The U.S. economy is still struggling to gain traction, but don't tell that to the Middle Tennessee real estate market. The Music City Center takes the cake in terms of size, but many other projects — mostly apartments and hotels — are adding to Nashville's skyline and streetscapes. Post Editor Geert De Lombaerde and reporter J.R. Lind say down in mid-August with Wood Caldwell of Southeast Venture, Ashlyn Hines Meneguzzi of Bristol Development, Thomas McDaniel of Boyle Investment and Michael Rankin of Crain Construction to talk about those projects and take a big-picture look at the region's growth prospects. This is the first part of our conversation. (Part 2 is here.)
DE LOMBAERDE: Wood, let’s get started by having you talk a little bit about what you’re working on, what’s got you excited these days and what’s got you a little bit concerned as we go into the next six months or a year.
CALDWELL: Well, you’ve got to put it in perspective. You look at what we went through in ’08 and ’09 and it was something. That was kind of rock bottom — and I was with Southeast when we went through the ’80s, starting in ’88 through ’90. For Southeast, that was even rougher. This was pretty bad, so if you put that into perspective, I think things are actually going pretty good. I know we’re a lot busier with real projects that we’re looking at.
But I think the other thing is that Nashville has just got a lot going for it. And first of all, it’s our mayor, the leadership that he’s provided […] has just been phenomenal. In Davidson County, we’re just seeing the mayor going after these corporations that were fleeing to what now is called the suburbs. There are two or three right now that we are kind of touching base with that are major companies looking to either move from Williamson County back into Nashville because they all kind of got their start here or they’re expanding.
Nashville is just in a real positive situation right now propelling job growth. I just think it’s because of what we’ve got here to offer. I could go on for you know hours talking about Nashville and how positive it is.
The other big thing is what’s happened with the apartment industry. You’ve got to look at what’s happened nationally. I read a great article the other day. It was talking about why this boom is happening. In the mid ’60s, around 65 percent of the families owned a home and then it went up to like 70 percent around 2000. Ashlyn, you probably know this a lot better than I do.
CALDWELL: And then it dropped down. But that 2 percent or 3 percent drop all of a sudden is millions of potential homes or people looking for places to live and they’re not necessarily ready to buy.
DE LOMBAERDE: Ashlyn, that’s a good transition for us to get your take on this boom in the apartment market.
HINES: We’re really just seeing [an improvement] after the downturn, and it was brutal in the housing industry. We’ve always been an apartment developer and when all of our renters started becoming buyers about six or seven years ago — all these kids getting out of college did want to buy condos — [it] turned us into condo developers. Now [with] that exact same group, we’ve seen that mind shift move from end to another in a really short period of time, probably five years.
With Icon, when we opened it when the market crashed, out of our 418 units, 118 showed up to close. That could’ve really been the end of our company.
DE LOMBAERDE: Right.
HINES: And it ended up probably being one of the best things that’s ever happened to us.
DE LOMBAERDE: How’s that?
HINES: Because it we were able to get in there and make that project successful for the people who bought there early. Units sell today at higher prices than they did in 2006. To stick with that project and bring it out of the doldrums like we did put us in a really good position when the whole market started turning and apartments were back on the radar screen.
We have a lot of capabilities in terms of urban design and those kinds of things and it’s hard to ramp up for that as a company. It’s just not easy to put together a team that can do that. So we were able to keep that team in place.
We’ve had three or four years of no construction with apartments all over the country. I mean it’s not just Nashville. It’s everywhere, but in particular, a city like Nashville where there’s a huge group of people moving for jobs. They move to Nashville just because they like Nashville and hope they can find a job.
DE LOMBAERDE: And that was happening before we were getting all this national publicity from Rolling Stone, GQ and the like.
HINES: Exactly. Now we’re getting this and they all want to be in urban areas. We are really seeing a project of ours, Bell Historic Franklin in downtown Franklin, do incredibly well. We’re seeing people come from Nashville to Franklin for different reasons. Maybe they are about to start a family or whatever, but they’re looking to rent. They want to be in the downtown of Franklin, not in kind of the suburbs. So there’s that whole shift of people looking for that almost in whatever market they’re in.
DE LOMBAERDE: Right.
HINES: We have as a company three projects under construction. We are closing another one today in Huntsville that [will have] a Publix grocery store and apartments with total mixed use. It’s a redevelopment of a housing project. We’re about to close a project in Jacksonville, have two under construction here in the Nashville area — we’re finishing Vista Germantown — and then we’re looking at probably three or four really strong opportunities just in different cities.
So I would say our company and the apartment industry are in as good a position today as we’ve ever been in.
DE LOMBAERDE: Thomas, we’ve talked about people coming to Nashville. Jobs are coming to Nashville in a lot of cases as well and you guys have been probably one of the most active developers in the last couple of years. How do you see things today?
MCDANIEL: The different phases of the market are interesting. We’re involved in office, retail and residential, too, with the Berry Farms project. But our areas of the market tend to move a little slower than Ashlyn’s. Apartments by nature are one-year leases and with apartment developments, typically you don’t have to pre-lease them to get them released. So that market is a lot more nimble on the upside and downside.
Right now on the commercial side, our general feeling is that there are a lot of people with their bathing suits on standing next to the swimming pool thinking about whether to dive in. And I’m sure that’s reflected in what Michael is doing pricing out a lot of stuff. A lot of people are considering things. We’re certainly working on a lot of projects that, if signed, would result in tremendous busyness for us. And that’s what I hear from really everybody I talk to.
We haven’t had a lot of big projects announced lately — and by “we,” I mean the market. But this Tractor Supply announcement this week is a big one. Obviously, LifePoint was the first one six months or so ago. If we start to see a lot of those dominos fall, I think this market will really take off. We don’t know how much pent-up demand there is out there on the office and retail side. But the discussions are active.
DE LOMBAERDE: And that’s much better than two years ago.
MCDANIEL: Yeah. And Wood said “past tense” as it relates to this downturn. I’d call out the past tense on that, too.
CALDWELL: I totally agree with everything they’ve said. The other thing is that there is a lot of money waiting to get in the market. I just think there’s a very unsettled situation nationally and I think that’s what it is more than anything. I think that’s why cap rates are so low. People don’t have anything to put their money in so they want to do deals.
DE LOMBAERDE: Right.
CALDWELL: Another thing is this: We were doing a study for a group that we worked with on the Brentwood market. It was interesting: If you looked at the absorption rates over the last 10 to 15 years, they always spiked when there was new product put on.
DE LOMBAERDE: So it’s a case of build it and they will come?
CALDWELL: Yeah, build it and they’ll come.
DE LOMBAERDE: It almost seems, too, like companies are trained to wait for that space. They can be patient if they want to.
CALDWELL: Yeah. You know, the whole LifePoint project, that’s a big deal. They’re leaving about 100,000 square feet and it will backfill in that Brentwood area. I just think there’s a lot of that kind of thing that are going on.
DE LOMBAERDE: Michael, Thomas said you guys are doing a lot of pricing and then you’re kind of waiting. Is that the where the market is right now for you?
RANKIN: It is and I’m really the caboose in this. We really saw the bottom last year, two years ago. We’ve seen more activity and a lot more exercising the past six to nine months, much more so than in the past five years. And you see a lot of deals along the lines of that great analogy that Thomas had: People standing next to the pool ready to jump in and the majority of them don’t jump in.
LIND: Which is a good thing in a way.
RANKIN: It’s a great thing. The last thing anyone needs is to get out too far in the deep end and go under. But they’re kind of sticking their toe in, seeing if it will work.
DE LOMBAERDE: Yes.
RANKIN: But the market in Nashville that seems to be really active right now from our perspective is the hospitality market. You see hotels going up everywhere. The convention center is driving that. The booked rooms that they are quoting come 2013, 2014 is astronomical. It’s really, in my little brain, hard to comprehend.
DE LOMBAERDE: More than 700,000 by now.
RANKIN: And so the shortage of rooms is there. Now someone would argue we’re already overbuilding hotels but there are a lot of hotels yet to be built.
DE LOMBAERDE: Is it a matter of a shortage of rooms per se or is it a shortage of newer, good enough rooms? Is there an element of having to build new because if the Music City Center is going to bring all these people to town, then the older properties may not get a piece of that business because they may not meet the standards.
RANKIN: Right. My thought on that would be it’s both. But I’m certain Smith Travel could answer that more directly.
DE LOMBAERDE: Good point. Swinging back to the backfilling of Maryland Farms: Is there enough of demand to fill the LifePoint and Tractor Supply spaces in the next couple of years? How quickly does that get filled?
MCDANIEL: We were looking at the market just yesterday, doing a report for our partners in respect to one of our tenants. It was a certain size he was going to be looking for. We’re looking at large blocks of space in the market today and in the combination of Cool Springs and Brentwood — excluding our new building we are just delivering — there is no block space. There are two subleases. Otherwise there is nothing greater than 40,000 feet in Brentwood or Cool Springs. And those are the markets that have annually, historically speaking, had the largest demand for space.
DE LOMBAERDE: Right.
MCDANIEL: So you know things are tight. At the same, we are just delivering a building this week that’s 175,000 feet and it’s 25 percent leased. Twenty-five percent is more than we thought it would be, but we have space available. People aren’t jumping in the pool quite yet — or at least not all at once and they’re taking just what they need and not a lot more. It’s an interesting dynamic in that there is very little supply but at the same time the tenant demand side is still a little cautious.
DE LOMBAERDE: How much is that because of the election? We’ve been hearing that for more than a year now, I think. “Nobody wants to make any decisions because of the election.”
HINES: We’re not a huge tenant by any means, but we are busting out of our office and we are saying, “Let’s just wait and see. We’ll make this work.” Because we’ve got all this work going on and the election is not really a factor in our decision making. I think everybody is taking a wait and see attitude.
MCDANIEL: I feel that, just emotionally, the stock market makes a huge difference.
MCDANIEL: And the stock market reflects a lot of factors, but I feel that, when people leave for work in the morning and CNBC is on in their kitchen and they see green arrows, they feel better about the day. And when you leave and the Dow Futures are down 300 points...
HINES: You’re depressed.
MCDANIEL: And not committing to anything.
HINES: It’s a seesaw — and we have such gridlock politically that you ask, “How much is it really going to matter?”
RANKIN: Well, I think it depends on the market segment. What we see with the medium to small corporations that we work for — and it’s very significant — is that they’re scared to death of 12/31 and what’s going to happen with these tax laws. They’re concerned about what’s going to happen in November and the ramifications of that going forward. In some of the global large entities, that’s maybe not so much the case. But in our world they are very cautious.
DE LOMBAERDE: So what’s going to settle them down? What’s going to make them feel more confident?
RANKIN: Time and decisions.
DE LOMBAERDE: Just any decision and then we’ll start planning from there?
RANKIN: Make the decisions. See what’s laid out on the table and then you have to react to that and keep moving.
DE LOMBAERDE: Do you all expect that, come next spring, the floodgates will open to a certain extent?
CALDWELL: All we’re looking for is certainty. We want something that we know we can look for and we haven’t been able to do that in the last three years. Even HealthSpring sat there for two years because they didn’t know what the new health care act was going to do. They were ready to go in ’08 and then everything started happening. I just think we’ve got to have some certainty.
DE LOMBAERDE: Let me transition back if I can to apartments. Ashlyn, you hinted at the fact that some people think we might be overbuilding but you said the pipeline is still very healthy in terms of new developments.
HINES: I guess you could overbuild, but it would be hard because so many people want to live here. The sites, they’re just not there. I don’t know that you could get a decent-sized site in the urban core — in particular around the Gulch and Germantown. They’re just not there. So I would say that those areas, I don’t know that you could overbuild.
DE LOMBAERDE: OK.
HINES: But I think we have a healthy pipeline right now. I think a lot of people get sort of wide-eyed when 10 projects are announced. Well, 10 projects can be announced and probably six of them happen and then they’re all kind of staggered at different phases. Just saying you, ‘Oh, there’s 3,000 units that are going to be built.” Well, in reality 1,500 of them will probably get built. And then they’ll all come online at different times and so it tends to level itself out.
DE LOMBAERDE: Yeah.
HINES: And then right now banks are very conservative. So unless you come to the table with a lot of equity and a really good track record, it’s not like you can just show up and get an apartment deal done. So it tends to weed out the ones that probably don’t need to be there anyway.
DE LOMBAERDE: Is there more discipline among developers, too, or does it come from the banks?
HINES: Well, as a developer, you are disciplined but you’re deal junkies, too. That’s the nature of a developer but the banks force you to be more disciplined. We are always very conservative in our underwriting because you just you need to be.
LIND: Would you think currently the lenders are a little more lenient or less stringent in the multi-family market versus hospitality or office?
HINES: I think so. With multi-family deals, we don’t have to do any pre-leasing. They’re pretty straightforward on how they’re financed and how the capital works and as long as you are doing a good and viable project. It’s not that it’s easy to get money but it’s probably easier than to get money on a spec office building.
LIND: Yeah, unless you’re Boyle, nobody is doing spec office buildings.
MCDANIEL: [5000 Meridian] was an interesting decision for us and we had a lot of fun talking about it for quite a while. I don’t think if that was a stand-alone site we ever would have released building specs.
DE LOMBAERDE: It was all about the momentum at Meridian?
MCDANIEL: It’s funny that in the previous upturn, we never did a spec building no matter how vibrant the market was. But we did have such interest at Meridian and we never got below 95 percent even when the market turned. So we convinced our partners by saying that, if we don’t lease a single square foot here, we’re not 0 percent leased. Look at the whole project: We’re 80 percent leased.
I think we knew when we finished that we would need to be patient getting leases. But at the same time, we’d be the only game in town.
DE LOMBAERDE: How big is that window for you to be the only game?
MCDANIEL: Well, no one has started anything and it will take someone at least 14 months to build something.
HINES: And that’s after they get it approved.
MCDANIEL: Right. You know, there’s an analogy there to how Bristol has been at the leading edge on multifamily site. When you guys did Bristol on Broadway and converted it to condos, that was the first thing in the market to do that. And then you did the Midtown project, which is probably one of the first when the apartment market started back up.
MCDANIEL: I remember reading that and saying, “Wow.”
DE LOMBAERDE: And now you’re in Brentwood as well.
DE LOMBAERDE: I guess there’s a little bit of similarity there and you’re going into a market where people would go, “Ooh, I don’t know…” But they’re good markets and there’s demand there.
MCDANIEL: Yeah, I would give these guys credit for being an early mover in identifying those trends quickly when the rest of us haven’t figured it out yet.
DE LOMBAERDE: I also wanted to talk about the different submarkets in the area. We’ve talked a little bit about Brentwood and Cool Springs. What other ones are positioned to do well in the next couple of years? Wood, you guys are active in 12 South. That looks like a longer-term story.
CALDWELL: I literally used to go to the gas station there with my father and Becker’s Bakery, which was this great old bakery, and went to Sevier Park all the time. Then Woodmont Boulevard became this barrier — you just didn’t cross over there — and now it’s this hot place to live.
If you drive through there, it’s just amazing. A tear-down home will come on the market and it will stay on the market for one day. Literally one day. If somebody is building, they’re going to replace it with a $400,000 home. It’s just remarkable what’s going on and now it’s starting to filter over to Eighth Avenue. Young professionals making a great living are moving into these markets. So can you find another 12 South apartment project? If you can, it’s going to be gold.
HINES: It should be good.
CALDWELL: The question is, can you get them approved.
DE LOMBAERDE: Michael, do you see any other emerging markets?
RANKIN: One that’s coming back that may not be on everyone’s radar is the Crossings, that Southeast corridor around Hickory Hollow and Cane Ridge. There’s good opportunity, there’s space, infrastructure. I think in the next decade, you’ll see some great growth there. HCA just made a big investment out there with their data center.
HINES: What will naturally happen with housing — apartments in particular — is that, when you can’t do sites in the Gulch, then you move down to 11 North. Then you have 1700 Midtown [near Baptist Hospital]. So that opens up Charlotte Avenue.
DE LOMBAERDE: Right.
HINES: You’ve got Germantown, too, so it kind of opens up little areas that you’d never think. All it takes is one person to do something of any size in an area like that and it starts to turn the whole area.
DE LOMBAERDE: It’s a real domino effect.
HINES: I mean, who would have ever thought the backside of Division would get developed? Look what is happening there and how that segues into Eighth and 12th.
MCDANIEL: You know, the 11 North project you mentioned was a big surprise to me.
DE LOMBAERDE: How does that influence what you want to do with the land you’ve assembled on the other side of Charlotte?
MCDANIEL: We’re trying to figure out what to do with this North Gulch land. It’s a great assemblage and has great proximity to everything, but it was not the first thing on everybody’s development radar. Then these guys come in with this significant apartment development right there that has garnered some of the top rents in the city…
HINES: That’s a classic example of somebody from out of town in my opinion looking at Nashville with a blank slate. They can come in and look at that and say wait a minute this is a good site and they hit a home run. It’s a great project.
LIND: You know I have sort of a weird affection for Charlotte and 11 North sort of opened up Charlotte here. I think we all kind of perceive Charlotte in a certain way and I think it has a lot of character. I think it’s sort of —
HINES: Very quirky.
LIND: I think Charlotte just got branded as a way to get from Bellevue to downtown and that’s all it was. So could we go that way? Is Charlotte the next big corridor?
CALDWELL: We’ve got the 28th Avenue Connector. That sat on Purcell’s desk for eight years and all a sudden…
HINES: When that opens, everything from that connector into the North Gulch and Germantown will become prime development opportunities.
CALDWELL: Yeah, it’ll all come together. That’s another big prime opportunity.
DE LOMBAERDE: Thomas, what’s your all’s timeframe for the North Gulch project? Is it a matter of finding the right tenants or do you look at other benchmarks along the way?
MCDANIEL: We have completed the assemblage. We finally got the last piece that we didn’t own. We’re demolishing everything now to have a clean slate and we have had surprisingly high interest from users of all types.
It’s a little different site. It’s not a pure office site in the middle of The Gulch. It’s not the first apartment or condo or hotel site you think of, but we have seen some great interest. It’s a large land assemblage right where it is and I think we’re going to have an announcement soon on a good part of that and hopefully more to follow. We’ll see.
DE LOMBAERDE: Do you want it to be mixed-use?
MCDANIEL: It will be mixed use to some degree and we have an idea of we want for it. But at the same time, the users may push us in one direction or the other.
DE LOMBAERDE: OK.
MCDANIEL: I was going to mention Charlotte, honestly. I think the whole corridor is going much more westward than the site we’re talking.
DE LOMBAERDE: That’s a good point about Charlotte. You think the connector is a good way from downtown, but it really isn’t.
MCDANIEL: No, it isn’t.
CALDWELL: It’s 10 or 12 blocks. You know it’s a short strip that can really get built up.
MCDANIEL: And HCA is already developing that corner in conjunction with Metro.
CALDWELL: Yeah, because that’s the only downside with a lot of other areas that we’ve mentioned. With the 12 Souths and your Eighth Souths of the world, there’s only a narrow strip of commercially zoned property. So for there to be any magnitude of commercial critical mass, you need something that’s bigger. There are large land sites on Charlotte that are hard to find on any other accessible arterial with that proximity to town.
HINES: But I think you’ll see on Eighth, when that apartment project comes up, it’ll transform that area.
CALDWELL: Oh yeah.
HINES: That project on the car dealership is going to be large enough that it’s going to put a big mass of people in that little area between there and Wedgewood.
CALDWELL: The only difference between that and 12South is that you’ve got the flow of traffic, the volume of traffic. You’ve got five lanes there on Eighth, so I don’t know whether you’ll get that kind of neighborhoody kind of feel.
DE LOMBAERDE: Can you do an extensive streetscape on that kind of an artery?
CALDWELL: Well, if you talk to Berry Hill —we went and looked at that project pretty significantly —they want to do something. They want to slow traffic down so they can start creating more of a retail opportunity for people. They’re thinking the right way.