The Nashville Business Journal
By Eric Snyder
A funny thing happened in December: Gateway II, a Maryland Farms office building, sold. And this was not the bargain-basement fire sale that many thought would be common in commercial real estate over the past year.
Northwestern Mutual bought the 117,000-square-foot building for $24.3M – a sales price of more than $200 per square foot, a healthy price even for boom times. The purchase rang out like a shot across the bow, coming after years in which commercial real estate was something to run away from, not invest in.
In the weeks that followed, several other office buildings sold. In the world of commercial real estate, someone turned the lights back on.
Thomas McDaniel, director of office leasing for the Nashville office of Boyle Investment Company, said Northwestern Mutual’s purchase of Gateway II is emblematic of the transactions that are happening with greater frequency in Nashville and across the country.
Life insurance companies, McDaniel said, “went the last 18 months without buying anything.”
For investors who have spent the last two years on the sidelines, or conducting triage on their existing commercial real estate portfolios, many are deciding that it is time to play catch up.
“People aren’t concerned about the end of the world anymore,” McDaniel said.
Back in the Market
According to figures from the Nashville brokerage office of CB Richard Ellis, commercial real estate sales in the Nashville market rose from $276 million in 2009 to more than $798 million in 2010, an increase of 189 percent.
Sales in 2011 have started with a bang. In January, the Adler Group bought the 110,000-square-foot Parklane Building in Maryland Farms for $13.7 million. The same month, the 154,000-square-foot, 100-percent-leased One Greenway Centre sold to a Florida-based investment group for about $36 million.
In February, Duke Realty Corp. sold three office buildings totaling 379,264 square feet, located north of the Nashville International Airport, representing about $28 million of a deal that included additional properties in Cincinnati.
These prices, brokers note, are hardly depressed. Despite the bad voodoo that has hung in the air over commercial real estate for so long, investors have decided that properties with good fundamentals – location, occupancy, etc. – will once again offer safe returns.
Core properties – new, well-occupied buildings in established markets, exemplified by the Gateway II and One Greenway Center purchases – are fetching prices at or near previous high-water marks, said Perry Gooch, a broker with the Nashville office of Cassidy Turley. Gooch, along with Cassidy principal Crews Johnston, helped broker the Parklane and Duke Realty purchases.
One factor that is allowing prices to stay healthy despite the recent recession is the lack of buildings on the market. Brokers have a hard time explaining why more buildings aren’t available for sale, but land on the same theory: Perception is reality.
“There was a perception that if something is on the market, it must be distressed,” Gooch said. Sellers willing to defy such perceptions are finding that the demand for core properties is as high as it’s ever been, he said.
Another factor: It’s still cheaper to buy an existing building than it is to build a new one, even at current pricing levels, said Barry Smith, president of Eakin Partners Commercial Real Estate.
Finally, low interest rates allow buyers to work with lower profit margins, allowing prospective buyers to compete against one another with aggressive bids, McDaniel said.
Across the Range
With the renewed activity in investment sales, it’s also telling to look at what types of property are selling. So far, Gooch notes, it’s been all kinds.
At the end of the spectrum, One Greenway and Gateway represent new, fully leased buildings in core markets. Parklane falls in the middle of the spectrum, as a well-occupied but older building in a core market. Finally, the 73-percent-leased Duke portfolio, consisting of Lakeview Place buildings one through three, represents buildings with notable vacancies in a lower-profile submarket.
Sales across the spectrum bring renewed clarity on building values to the Nashville market, which, prior to last December, hadn’t seen a notable investment sale since the end of 2008, Gooch said. It also shows that whether that a deal is driven by a cash-laden buyer like life insurance companies or financed through commercial mortgage-backed securities and the debt market, all of the pieces of the puzzle are back at the table to make deals happen, Gooch said.
Land Sales Stir
The renewed activity has not been confined to buildings, either. The Nashville market has seen recent examples of raw, developable land trading hands.
In October, Vanderbilt University bought a 22-acre site in Cool Springs for $5.1 million, in preparation for a $200 million medical-office project. In Nashville’s midtown area, JP Morgan Chase and Southern Land Co. bought a 2.71-acre site in January for a healthy $10.65 million to prepare for a 300-unit apartment and mixed-use development on Elliston Place.
Land sales typically come at the tail end of recoveries in commercial real estate. Brokers, however, noted that these two examples are for specific sectors – health care and apartments, both of which are proving resilient amid the recession – and do not suggest a full blown recovery in land sales.