Tennessee ranks high among the best US states to do business in. To a great extent, this reputation is due to its business climate, characterized by healthy state finances, some of the lowest taxes in the nation, and ongoing investment in workforce development and education, which enhances the quality of talent local businesses have access to.
Over the years, Tennessee has received multiple awards that attest to the state’s reputation as an outstanding location for business activities, including mentions to its low cost of doing business, quality of manufacturing facilities, responsive state government, and foreign direct investment. As a result of this business-friendly environment, Tennessee has one of the nation’s highest amount of new company registrations.
The state also boasts excellent transport infrastructure (including a busy cargo airport, a major railway hub, and one of the US largest inland ports), which is conducive to a thriving industrial real estate market.
Also, supportive of the state’s commercial real estate market is the manufacturing sector, which has a strong presence across Tennessee and drives significant economic activity with established expertise in automotive, rubber, glass, ceramics, and advanced manufacturing.
Other industry sectors with a significant weight on the Tennessee commercial real estate market and the general economy include logistics, distribution, finance, technology, headquarters, and aerospace.
Tennessee’s business base is comprised of more than 630,000 small businesses, plus large companies with national and global presence, including 10 Fortune 500 firms. Major corporations based here include Bridgestone, General Motors, Tyson Foods, Whirlpool, Volkswagen, Dollar General, and Fedex.
Office Market in Tennessee
Nashville is one of the top five fastest-growing cities in the United States, and has sustained job gains since 2015. Currently, Tennessee’s capital is considered one of the best job markets in the US.
Predominant trends in this market include:
– The consolidation of a flight to quality, with more than 75% of transactions involving Class A or trophy space.
– The expansion of downtown Nashville and Midtown sub-markets with the delivery of several new prime location office developments.
– Sublease vacancies reaching historic highs, yet this type of office accommodation remains an attractive option due to its affordability.
– Record high investment sales, since the city’s economy is in better shape than other urban centers, so investor confidence is high.
– Growing demand for spec suites, especially in the 3,000 to 5,000 square feet range.
Overall, Nashville has approximately 48 million square feet of office space, nearly 30 million sf of which are Class A offices. The biggest concentration of best-in-class offices is in downtown, Midtown, Cool Springs, and Brentwood.
Vacancy rates have increased noticeably during the past 5 years to averages of 18%, but much of this increase is down to surplus space coming from new commercial property deliveries that have tilted the supply-absorption ratio towards the supply side.
Both direct and sublease asking rates have increased steadily over a five-year period. Averages for all asset classes are $36 and $23 / psf respectively. Rental rates for Class A offices are in the mid to high $40s in the most centrally located Nashville buildings.
Knoxville is a secondary market, but has all the fundamentals in place to expand sustainably.
At 4%, vacancy rates are well below the historical average, and the lack of new developments make this market favorable to landlords.
The current trend towards downsizing office footprints situates the majority of leases for space at 3,500 square feet max.
Average rents remain sub $20 / psf, and annual rental growth values have been increasing at around 2%.
Five-year trends evidence plummeting absorption levels relative to new deliveries and fluctuating vacancy rates. Overall performance has been labelled as lackluster, although quality space in downtown Memphis is still good value.
Asking rents dropped from the highs achieved in late 2020 to averages just below $20 / psf and $23 / psf for Class A offices.
Tax Breaks, Business Incentives and Support
Long-term economic growth in Tennessee is being fostered thanks to an extensive program of grants and business support. Some of the programs available include:
– The FastTrack scheme, which consists of several funds and assistance programs that can help cover the costs of training, infrastructure, commercial real estate, and equipment.
– Tax credits and exemptions for job creation, the purchase of machinery, R&D activity, call centers, manufacturing, film and entertainment production, data centers, etc.
– Grants for female or minority-owned businesses and those in eligible rural areas, at-risk and distressed counties.
More details about support available and eligibility from Tennessee’s Department of Economic and Community Development.
