Office market hot, but watch sublease space

The Nashville office market continues to show steady improvement. The overall vacancy rate for leased office space in the city has dropped almost three percentage points since the beginning of 2004 to 11.8 percent.

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This can be attributed not only to very little construction in the last two years, but also to some good absorption. In fact, 2004's net absorption of 728,980 square feet is one of the better years in the past 25 years.

The Nashville office market looks even better when compared with the nation as a whole. Total U.S. office vacancy to end the first quarter, as computed by Grubb & Ellis, is 16.4 percent.

Over the past 12 years, the average vacancy rate of Nashville's office market has been more than 20 percent lower than the national market. Of the 56 office markets in the United States that Grubb & Ellis tracks, only six had lower vacancy rates than Nashville at the end of 2004.

The Nashville office market also differs from the national market in that our suburban office market is in far better shape. The national suburban market vacancy is 17.1 percent; in Nashville it's 10.9 percent.

There are wide disparities in the health of the Nashville office market depending on the class of space or the area of town. Class-A space (nicer buildings built from 1984 to present) has a vacancy of just 7.3 percent for the entire Nashville area. Compare this to the class-B and -C vacancy rates of 17.3 percent and 18.3 percent, respectively.

Brentwood and the Green Hills/ Music Row areas have vacancy rates less than 6 percent, and the West End submarket is 7.5 percent, while the airport market has a vacancy of 18.5 percent.

Sublease space is still a concern, and if added to the current vacancy rates, would add on an additional 2.8 percent of vacancy. The good news is that the sublease vacancy is decreasing, but much of the space currently for sublease has either one or two years of lease term left. As a result, landlords could be face higher vacancy rates in the next two years.

Class-A vacancy rates in most submarkets are low and demand is strong. A number of developers have buildings on the drawing boards that would add over 800,000 square feet to the Cool Springs area alone. Those projects await a large anchor tenant to get them out of the ground.