Key Take Aways from September 2023 Meeting!
Bond Oman (Oman-Gibson Associates): They have had a couple ground breakings in Nashville and Clarksville. They have been awarded three large MOB surgery centers. He feels like things are slower and getting paperwork out has been slower as well. The biggest issues he is having right now are debt markets, supply chain construction cost and labor. On the acquisition side, debt market is still a challenge they are probably putting 60% – 40% equity in everything they are doing right now. Bond’s slogan is “Stay Alive Unti ’25.”
Casey Estanislao (Hastings Architecture): They do work across a multitude of different sectors. About 80% of their revenues are in the Middle Tennessee market. She said that they are not feeling a significant recession. She acknowledged that they keep waiting for some of their large-scale private development to back off and maybe even take a pause and while things have slowed, they have not seen anything go away. The most challenging part of the summer for them, have been with debt markets and to keep consistent teams for large projects in place. They are remaining diverse through the end of the year to ensure that they are in a good place for 2024.
Crosby Ellinger (CapStar Bank): He said that he is not out in the marketplace as much being a portfolio manager, but he is working with existing deals in their portfolio, and he gets to see how interest rates are impacting loans in their portfolio now. Lately, he has been working on doing a lot of reviews and sizing up loans compared to when they were initially underwritten. He is seeing the impact that interest rates are having on the ability to repay. Moving forward he is working with clients on creative ways to solve the issue of the rising interest rates.
Jim Murphy (Bradley Arant Boult Cummings): He is seeing a softening of work but not a total drop and he believes part of that is people still want to come to Nashville. He feels that is still driving a lot of people to at least get through their entitlement process and plan on hitting the ground running when the interest rate problems get better.
John Agee, P.E. (Terracon): He said that they have rebounded and passed where they were this time last year, which is great and a good sign. A lot of their clients are coming from other parts of the country. He is seeing some international and industrial projects. John is also seeing an uptick in federal work happening here in Middle Tennessee, Clarksville, Thompson Station, and Columbia. He is seeing some mixed-use and some office space. A lot of it has been industrial and a ripple effect from the industrial work. He is seeing an uptick in convenience stores.
Kelly Cochran (STREAM): During COVID they did three times the volume of new leases and had a lot of leases to work through but now those leases are moving into the design phase and landlords are having difficulty securing the funds necessary to deliver the tenant improvements at the lease rate that they committed to at the beginning of COVID. A lot of her time now is spent going out and speaking with the lessors and possibly changing some of the State’s design standards so that it is more affordable within the fiscal parameters. She is also consolidating the footprint in Nashville into State-owned and they are letting go a lot of their leased space.
Lee Hunter (CapStar Bank): Lee said that things have somewhat calmed down in the banking world. He feels that everyone has settled down from the bank failures earlier in the year and bank deposits leaving the system are not like they were. Flip side is that banks are having to pay for deposits to keep them. He said that net interest margin is compressing. He said that they are definitely looking at a lot of debt service coverage covenant trips and Lee went on to say that they typically have debt service coverage covenants annually in their loans. He is just trying to keep the book a business clean.
Steven Culp (W.E. O’Neil Construction Co Steven said that they focus heavily on multi-family, schools, and religious facilities. He has noticed that multi-family is taking bit of a dive right now and there are a lot of new products coming online. He has heard from different developers that there is more concern over liquidity than interest rates. He feels that it will take about two years to eat up the supply that’s coming on the market right now because of the population growth. He feels that prices will begin to come down in six months to a year. He feels that when the private projects slow down, the State projects pick up.
Vic Alexander (Kraft CPA’s PLLC): The expense limitations that went into effect where businesses are limited to only deducting only 30% of their interest before earnings taxes, businesses are beginning to see the effects. The net effect is that it will cause more taxes to be paid for the business, but the plus side, from the estate planning standpoint, we are starting to see some stabilization of prices even some appraisals are coming in a little lower than before because the of the interest rate environment. Vic does a good amount of transaction advisory work, not real estate specific, but he is seeing a decrease in the amount of activity in that sector which means that the private equity markets are not as active.
Travis Groth (Maury County Chamber and Economic Alliance): Travis is with the leading economic development organization in Maury County. He is continuing to see a lot of activity and diverse types of projects but the theme they have noticed is increased complexity.
Margaret Martin (Thompson Burton PLLC): She is an airport lawyer that really focuses on the development of airport property both aeronautical and non-aeronautical. She is interested in the State legislation locally regarding both control of the airport and who is going to be on the board, as well as some other powers that have come down to the Airport Authority through the new legislation. They have new eminent domain power and some additional land use control power. She believes it will be interesting to see how that plays out. Nationally, airports have a lot of money and they have a lot of federal infrastructure funds coming in. They are trying to spend those funds. Some have varying levels of sophistication on how to do that. Part of what she does is help a private company navigate with an airport a collaborative development that is compliant with that particular airport’s state, local, and federal requirements.
Warren Smith (Magnolia Investment Partners): Magnolia Investment Partners owns office and retail space throughout the state. Warren is fortunate that they are well-capitalized with their buildings and in the many cases they already have permanent mortgages that are well below market. What he is seeing in the debt market is that the banks are frozen and is nervous to step out, understandably. Magnolia is having solid activity in their Memphis and Knoxville properties, but there is so much more competition in the Nashville market so it’s more of a challenge.
Stewart Lyman (Stream Realty): Stewart focuses almost exclusively on third party landlord leasing of office space in the Nashville area. In terms of trends that he is seeing, because activity is slower and deal sizes have gotten smaller, they still have a lot of tenants moving into town but they are not the larger companies. They are taking less space, but they are typically needing space quickly. People and owners of real estate that are building out spec suites that are move in ready have done extremely well. He is noticing that the tenants that leased spec suites at the onset of COVID are now getting out into the market to lease more space and keep longer terms. Stewart said that another trend is the focus to get employees back to the office and with that the upgrade of expectations for building quality and on-site amenities and walkability.
Stephen Brink (First Southern Mortgage Corp): First Southern Mortgage Company is a commercial mortgage banking firm and finance all property types throughout the Southeast. He said the catch phrase in the financial world is “higher for longer” because most people believe that the interest rates will stay at this level or slightly higher for a longer period. If there is a relief in inflation, he believes most of the short-term rights will come down and the 10 year and longer-term rights will probably stay the same. He feels that everybody wants retail again and the cap rates are holding pretty well.
Andrea Sullivan (Bristol Development Group): They develop projects around the Southeast and will be delivering one shortly just across the river on Dickerson Pike. As the Senior Controller, she does a lot of tax-based work and probably does about 50 plus returns in the crunch of the busiest time of the year. Her real challenge right now is managing interest carries.
Nahshon Roth (Bristol Development Group): Nashon is seeing higher costs, higher interest rates, lower leverage, and higher insurance. One of his colleagues put it best when he said, “that it will be great to get back to a place where there is only one elephant in the room at a time instead of four or five.” He is starting to see some price decreases on some of the deals that they are putting together right now, but not a whole lot. Bristol has about four deals that they are trying to finish now, then it will probably just the initial pause. He hopeful that they will come out with some finished product in 2025.
Max Smith (Colliers): Max is a broker with Colliers and he focus primarily on industrial investment sales and they also have leasing and development. It was easier to get things done last year but they are still having a decent year on the investment side. He is seeing a lot of owner occupant sales, sale/leasebacks and owner occupants buying property. On the leasing side for industrial, the big box has slowed down and is on hold. He is still seeing growth in the smaller to mid-sized space. They cannot develop as much as they would like because they are having zoning issues. On development side, they have a project they are working on in Clarksville. Overall, he is happy to be in industrial.
Justin Gallardo (Capstar): Justin is still feeling the slow down based on the phone calls and emails that he is getting looking for financing. He said that appraisals and LTVs have yet to cause any issues, but it is the debt yield / debt coverage that is. Appraisers are looking in the rear-view mirror, the volume is much lower. It is harder to infer what the implied cap rate is today even though everyone thinks it should be higher than it was last year, but it just hasn’t been the actual transaction volume to firm that up. They are reluctant to increase those cap rates. The debt coverage is what’s driving the tighter proceeds or the paydown.
Brendan Boles (Kimley-Horn): Historically they have tried to be 50/50 between public and private but over the years, they are doing more private work. They are doing a lot of industrial and retail work. They have an office in Nashville, Franklin, and Memphis. He understands that the focus of the group is Middle Tennessee but he said that there is lots of work as you follow some of the big spins that are happening. For instance, in Spring Hill, GM has their own battery plant production that is coming online, there is a lot of activity in Columbia, mainly in the single-family sector. He has some clients that are looking to do “build to rent” models in single-family. He is seeing an uptick in public sector work. He says it is nice to stay diversified, if you can.
David Johnson (Marcus & Millichap): He is focused primarily right now on bringing Aubrey’s to Nashville. They will do 6-8 units here and have closed in Springfield, under contract in Lebanon. He said that Aubrey’s is like J. Alexander, but with a better price point. He said that Huntsville is on fire now and they will probably do stores there as well.
Deneen Owen (International Workplace Group): Deneen does flexible office suites. She works alongside regular business owners and brokers. They do build out space, swing space for a lot of brokers. They do lease terms from anywhere from month to month up to 2 or 3 years and with renewable options. The good thing about flexible workspaces is that you can grow as you need to. There has seen a huge uptick of people interested in what they do. They have nearly 4,000 locations in the in the US and globally. They normally lease out and sublease but they are in discussions to open a few with partnership deals. They are doing build outs and will manage and facilitate but it’s more of a profit-sharing option. She is seeing a lot of month-to-month as people do not want to commit on long-term.
Dominic Zabriskie (Andreas Ventures): Andreas is a boutique development firm. Dominic is looking at partnering with either developers or landowners that may have started a project and either gotten sideways on construction costs, increases or rising interest rates. He will step in and help them identify ways that they can cut their site plans or building design. He can also help them find alternative funding sources. He is working on a TIF financing equity opportunity. He has zero experience with convenience stores, but he is working with a team that has five convenience store projects right now. He has not seen prices on the construction side necessarily come down, but site contractors are more receptive and are willing to meet sooner than before. He also works with the city on alternative funding sources.
Jarrod Finger (bpl Enclosure): Jarrod is now with bpl Enclosure as a result of a merger with WiSEngineers and Bennett & Pless structural engineers. Bennett & Pless is the parent company that is based out of Atlanta but have offices all over the Southeast. He has seen a split in the kinds of projects that they are working on. He continues to have success with the smaller 24,000 sq. ft. or less, retail restaurant hospitality projects and then starting with the 300,000 plus manufacturing light industrial projects that were put on hold are coming back with a vengeance. The smaller retail single box stores that are not part of a shopping center have been plugging along and staying consistent over the last few weeks. He is seeing a lot of promising large-scale projects coming along.
LaTonya Martin (Grande Style Homes): LaTonya is a brokerage owner with Grande Style Homes. They do residential commercial real estate. She works with a lot of buyers, sellers, and builders. She is helping builders find some land for their developments. One is stuck in codes; one is needing a new engineer. She has clients still coming in looking for land, gas stations, commercial space as well relocating here. Some of her clients are looking for Airbnbs that do not live here, but know Nashville is a fun spot. She is finding that sellers are asking for comps but they are not willing to give up their home yet. The buyers that they have are looking for a lot of new construction to move to as well.
Matt Largen (Williamson, Inc.): Matt is the president and CEO of Williamson, Inc. They are the Williamson County’s Chamber of Commerce. People still do not know what to do with their office space, how often people are in, etc. They will have a Market Update Business Lunch on November 1 from 11:00 am – 1:00 pm at 308 Mallory Station, Road, Franklin, TN 37067. This will be a market update on commercial and residential real estate. Before the event, they will put a survey out to their large companies asking them what are they doing in terms of work from home, what have you learned from work from home, and to get better intel on where things are heading. Go to williamsomchamber.com for more information. He also feels that it is important that just because companies are not looking does not mean that we are not doing the work to try to find the companies. They will be hosting a site consulting conference specifically in Williamson County in September 2024.
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