Key Take Aways from November 2023 Meeting!
Allie Fletch (Terracon): Allie recently moved from Buffalo, NY and works at Terracon. She was excited to see Nashville interstates and almost being the hub with manufacturing and development along the interstates. The closest other one is 90 and there isn’t much going on there.
Bond Oman (Oman-Gibson Associates): For the new people, Oman-Gibson is a medical development group. On his side of the field pricing is a problem, construction costs have not gone down, and financing is probably one of their biggest issues right now. Currently, he has about 15 projects and he is trying to figure out how to finance them. They are doing a lot of behavioral and surgery centers projects. Good to be in medical right now.
Jim Murphy (Bradley Arant Boult Cummings): Jim has been extremely busy these last couple of weeks, which is an encouraging sign. He had a couple of projects that were on hold and now they seem to be showing signs of life, which is a positive. He is seeing things being slower in the multi-family and office projects. He is seeing projects that he thought would slow down, are not. Currently, it is a mixed bag.
John Agee, P.E. (Terracon): Has a couple of projects that have gotten through the due diligence, etc. and once the Feds raise interest rates, the projects were put on hold. They are saying it is “not a no, just a matter of when” to continue the project. He has noticed a big shift in competitiveness in construction cost. Terracon has decided to open an office in Clarksville, TN because they have missed too many jobs in Clarksville. He is optimistic, but staying cautious and smart.
Justin Gallardo (Capstar): He mentioned that several people in the room attended the Urban Land Institute (ULI) Nashville Emerging Trends in Real Estate Breakfast earlier this morning. ULI chose Nashville at the top market for ’24 for the third year in a row and you would expect a lot of high fives, but he personally found the panelists, and some of the people that he spoke with, to be negative, but Bond Oman said that they were being realistic. Although we are looked at as being the best in the market, it is still tough to get things going with the current interest rates. He feels the demand will keep coming because people are still moving to Nashville.
Kelly Cochran (State of Tennessee Real Estate Management (STREAM)): She leases office space for agencies, so she tenant reps. The State is increasing their TI standards in January 2024 to a much higher rate. She feels like there will be an inability to access money and people will need to borrow a lot of money. In downtown Nashville, the State is reducing its square footage significantly. They are getting out of most leased space and going into state owned space.
Lee Hunter (CapStar Bank): Lee mentioned that it was announced that CapStar Bank will be partnering with Old National Bank. This transaction will probably close late first quarter, early second quarter. CapStar will be their Tennessee bank and will have more capacity to increase loan limit but is not certain by how much right now. He feels that capital calls are the norm in most businesses because of rates spiking like they have been. He feels that the strong will thrive and survive through this downturn and others will not. He is seeing that people are hemorrhaging with what they purchased, although there are some strong equity providers out there.
Steven Culp (W.E. O’Neil Construction Co.): W.E. O’Neil Construction is a national commercial building firm where the individual offices run their own operations depending on the market. Multi-family projects are flattening out but schools and public building projects are picking up the slack. Tennessee Board of Regents have put out 10 RFPs this past week for big projects worth $3m. Every new project is affordable housing developments and about 75% are looking for alternate methods of funding. Developers are looking away from downtown. He is noticing that more townhomes are being built.
Tom Trent (Bradley Arant): Tom is a partner at Bradley and practices in the commercial real estate and economic development areas. They are working with STREAM every day now and that is taking off. He is finishing up deals on several automotive plants. The industrial side seems to be humming and he has not seen a new office deal in years, although he has several clients working on the East Bank. People are still seeing people moving to Nashville but they are staying in the surrounding nine counties. Tom is seeing many mixed-use developments with townhomes, apartments, retail, live-work-play environments being built in West Tennessee near the new Ford plant. Counties cannot afford to build schools fast enough.
Vic Alexander (Kraft CPA’s): Vic is with Kraft CPA’s in Nashville and they are a large regional accounting firm. Seeing a little softness in the multi-family area. The upper end is being affected more than the B and C class. Insurance is affecting them more and he has seen insurance companies pull out of deals and rates have gone up significantly. Coastal projects are unbearable. People are renting and funding versus selling until things get better.
Andrew Moriarity (Bohler Engineering): Andrew has been involved in REAL Professional Network in South Carolina for many years. He started coming to Nashville about a year ago to get their operations up and they have an office in Cummings Station. Bohler is a land development public consultant firm with over 1,000 employees with 34 offices. He works primarily with developers for public companies that do development work from residential, retail to industrial. He is noticing that publicly funded companies (like Walmart) are ramping up. The retail clients have gotten busier. The multi-family, more complex urban mixed-use projects have slowed down. They have been hit hard by the “work from home” phenomenon, etc. The advanced manufacturing, storage, data centers – the higher value projects are busy. He said Raleigh (tech hub) and Charlotte (financial hub) have similar issues as Nashville.
Adam Klenk (Capstone): Adam is with Capstone Apartment Partners in Nashville. They are a multi-family brokerage company. They sell existing apartment developments. The increase and rates have really impacted their business. Transaction volume is down over 75% over the last 18 months (nationwide). He has started to see more affordable developments. They have become nimbler with the hotel redevelopment that are being developed into studio units and entry-level housing option. Concessions have gone up considerably over the last 12-18 months. They have come down recently with only 1 to 2 month concession, which is still high. Apartments have lost 20-30% of its value because of interest rates. Buyers are the first to come down on their price, then brokers, then sellers.
Billy Brown (The Investors Capital Group): Billy is a commercial loan brokers that cater to up and coming investors. They do a lot of creative things. He teaches on how lending works and has a newsletter, for the past seven years. He is seeing more bridge loans in the lending space. He is seeing more in the SBA space. He is seeing more investors waiting for deal. He said it will be 2025 before things change. If nothing is done, the inflation will be about 4% for the next couple of years. Investors are frustrated. He is telling his people to look outside of the standard office building. There is ton of money out there. He has another business, a private indoor golf social club in Brentwood, named The Golf Sanctuary. This business creates community and they do events. The Golf Sanctuary has a speak easy vibe.
Eric Deems (Land Advisors Organization): Eric is a land broker which is a fancy way of saying “chase sewers for a living.” His clients are homebuilders and apartment developers. Many homebuilders dropped their land holdings a years ago, not knowing what was going to happen. Now, they cannot get land quick enough. MSA-wide the new median is $556k. He loves Maury County and it comes down to density. Hendersonville is holding onto their free land because they do not want the traffic. He said in 2021 and 2022, 1 out of 3 new residents came from California. He is bullish on what happens here.
Kim McAfee (CMK Properties): CMK is a small developer out of Brentwood. They do a little multi-tenant medical office. His primary focus is single-tenant net lease development and some acquisition too. They develop early childhood facilities. They focus on investment-grade retail with a few of their clients. He mentioned that cap rates for single-tenant net lease have gone up about 75-80 basis points this past year. Fee developments is one thing that he has been looking at lately. They act as developer, make a fee, exit. It is a lower risk for them and they do not make as much on these transactions. His thought is if they establish these relationships, prove themselves and make it through these times and when it does eventually turn, they will be in position to expand and grow.
Stephen Brink (First Southern Mortgage Corp): Stephen is with First Southern Mortgage Company and they provide mostly debt, but also equity. Their debt offerings come from life insurance company debt funds and pension funds and agency lenders. Wide variety of different lenders and their sizes range from $3m – $120m. He said that there is debt available, it is just what you are willing to pay for it. He sees that the debt and equity is starting to shift places. Life insurance companies have plenty of money available and its pricing is about 175-225 basis points over the corresponding treasury rate and most people are looking at 5–7-year term loans now in hopes of being able to refinance and get a better rate, when rates come down in 3-7 years. They are doing more construction and bridge lending and a lot less of standard life insurance company, long-range fixed rate stuff. There are still a number of long-term lenders that fund build for rent projects.
Stewart Lyman (Stream Realty): Stream Realty Partners is a full-service real estate firm. Stewart focuses on working with institutional owners of office buildings throughout the Nashville market. He is seeing a real bifurcation in the market in terms of office demand. Tenants are going from a well-located, but older building and upgrading to the newest class buildings. Tenants are using the upgraded office space to entice people back into the office. He does not feel that we are overbuilt on the office side. He is not seeing new starts happening and the buildings that are currently underway will stabilize. It may take longer than it used to. On the flip side, the older products will leave holes in the lower-class office buildings. What will they do to get and retain tenants?
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