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Prospects for Southeastern Commercial Construction Gain Momentum

As part of our effort to gather economic information, the Atlanta Fed's Center for Real Estate Analytics recently conducted several outreach efforts to help gauge the state of the commercial real estate market in the Southeast. Staff from the Center traveled to Nashville to meet with local real estate industry contacts and discuss recent developments in commercial markets. Contacts included leading commercial real estate management, architects, developers, brokers, and industry analysts.

The overarching theme from attendees was that the Middle Tennessee commercial real estate market has strong fundamentals and was performing well. The market was better positioned than most going into the downturn. Construction remains very limited, and supply is described as "tight" in most submarkets. Contacts stressed, though, that nonresidential construction will soon be needed to spur economic growth; however, access to construction financing remains challenging.

Other notable highlights from discussions with Middle Tennessee contacts:

  • Office vacancy was described as low across most submarkets. Brokers reported that prospective tenants have been turned away because of the lack of contiguous vacant space.
  • Renewed interest in locating offices in downtown Nashville is taking place.
  • There continues to be a growing shift to higher-density office space (shrinking cube space and conference rooms and fewer break rooms) while the demand for more parking spaces continues to grow, especially in suburban markets.
  • Reports on retail real estate were similar to national reports; good locations are doing well while marginal locations are struggling.
  • Grocery stores are under increasing pressure from large discounters selling groceries, and getting infill tenants remains difficult.
  • Hotel construction is strong in the Nashville market, and the outlook is bullish.
  • The apartment market occupancy rate is high and rents have risen. A great deal of construction is under way.

The Atlanta Fed also recently concluded a poll of southeastern commercial contractors. Reports indicate that the pace of commercial construction improved from earlier this year and compared with a year earlier (see the chart). Backlogs have risen as well. Material price increases have subsided somewhat from reports earlier this year, while pressure on labor costs appear to be rising.

Most contacts anticipate that commercial construction activity will be flat for the remainder of 2012 on a year-over-year basis. Some suggested that 2012 would be the bottom of the market, with improvements expected next year. The outlook for 2013 is clearly more positive, with most anticipating stronger activity compared with 2012; however, comments indicated that a great deal of uncertainty remains as well.

Overall, both contacts in Middle Tennessee and our poll of southeastern commercial contractors indicate that some positive momentum is occurring that could lead to modest improvements in commercial real estate construction for that area in 2013.

Photo of Whitney MancusoBy Whitney Mancuso, a senior economic analyst with the Atlanta Fed's research department

July 31, 2012 in Real Estate , Tennessee | Permalink


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