July 01, 2017

Tennessee and Kentucky Are Riding High

Southeast Real Estate Business

Led by Nashville’s substantial employment gains, Tennessee and Kentucky are successfully navigating the national disruption caused by closing box box retailers following the 2016 holiday shopping season.  Several industries unique to the region are supporting the growth of the two states’ retail markets.

“Our Tennessee and Kentucky markets have enjoyed strong economic performance with solid population growth and investments by both existing and new-to-market employers,” says Stephen Lebovitz, president and CEO of CBL & Associates Properties Inc.  The publicly traded retail owner and developer is based in Chattanooga, Tennessee and owns, holds interest in or manages 123 properties as of this writing, including 80 malls and open-air retail centers.

“The employment growth has supported expansion into these markets by new retailers as they see opportunities to reach a growing base of new customers,” adds Lebovitz.

Retail owners and developers in the two-state region are experiencing the buzz of activity firsthand.   BC Wood Properties, a value-add shopping center investment firm based in Lexington, Ky., owns several assets in the region.  Jason Gentner, BC Wood’s executive vice president of operations and leasing, says that the Tennessee and Kentucky assets in the company’s portfolio are performing well.

“All of our properties in Kentucky and Tennessee are at or above occupancy of what they’ve been in the past,” says Gentner.  “We’re able to push rents right now in our Kentucky and Tennessee properties, and our occupancy rates in those centers are all above 90 percent.”

The following is a metro-by-metro look at the retail markets in Nashville and Memphis.

Nashville Capitalizes On Its ‘Incredible Growth’

By almost every measure conceivable, Nashville is thriving.  The Nashville area Chamber of Commerce reports that anywhere from 80 to 100 people are moving to the metro on a daily basis, and the city has posted above 4 percent employment growth on an annual basis for the past four years running.  The city’s robust job market is such that Nashville has nearly 20 percent more jobs now than its pre-recession peak, according to Co-Star.

Nashville also offers the intangibles that set it apart from other markets in the Southeast, including its renowned country music presence and its identity as a tourist destination.

“Tourism is a major factor that is helping drive the retail and restaurant demand, which was initially spurred by the new convention center downtown,” says Fraser Schaufele, director of leasing for GBT Realty, a retail and multifamily development firm based in nearby Brentwood.

Within a two-week span in June, the city hosted the Stanley Cup Finals and the 2017 CMA Music Festival, as well as Bonnaroo Music and Arts Festival in nearby Manchester.

“Nashville was the center of the entertainment world for a good 10 days, and the city really shined in the spotlight,” says Charles Warner, vice president and principal of Baker Storey McDonald Properties Inc., a member of the X Team International Brokerage Network.

Retail demand in Nashville has outpaced supply for the past few years, driving the metro’s vacancy rate to 3.4 percent in the end of the first quarter, 260 basis points lower than its historical average, according to CoStar.  Net absorption in the first quarter was about 1.8 million square feet, nearly double deliveries in the same time frame (992,000 square feet).

“Nashville is finally getting more retail added to our inventory,” says Rob Foss, principal and head of retail services at Avison Young’s Nashville office.  “There’s an enormous amount of demand for retail, dining and entertainment in the core markets around Nashville, but the supply hasn’t kept up.  The new space coming on line has been absorbed quickly and the market continues to tighten.”

IKEA announced in late May its intention to open a new 341,000-square-foot location within Century Farms, a 310-acre mixed-use development off Interstate 24 in nearby Antioch.  Oldacre McDonald LLC and TPA Group are the developers of the project.  The new IKEA store is expected to open in 2020.

In southwest Nashville, Crosland Southeast is underway on One Bellevue Place, a major redevelopment of the former Bellevue Mall.  The project will add 375,000 square feet of retail and restaurant space, as well as multifamily residences, seniors housing, a hotel and a 120,000-square-foot skating rink/community center operated by the Nashville Predators, the city’s NHL franchise.

Even though the enclosed mall platform is struggling nationally, Nashville’s malls are faring pretty well thanks to the heightened demand of retail space in the metro area.  CBL has renovated its Cool Springs Galleria mall in Franklin’s Cool Springs district by adding a California Pizza Kitchen and Kings Bowl America, and Simon Property Group recently added Madame Tussauds at Opry Mills.  The new location is the company’s seventh wax museum in the country and first ever within a mall.

“Clearly at this time, the enclosed mall format in Nashville is not dying,” says Justin Schad, principal broker of TRIO Commercial Property Group’s Tennessee office.

In Nashville’s core, several mixed-use developments are changing the face of the city.  OliverMcMillan and Spectrum Emery broke ground in April on the $430 million Fifth + Broadway development, which will add 235,000 square feet of shopping, dining and entertainment to downtown.

AEG, the developer behind entertainment and sports arenas including LA Live and the 02 Arena in London, recently purchased four acres from Southwest Value Partners within the former LifeWay Christian Resources campus downtown.  AEG will develop a 4,000-capacity music venue, Regal Cinemas theater, boutique hotel, dining, retail and a 600- to 700-capacity live entertainment club.

In the North Gulch district, a joint venture between Boyle Investment Co., Northwestern Mutual and Northwood Ravin is developing Capitol View, a $750 million, 32-acre mixed-use development that will add 130,000 square feet of retail and restaurant space.

On the other side of the Cumberland River, Chicago-based Monroe Investment Partners is planning a 125-acre mixed-use project called the River North Development District.  Monroe is anticipated to break ground on Phase I, known as The Landings, this fall.

“The River North Development District could be a game changer for the other side of the Cumberland River, which will completely transform the north and east side of the river,” says Warner.

Despite the large amount of retail development in the works, demand continues to outpace supply in its top submarkets.

“Nashville can be considered under-retailed to a certain extent in the most desirable submarkets,” says Schad.

Nashville has helped keep its retail supply in check thanks to the natural barriers to entry of the Cumberland River and the city’s unique topography.  The price of developable land also has increased dramatically, along with construction costs.

“Land and construction pricing is putting heavy pressure on market rents,” says J. Anthony Vaughn, executive vice president and partner of Colliers International’s Nashville office.

“Developers, investors and lenders are being very strategic about what kind of product is being built and where it’s being located,” adds Allen McDonald CCIM, principal at Baker Storey McDonald Properties.

Retail landlords in Nashville have been able to command higher rents from their tenants to recoup the increased price of development.  CoStar reports that the market experienced 5.4 percent rent growth at the end of the first quarter, 400 basis points above its historical average.

The only negative to so much growth in a concentrated area like Nashville is the stress it can put on infrastructure.  On the horizon, Nashville’s residents are hoping that the $6 billion transit plan, known as nMotion, can alleviate the congestion and create a more walkable cityscape, which should ultimately help support even more retail, dining and entertainment nodes.

“Mass transit will create new opportunities for many retailers in Nashville,” says Schad.  “We are anxiously waiting to see how that plays out here.”

Memphis Retail Performance on the Rise

Memphis is adding to its well-established identity as a distribution and manufacturing hub with gains in its retail and office markets.  According to CoStar, Memphis is close to its historical average in terms of first-quarter deliveries (approximately 1.2 million square feet) but is outpacing its historical performance in terms of vacancy, absorption, rent growth and investment sales.

The city’s office market is also seeing a boost with ServiceMaster, a home and commercial services provider whose products and services include home warranties and inspections, transforming the former Peabody Place Mall downtown into its global headquarters.  The publicly traded company was considering several other metros before deciding to stay in Memphis.  Wunderlich Securities Inc. is also relocating its headquarters from the suburbs to downtown.

“Memphis is having its own kind of renaissance right now, it’s getting a lot of attention on the national scale,” says Brian Whaley, senior associate of CBRE’s Memphis office.  “There’s a lot of excitement and investors are still able to get a good return on investment.  It’s a low cost to entry market, and right now it’s just an exciting time to be here.”

One of the most talked about projects in the metro area is Crosstown Concourse, a 1.5 million-square-foot adaptive reuse project of a former Sears distribution center in Midt0wn.  Set to open in August — 90 years after it original opening date — the project will include 65,000 square feet of retail space, 620,000 square feet of office space and 270 residential apartments.

“Crosstown Concourse is going to be a one-of-a-king project,” says Jonathan Aur, a commercial sales and leasing associate with Boyle Investment Company, a Memphis-based commercial real estate developer and investment firm.  “The Shopping Center Groups is doing a good job of putting together a unique tenant mix over there.  “It’ll be interesting to see how the surrounding properties in the neighborhood react to it.”

Memphis has several retail and mixed-use projects that are in various stages of the development pipeline.  Boyle just delivered the first phase of Schilling Farms, a 443-acre master-planned development in Collierville that was quickly absorbed by the market.”

“Phase I was fully leased before we finished construction, which is wild because we didn’t know how retailers would react to the development,” says Aur.  “We unfortunately had to pass on some pretty great retailers because we didn’t have any more availability.”

At the corner of Poplar Avenue and Perkins Roads, one of the most desirable Main-and-Main intersections in Memphis, Seritage Growth Properties is redeveloping a former Sears store.  The company is converting the nearly 200,000-square-foot store into a Nordstrom Rack and LA Fitness.  At the same intersection, Sprouts Farmers Market is underway on its third store in the market at  a former Kroger location.

Kroger is adding another store of its own in Arlington.  The grocer will add a 125,000-square-foot Kroger Marketplace store across from Arlington High School, the largest high school in the state.

In Germantown, Atlanta-based Carter and Memphis-based Elkington Real Estate Group have teamed up to develop a $200 million, 33-acre mixed-use project near Saddle Creek, an open-air lifestyle retail center.

These significant retail and mixed-use projects, the city’s strong industrial presence, and a resurgence of corporations locating downtown are helping revitalize the Memphis area, and retailers are taking notice.

“Memphis is still viewed nationally as a tertiary market, but we’re inching closer to becoming a secondary market for a lot of retailers,” says Whaley.  “Memphis is a blue collar town and we have a heavy presence of discount retailers, but our trajectory is on the rise.”