MARKETBEAT Nashville Office Q1 2019 NASHVILLE OFFICE Economy Nashville’s increasing employment and population reveal an Economic Indicators 12-Month Q1 18 Q1 19 economy among the healthiest in the U.S. Extremely low Forecast unemployment and a tight housing market differentiate Nashville Nashville Employment 1,001.1k 1032.8k from its regional and national competitors. Employment topped Nashville Unemployment 2.6% 2.5% 1.0 million in 2018 and projections foresee further growth, with U.S. Unemployment 4.1% 3.8% population exceeding 2.0 million within three years. All this translates into booming commercial and residential real estate February 2019 numbers used to represent Q1 19 sectors. Optimism toward Nashville’s future is shared by a Market Indicators (Overall, All Classes) development community that is confident in introducing 12-Month speculative construction in traditional and emerging parts of the Q1 18 Q1 19 Forecast metropolitan area. Vacancy* 8.5% 10.3% Market Overview Net Absorption* (sf YTD) 52K 42K The Nashville office market got a strong start into 2019 with Under Construction* (sf) 1.8M 3.9M leasing activity reaching almost 480,000 square feet (sf), equally Average Asking Rent* ** $26.45 $26.95 divided between the CBD and Non-CBD areas. This is twice the *Numbers not reflective of tables in U.S. MarketBeat report square footage leased in Q1 2018. The majority of the leases **Rental rates reflect weighted gross asking $psf/year were signed at Class A properties within the CBD and Gulch. Outside of the CBD, Cool Springs and Midtown had the strongest Overall Net Absorption/Overall Asking Rent leasing activity. 4-QTR TRAILING AVERAGE The Nashville CBD and Non-CBD have traded places in terms of 550,000 $30.00 vacancy over the last year. The CBD’s overall vacancy rate $29.00 450,000 decreased 350 basis points (bps) to 8.6%, while the Non-CBD $28.00 submarkets went from 7.5% to 10.7% year-over-year. Several 350,000 $27.00 new buildings came online since the beginning of 2018 – some 250,000 $26.00 of them only partially leased. However, most of the vacancy $25.00 150,000 increase can be attributed to tenants moving to CBD locations. $24.00 The CBD vacancy rate is expected to decrease further in coming 50,000 $23.00 quarters with tenants moving into the new spaces they leased in -50,000 $22.00 previous quarter. 2011 2012 2013 2014 2015 2016 2017 2018 Q1 19 Overall absorption finished first quarter at positive 41,576 sf – Net Absorption, SF Class A Asking Rent, $ PSF closely resembling Q1 2018 performance. The picture is more drastic when absorption is viewed by class. For Class A, absorption was positive 164,864 sf, while Class B posted Overall Vacancy negative 118,209 sf. More specifically, Class B properties in the 14% Non-CBD areas suffered the most, and landlords will have to explore ideas about how to retain and attract tenants going 12% forward. Brentwood posted 90,336 sf of negative absorption and landlords will need to find a new way to attract tenants to reverse 10% the trend of rising vacancy, which increased from 9.0% to 12.3% 8% year-over-year. The direct average gross asking rent in Nashville was $27.07 per 6% 10-Year Historical Average = 9.6% square foot (psf), up 1.5% from $26.67 psf year-over-year. Class A rents increased by 5.4% during the same time frame to 4% 2011 2012 2013 2014 2015 2016 2017 2018 Q1 19 cushmanwakefield.com I 1 MARKETBEAT Nashville Office Q1 2019 $31.10 psf from $29.50 psf, reaching an all-time high. The New Supply submarkets with the highest asking rents were Green NEW SUPPLY EXPECTED TO REACH 2017 HISTORIC HIGH Hills/West Nashville with $37.06 psf, Midtown with $35.60 psf Cool Springs/Franklin with $31.97 psf and the CBD with $30.37 2.5 psf. Trophy building asking rents in the CBD and Gulch reached $45.00 psf to $47.00 psf full service gross. A main 2.0 driver for the increase in rents has been the new construction 15-Year Historical Average = 700,000 SF that came online over the last few years. Also contributing to 1.5 rental rate increases has been the large number of building MSF 1.0 sales, particularly in the CBD. The new landlords are hoping to capitalize on Nashville’s strong fundamentals. High land and 0.5 construction costs lead investors to set asking rents at higher levels. Tenants looking to move have accepted the fact that 0.0 rents have increased significantly and are willing to pay for 08 09 10 11 12 13 14 15 16 17 18 19F 20F quality and walkability to attract and retain top workforce talent. However, tenants that are interested in staying put are being tested by potentially having to pay much higher rates at their Net Absorption-Deliveries-Vacancy TENANTS OCCUPYING NEW SPACES TO KEEP VACANCY FROM RISING current locations. Just over 152,000 sf of new Class A product was completed in 1.9 14% the first quarter in two speculative buildings outside of the CBD 1.7 – 818 18th Ave South in Midtown and 3811 Cleghorn Ave in 12% the Green Hills/West Nashville submarket. Half of the space is 1.4 already occupied. Of the 3.9 million square feet (msf) – with a 1.2 10% large portion being speculative space – currently under 0.9 construction, 1.5 msf are targeted for completion in 2019. This MSF 0.7 8% is the second highest completion level after the historic high of 0.4 Rate Vacancy more than 2.0 msf in 2017. AllianceBernstein committed to 501 6% Commerce in the CBD that was started as a spec project. 0.2 Tenant interest is high; however, most tenants are expected to -0.1 08 09 10 11 12 13 14 15 16 17 18 Q1 4% sign leases closer to the projects’ completion dates. An 19 example of leasing just ahead of delivery was Block D of Net Absorption Deliveries Vacancy Rate Capitol View, which was fully pre-leased in Q4 2018 with the Rental Rate Growth building finishing construction in March of 2019. CLASS A RENT HAS SEEN GROWTH OF 37% IN THE PAST 10 YEARS Almost 2.5 msf of properties traded in Q1 2019. The largest sale of the quarter was Shorenstein’s purchase of UBS Tower $31.00 from Rubicon Equities. The 600,866-sf asset sold for $135.0 $29.00 million or $225 psf. Two additional prominent trades were the $27.00 acquisitions of Philips Plaza and Nashville City Center by $25.00 Wheelock Street Capital and CapRidge Partners respectively. $23.00 $21.00 Outlook $19.00 $17.00 • Average direct rents should continue to climb in 2019 as newly constructed buildings come online and pre-leasing accelerates $15.00 in these buildings. 08 09 10 11 12 13 14 15 16 17 18 Q1 19 • Vacancy is expected to increase for Class B suburban properties as tenants look for more modern options in Class A Class A Class B Overall buildings. Class B buildings offering dense parking ratios may fare better. cushmanwakefield.com I 2 Numbers on this page are not reflective of tables in U.S. MarketBeat report MARKETBEAT Nashville Office Q1 2019 DIRECT CLASS A CLASS B YTD SUBMARKET INVENTORY DIRECT DIRECT Q1 19 DIRECT NET YTD DIRECT NET UNDER CNSTR AVERAGE DIRECT DIRECT DELIVERIES (SF) VACANT (SF) VACANCY RATE ABSORPTION (SF) ABSORPTION (SF) (SF) ASKING RENT AVERAGE AVERAGE (SF) (ALL CLASSES)* ASKING RENT* ASKING RENT* Airport North 4,255,752 571,896 13.4% -64,063​ -64,063​ 0​ 0 $20.26 $23.55 $18.65 Airport South 3,790,842 393,603 10.4% 8,402 8,402 0 62,091 $19.05 $26.80 $19.18 Brentwood 5,606,745 640,070 11.4% -73,343 -73,343 0 228,500 $27.50 $29.57 $26.82 CBD 8,372,664 619,522 7.4% 25,628 25,628 0 1,217,720 $27.38 $30.37 $26.75 Cool Springs/Franklin 8,119,704 901,017 11.1% 50,577 50,577 0 535,000 $30.91 $31.37 $26.49 Green Hills/West Nashville 2,038,648 78,622 3.9% 39,024 39,024 31,000 0 $35.49 $37.06 $24.00 MetroCenter 1,871,717 109,231 5.8% -6,624 -6,624 0 0 $22.77 $25.50 $21.88 Midtown 4,695,054 331,359 7.1% 69,764 69,764 121,500 1,902,343 $33.55 $35.60 $31.42 North Nashville 620,544 54,174 8.7% 0 0 0 0 $20.35 $21.47 $19.19 NASHVILLE TOTALS 39,371,670 3,699,494 9.4% 49,365 49,365 152,500 3,945,654 $27.07 $31.10 $24.37 Note: Stats are not reflective of the U.S. Overview tables *Rental rates reflect gross weighted asking $psf/year, in buildings with available space Q1 19 DIRECT YTD DIRECT INVENTORY DIRECT DIRECT YTD DELIVERIES UNDER DIRECT AVERAGE NET ABSORPTION NET ABSORPTION (SF) VACANT (SF) VACANCY RATE (SF) CNSTR (SF) ASKING RENT* (SF) (SF) Class A 19,277,783 1,668,339 8.7% 129,060 129,060 152,500 3,766,139 $30.71 Class B 17,208,685 1,940,807 11.3% -74,616 -74,616 0 179,515 $24.25 Class C 2,885,202 90,348 3.1% -5,079 -5,079 0 0 $18.10 Key Lease Transactions Q1 2019 PROPERTY SF TENANT TRANSACTION TYPE SUBMARKET 333 Commerce Street 132,095 AT&T Renewal CBD 111 Westwood Place 98,200 Brookdale Senior Living Renewal Brentwood Commerce Center East 18,162 Total Quality Logistics, LLC New Lease Airport North Fifth Third Center 17,322 Lucent Health New Lease CBD L&C Annex 11,104 Keep Truckin New Lease CBD Key Under Construction Projects Q1 2019 PROPERTY SF TARGET COMPLETION TYPE SUBMARKET 11th St @ Church / Asurion BTS 551,000 Q4 2021 BTS Midtown 1600 West End Ave / Broadwest 512,000 Q4 2021 Speculative Midtown 200 10th Ave / Nashville Yards / Amazon BTS 500,000 Q1 2021 BTS CBD 501 Commerce St 371,570 Q2 2020 Speculative CBD 1222 Demonbreun at Gulch Union 330,000 Q2 2020 Speculative Midtown Capitol View - Block E 302,000 Q2 2019 Speculative Midtown Peabody Plaza 280,000 Q2 2020 Speculative CBD cushmanwakefield.com I 3 Numbers on this page are not reflective of tables in U.S.