder of 2019. Vacancy & Availability CLASS A VACANCY + RENTAL RATES > Nashville’s market-wide vacancy rate closed first quarter at 7.6%, $35.0 15% decreasing 20 basis points since 4Q 2018. > The largest increase in vacancy since last quarter occurred in the Green $32.5 13% Hills/Music Row submarket with the delivery of The Chet (126,384 SF). Ernst & Young is planning to occupy 63,000 square feet in August. $30.0 11% Rate Vacancy > Strong occupancy gains are expected in the second half of 2019; Rate Rental $27.5 9% however, sizable vacancies and new construction may put slight upward pressure on the office vacancy rate. Sizable suburban vacant blocks are $25.0 7% anticipated as Mars Petcare, Vaco and Dave Ramsey vacate buildings in Cool Springs and Brentwood to relocate into new construction. $22.5 5% Additionally, over 520,840 square feet of new construction is slated to deliver in the second quarter. $20.0 3% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Rental Rate Vacancy Rental Rates Source: CoStar & Colliers Research > Rental rates in the Nashville market continued along an upward trajectory during the first quarter, closing out 1Q 2019 with a market average of $27.28 per square foot. This represents an increase of 1.4% since last quarter, and a 3.4 % increase since 1Q 2018. > Strong leasing demand and new office construction continue to elevate NASHVILLE MARKET NEW DELIVERIES the Class A average rent to new record levels. Asking rates have 3,000,000 reached into the low to mid-$40 per square foot. 2,500,000 Absorption & Leasing Activity 2,000,000 > Nashville’s office market posted 97,262 square feet of positive net absorption at the close of 1Q 2019, the lowest quarterly absorption Feet Square 1,500,000 since 1Q 2017. > Absorption is expected to increase significantly in the coming quarters 1,000,000 as tenants are slated to move into newly delivered construction throughout the market starting in Q2 2019. 500,000 > Downtown led the market in absorption this quarter at 73,294 square 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 feet, The move-ins of Ernst & Young and United Music Group at 222 2nd Avenue represented a combined 76,000 square feet. Deliveries Future Deliveries 10-Year Average Deliveries > The Airport North and Airport South submarkets experienced two sizable vacancies in the market created by LKQ (52,805 SF) and Art Institute of Tennessee (41,219 SF), bringing vacancy in those submarkets to 10.9% and 8.9%, respectively. CONSTRUCTION BY SUBMARKET Office Development > Nashville has 4.95 million square feet of office spaceunder construction, West End with 31% delivering by the end of 2019. 4.95M SF GH/Music Row > Over 60% of the office development is concentrated in the Downtown UNDER submarket. Infrastructure work is now underway on multiple parcels CONSTRUCTION Downtown at Nashville Yards, totaling one million square feet. Developers also broke ground on Asurion’s new headquarters (552,800 SF) this Cool Springs quarter in the Gulch. Brentwood > Speculative development remains elevated totaling over 1.3M square feet. 2 : Nashville Research & Forecast Report | 1Q 2019 | Office | Colliers International NASHVILLE OFFICE MARKET INVENTORY DIRECT VACANT SUBLEASE TOTAL 1Q UNDER AVG RENTAL RATE MARKET BUILDINGS (SF) (SF) VACANT (SF) VACANCY RATE ABSORPTION CONSTRUCTION PSF (GROSS) AIRPORT NORTH Class A 12 2,292,908 383,040 33,043 18.1% -13,760 0 $25.80 Class B 38 2,534,724 84,470 4,538 3.5% 8,750 0 $19.80 Class C 6 263,844 48,591 0 18.4% -3,252 0 $17.10 TOTAL 56 5,091,476 516,101 37,581 10.9% -8,262 0 $23.09 AIRPORT SOUTH Class A 5 482,121 6,906 0 1.4% 0 0 $27.50 Class B 62 4,540,619 455,909 15,668 10.4% -6,004 0 $21.95 Class C 28 1,413,968 92,849 0 6.6% 300 0 $20.25 TOTAL 95 6,436,708 555,664 15,668 8.9% -5,704 0 $20.49 BRENTWOOD Class A 27 3,015,244 155,444 35,060 6.3% 20,379 316,000 $30.40 Class B 56 3,681,730 426,603 61,724 13.3% -8,680 0 $27.24 Class C 6 239,924 7,389 0 3.1% 0 0 $23.61 TOTAL 89 6,936,898 589,436 96,784 9.9% 11,699 316,000 $28.29 COOL SPRINGS Class A 44 6,421,183 654,906 148,875 12.5% 1,451 553,700 $30.79 Class B 62 2,572,867 211,173 7,810 8.5% -34,998 0 $26.30 Class C 4 130,265 0 0 0.0% 1,680 0 $22.84 TOTAL 110 9,124,315 866,079 156,685 11.2% -31,867 553,700 $29.61 DOWNTOWN Class A 20 6,381,708 333,006 145,668 7.5% 73,294 2,974,079 $34.92 Class B 45 4,385,941 241,705 1,597 5.5% 3,428 0 $28.15 Class C 29 3,153,508 61,613 0 2.0% 6,054 0 $22.49 TOTAL 94 13,921,157 636,324 147,265 5.6% 82,776 2,974,079 $29.72 GREEN HILLS/MUSIC ROW Class A 12 1,459,237 209,474 6,401 14.8% 16,212 107,840 $36.10 Class B 38 1,696,687 39,160 3646 2.5% -13,993 0 $29.46 Class C 17 691,982 8,395 1,100 1.4% -1,428 0 $26.45 TOTAL 67 3,847,906 257,029 11,147 7.0% 791 107,840 $35.50 METROCENTER Class A 2 339,032 0 0 0.0% 0 0 $25.50 Class B 16 1,155,614 54,356 1,696 4.9% -1,442 0 $23.71 Class C 5 289,442 0 0 0.0% 0 0 $17.00 TOTAL 23 1,784,088 54,356 1,696 3.1% -1,442 0 $24.26 RIVERGATE/HENDERSONVILLE Class A 11 662,383 40,087 6235 7.0% -1,848 0 $21.80 Class B 19 954,423 34,463 0 3.6% 23,950 0 $19.30 Class C 15 780,723 11,105 0 1.4% -1,567 0 $18.40 TOTAL 45 2,397,529 85,655 6235 3.8% 20,535 0 $20.14 WEST END Class A 18 2,987,830 119,198 22,142 4.7% 34,544 644,000 $32.94 Class B 29 2,199,826 120,600 2152 5.5% -7,351 0 $28.95 Class C 14 674,209 7,073 0 1.0% 1,543 0 $25.92 TOTAL 61 5,861,865 246,871 24,294 4.6% 28,736 644,000 $31.92 MARKET Class A 151 24,041,646 2,002,061 397,424 10.0% 130,272 4,595,619 $30.38 Class B 365 23,722,431 1,468,439 98,831 6.6% -36,340 0 $25.90 Class C 124 7,637,865 227,015 1,100 3.0% 3,330 0 $22.51 MARKET TOTAL 640 55,401,942 3,697,515 497,355 7.6% 97,262 4,595,619 $27.28 3 : Nashville Research & Forecast Report | 1Q 2019 | Office | Colliers International Q1 2019 NOTABLE LEASING ACTIVITY PROPERTY TENANT LEASE TYPE SF SUBMARKET AT&T Tower AT&T Renewal 132,095 Downtown Suntrust Plaza Amazon New 54,000 Downtown 5000 Meridian Quore New 25,941 Cool Springs 640 Grassmere Park GSA Renewal 24,326 Airport South One Meridian Undisclosed Sublease 23,307 Cool Springs Commerce Center East Total Quality Logistics New 18,162 Airport North *Bold text denotes Colliers International transaction.