Key Take Aways from February 2024 Meeting!
Jim Murphy (Bradley Arant Boult Cummings): Jim is a partner at Bradley. He is working on a couple big projects that are government involved. As a result, some of the traditional market forces are not having an impact on his work. He anticipates being busy for a while. Jim is still seeing work in the incentive space. He has noticed that developers that he works with are slowing down because of market interest rate issues. It’s either feast or famine and right now it’s a feast for Jim.
Andrew Moriarty (Bohler Engineering): Andrew is a partner with Bohler Engineering, a land development consulting firm. He is seeing a lot of their corporate clients, like Walmart, beginning to ramp up. The industrial market is still pretty healthy, and it is not overbuilt. There are opportunities out there and he is seeing a lot of bank branch activity across the country. Some of the inner-city areas like Philadelphia and DC have slowed significantly and they are challenged. People are not back to the office so a lot of the services are closed. It’s a public safety issue as well. Luckily, Nashville does not have that issue.
Richard Warren (Bradley Arant Boult Cummings): Richard is a partner at Bradley. He mentioned that Warren Buffet would say when the tide goes out, you can find out who has been swimming naked. Unfortunately, the tide has gone out and we are now seeing what is going on. He is doing workouts and he is seeing private equity lenders in places like New York. So far, it’s good in Nashville. He finds it interesting that on the Roundabout Plaza it was just announced on the property where Off Broadway Shoes was located, there will be another high-rise apartment building. He said that people seem to be having a problem leasing up the current inventory and they are still building more. Richard feels that we are clearly in some type of transition, he just doesn’t know quite where it is going.
Mike Murphy (Cumberland Advisors): He focuses on office and multi-family. The office has been a little slow. He just delivered 296-Class A multi-family units in Mt. Juliet and they are leasing well. He is just a little below where he would ideally like to be in rents but generally he is pretty encouraged. He is still looking in the multi-family arena. This is a good time to get things entitled and be ready when conditions are a little more favorable. He is very bullish on Nashville in general.
Stewart Lyman (Stream Realty): He focus primarily on office and industrial. He feels that the market is still there and the demand for office space is not dead. He did mention that the “flight to quality” buzzword is true. Most of the current development and recently delivered development is performing very well. Employers are trying to entice their employees back into the office by having amenities, activated green space and outdoor walkability. The older buildings that were built in the 80s, are trying to compete. They are having to have capital infusions and add the amenities. If people do not want to pay the price, they are looking at the lower end buildings that are well located but they will demand the amenities. People are also looking for spec suites where they want to sign the lease and move in the next day. Stuart is optimistic things will come back as the year goes on.
Steven Culp (W.E. O’Neil Construction Co.): They are a commercial building contractor national firm but each business unit runs its own local market. They have typically focused on multi-family, education, religious facilities, office mixed use and a little bit of industrial. Multi-family is slowing down a bit but there are still multi-family projects out there. Some of the current projects are on a smaller scale than projects he has seen in the past, but they are still moving forward. The public work is ramping up and he’s seeing more work done out of STREAM. He met with TDOT and they have a pretty good program coming for buildings, for maintenance facilities. He is noticing a lot of banks are coming into the area and are purchasing existing branches from other banks. The education side is really good in Tennessee right now and they have good work coming out. It’s a good time to be in Nashville but it is still very competitive.
Caroleen Wilkes (Wood Partners): She said last year we saw a lot of construction inflation, but rent and rent growth was keeping up with the inflation so she was able to get deals done. At the end of last year, beginning of this year, she is seeing interest rates going up, but not rent rates. They are stabilizing and all of a sudden you do not have rents to fall back on market volatility. She thinks this will make us hyper focused in the market. She feels that we are blocking and tackling each deal now and it’s making us think about how to become more efficient and be more calculated.
Jeff Thomas (Charles Hawkins Co.): They manage about 9-10 million sq. ft., and they are about 95% occupied across their portfolio (Northern Alabama to the Kentucky-Tennessee border.) That’s a good sign but there is a shock of where the rates were and where they are now. Sales have slowed down but he is pretty busy on the leasing side. There are still a lot of companies looking for space to lease. He said there just isn’t that much space available. There isn’t much on the bulk side either. He feels that if you want to build, you are looking at 18-24 months on those projects. He feels that people are living further out which is causing them to have longer drives into Nashville for work.
Susan Felts (First American Title Insurance Company NCS): She feels that January is a hangover from December and now she has hit the jog again. Here in Nashville, she is seeing things stay steady. She definitely isn’t going crazy but not as slow as some of her sister offices like New York and Chicago. She is staying busy. She has some government work and healthcare work that keeps her pretty busy. She just got a student housing project so she’s hopeful that we’ll pick up again.
Toby Hardy (Retail Equities, LLC): Toby moved to Nashville a couple years ago and has helped raise his grandchildren. He is looking for good USR, restaurants, banks, single tenant pad opportunities. He is looking forward to doing business in Nashville, but they are pretty selective and do not take a lot of development or city hall risks. They are more singles and doubles, instead of grand slams.
Rob DeCamp (Charles Hawkins Co.): Rob works more in the asset management of Charles Hawkins Co. He oversees their portfolios. They do property management, accounting, and investment development. They are looking to diversify and get in on the retail side. Their portfolio has stayed strong, fortunately. They are 95% occupied and their leasing has stayed strong, and their tenants are renewing. They have a 40,000 sq. ft. vacancy in Spring Hill, if you know anyone looking, please let him know.
Justin Gallardo (CapStar Bank): Justin has been the “rate updates” guy in our group. He summed 2023 up as the year of the capital call and feels that in 2024 they are hoping to find distressed deals until they can see a turn in rates. His customers are asking him if he has any problem loans, let them know. He just closed a multi-family deal, and he usually uses the historical financials as part of the underwriting and he asked the borrowers for an insurance quote and it was a 50% increase over the previous owner. He was shocked to hear this increase. Also, he was talking to a friend about the traffic going into the office and it is really obvious as to how much more traffic there is, both downtown and Maryland Farms.
John Agee, P.E. (Terracon): His perspective of the health of the economy based on the deals that are being cranked out is that we are on track with 2023 Q1. Right now, it’s jamming. He feels that we are still in an attractive place. Warehouse logistics has slowed down a bit. He feels that Amazon way overbuilt and that impacted everything. They are still doing due diligence for the multi-family, mixed use towers. The food and convenience chains are still coming to Tennessee. People are still coming with money. John is still optimistic.
Adam Klenk (Capstone Apartment Partners): He feels that overall, the market is in a good place and it has brought a lot of buyers back to the market that had previously set out. He has seen a lot of affordable land, which is land that is zoned for low-income housing tax credits, that is moving great over the state. On the market rate side, they are still selling land, it’s just a little bit slower. On the existing side, Class A new construction is lower, and you are not seeing as many deal transactions right now. He is selling more land that is for retail sales. He feels that we need to be more creative in finding deals and putting them together.
Travis Groth (Maury County Chamber and Economic Alliance): In the last two to three years, he has seen unprecedented growth of really large projects. That may have been quieted down a bit, but he has seen an uptick in interest of existing industries to look at expansion opportunities. Travis went on to mention that SmartAsset ranked Maury County as #1 Tennessee in all four categories (business growth, GDP growth, building permits, and incoming investments), #3 in the U.S. (about 3,200 counties) for incoming investments and No. 7 for business growth.
Lee Hunter (CapStar Bank): One of his commercial real estate brokers said that there is 50% less transaction volume than it had been in the last few years. The requests that Lee is seeing are the value-add apartment deals where it is an acquisition, renovation, raise rents, etc. Those people seem to still be active and there seem to be some motivated sellers. Lee went on to mention that the broker friend mentioned that the people coming in from out of state buying $30m/acre for a high rise are now gone. The multi-family, new Class A construction, kept everyone busy for the last couple of years and it is oversupplied right now. Lee feels that the strong will survive and thrive. There will be more pain this year, but we are getting close to turning the corner.
Kelly Cochran (State of Tennessee Real Asset Management (STREAM)): She executed a lot of leases during the pandemic and trying to be a good partner with the lessors her design department has been overloaded trying to program space for the new leases that need to commence. They have been delinquent in getting plans to owners so they can build the space out for her. Some of the owners can no longer afford to meet the contract because of increased costs and what they agreed as a lease rate will no longer cover expenses. Kelly is trying to work through these issues. If they had renewal options, she is commencing them to give a little bit more length of term to the landlords. Also, she mentioned that Citizens Plaza has been taken off of the market.
Josh Yates (CBRE): Josh mainly does industrial, tenant rep and sales. In Nashville, their total square footage market is 218 million. Last year 89% of the space leased was under 200,000 sq. ft. He has a huge inventory issue of smaller spaces under 200,000. He is noticing that the bigger players are interested in getting back into space. On the capital market side, they will track properties at least 30,000 sq. feet and larger and they tracked 28 transactions last year for a total of $528 million. This is still short compared to Phoenix who had $2.1 billion in sales last year. He feels this is from having a lack of sellers because he has a lot of people that want to get into Nashville and as the institutional players have hidden, this is the time shine for the private capital people. This was the time for them to get in on the good properties, in good locations, with good tenants. Best value add are having better sales with shorter lease terms.
Laura Hart (CBRE): Laura added to what Josh mentioned by saying that the largest number of lease transactions nationally for industrial were sub 25,000 sq. ft. This is a square footage that people are not usually excited about because it is the same amount of work to do a 25,000 sq. ft. lease as it is to do a 200 or 500, but that is where the work needs to be done and that is where we need product. She feels that Nashville has been underserved in this smaller product. The local businesses that have been succeeding need to expand so they have the opportunity to grow. She mentioned that Spring Hill is a great city and the benefit that it has is that it is a reverse commute. Most business owners will live in Williamson County if they want to have a building or business, it is very convenient to go 65S in the morning, instead of 65N.
Sam Boroughs (Nicol Investment Company): He works mostly in multi-family but also has some senior housing and in the past they did a little bit of self-storage. He manages finance acquisition for Nicol. There are fewer buyers out looking for apartment land so he feels that this is a good time to selectively buy one parcel or work with groups that have good proposals for one or two deals for the future. He went on to say working with banks is a real thing for anyone that has been in the development world in the past three years. He would guess that if you asked 10 developers, you would be lucky to find two that said that they finished their projects on time. It takes a lot of conversations to work with banks and hopefully reasonable proposals will win in allowing just a little more time.
Lori Manners (Builders Insurance Group): Lori is with Builders Insurance Group out of Atlanta, which is a regional property and casualty company currently in 20 states. She currently manages the states of Tennessee, Alabama and Georgia and is looking at expansion for Tennessee and Alabama. Builders Insurance is not taking a lot of rate or increasing because they do not have a large book of business in property, in particular residential or automobile, and is strictly a commercial insurer that works with about 80 agencies that are commercially focused in these three states. She mentioned that they will have a new writing company that is coming out on March 1 for the State of Tennessee specifically that will have a nice preferred rate with a lower lost cost multiplier for the State of Tennessee work comp. She went on to say that general liability and umbrella is rising somewhat due to reinsurance costs. They are trying to hold steady for their insurers and will be growing and developing a lot because of a strong balance sheet as a company.
Nahshon Roth (Bristol Development Group): They felt all the capital call pain from last year. Overall, he is seeing good, positive leasing and the rents that they underwrote is well below what they are achieving which has offset the higher insurance cost, etc. He believes they are well positioned, and he is working on closing deals that will be delivered in the next three years, or so.
Henry Varner (Bristol Development Group): Henry said that it has been challenging to get the new deals across the finish line and harder to get them to pencil. He does a lot of financial modeling and it’s been harder to get a good construction loan, find investors for these deals. They have been resilient in getting some projects done and they have been fortunate for that.
Rob Eakin (Eakin Partners): They have personally looked into bridge financing, converting assets, and selling. He feels that Nashville will continue to grow, and everyone will benefit from that. They have done everything from downsizing, creating spec suites, to adding amenities to office buildings. They are being very conservative and are not looking at new developments, but redeveloping some of their current assets that they currently oversee and he is looking forward to 2024.
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