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2022: The most challenging year for the Nashville office sector since 2008
Vacancy rates in Nashville climbed to 18.6%
On Thursday, news broke that tech giant, Amazon, was pressing pause on the development of its 28-story-tall high rise, “Juno” , the second of its two towers in the Gulch. Amazon’s neighboring tower, 20-story “Anne” was finished in 2021.
No one should be surprised by the grim headline. Last month, Amazon slashed 18,000 jobs — 6% of its corporate workforce and its largest layoff in history — as the largest e-commerce company struggles amid slowing online sales and braces for a recession.
But the recent national layoffs shouldn’t have been the only omen signaling the development’s delay. 2022 arguably marked the most challenging year for Nashville’s office sector since 2008.
Vacancy rates climbed to 18.6% — 10.6% higher than in 2019 and the highest since 2008. Net absorption plummeted 56-percent from 2021, and market rents failed to even keep up with inflation. The average asking price per square foot in Nashville rose 6.0% year-over-year (to $31.18) according to CBRE data, while the Bureau of Labor Statistics clocked inflation at 6.5% for the year.
Discouraged by rising vacancies and soaring interest rates, developers pumped the brakes on a number of projects last year, and in 2022, only 778,151 square feet of new office space was delivered to the Nashville market — less than a third of the amount delivered in 2021 (2,649,409), according to data from CBRE.
“With office use only about half of what it was before the pandemic, Amazon’s tower certainly won’t be the last major project postponed this year,” CCIM Chief Economist KC Conway told TennBeat. “Demand for office space will continue to weaken in across the country.”
To the economist’s point: 37% of the space under development remains available, more than double the rate in 2019 and approaching the record 39% in 2008, according to data from Costar.
Some companies, including Nashville banking behemoth, Pinnacle Financial, instructed workers to return to their offices in January, after more than two years of remote work. But many businesses adopted hybrid strategies, allowing employees to work from home two to three days a week.
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According to an analysis by the Society of Industrial and Office Realtors, the average Nashville worker is in the office about 10.7 days a month, compared to 17 before the pandemic. As a result, tenants need less space.
“76% of office leases signed last year were sub 10,000 square-feet,” said Diana Johnson-O’Brien, Head of Research for CBRE’s Tennessee offices.
She added that smaller leasing requirements made it challenging to counterbalance the negative absorption sparked by major tenant move outs despite a high level of activity.
Even with a historically turbulent year, the Music City still fared better than most major markets in 2022. San Francisco, Boston and New York all posted vacancy rates above 25% and rental rate increases below 4%, according to a Real Capital Analytics report.
“Nashville is well-positioned to weather these challenges, as the market continues to benefit from inbound migration, company relocations and investors seeking opportunities to invest in this dynamic, high-growth, secondary sunbelt market,” said Roscoe High, a Senior Vice President of Capital Markets at CBRE.
Conway agrees, Nashville is better equipped to handle 2023’s looming challenges, but says, “caution” is the word of the day for all markets. “There are times to buy, times to sell, times to develop and times such as now to be patient.”