“When COVID hit, we were as active as we had ever been and had a multitude of interest on most all of the properties that we market,” said Thomas McDaniel, director of office properties for Boyle, a Nashville-based development company that oversees many local properties, including McEwen Northside, Berry Farms and Meridian. “But from there on, although we continued to show up at work every day and do the best job that we could representing our properties, for the most part, there was a six-month period there where we really could have just turned the lights off and stayed home.”
In Cool Springs, the commercial district for Franklin and Brentwood, vacancy rates hit a 10-year high, rising to between 14%-18% in the fourth quarter of 2020, according to reports from real estate data firm CoStar.
Tom McArthur, principal broker and co-owner of McArthur Sanders Real Estate in Franklin, said there are a number of factors that have contributed to this increase, including fluctuating unemployment rates, new building construction and lower overall demand. With the coronavirus pandemic still ongoing, he said it is not yet clear if vacancy rates in the area have peaked or if they could continue to rise in 2021.
“As we go forward, it’s going to make people rethink how much office space they need,” McArthur said. “So I don’t know that we’ve seen the full repercussions of COVID. I think it’s probably another three to six months before we actually see how things are going to really pan out.”
Navigating a new normal
While many state-mandated business restrictions have been lifted in Williamson County, Lee Ann James, a Realtor with Nashville-based Parks Realty, said employer decisions will be the primary driver of any sort of comeback for office spaces.
Early projections from Parks Realty and CoStar show there is likely to be an additional increase of 3% in vacancy rates in 2021 in Cool Springs before those figures level out.
“I think everyone needs a little more time to figure out if people are actually going to come back to their traditional office space or if it’s going to be more of a hybrid, where folks work from home part-time and [from] their office,” she said. “So, I think [it] probably might inch up a little bit before it mellows out and creates our new normal.”
The Greater Nashville area is not alone in experiencing higher vacancy rates. According to reports from the fourth quarter of 2020 by real estate firm Cushman & Wakefield, the average office space vacancy rate nationwide is 15.5%, and rates in nearby cities, such as Atlanta and Memphis, are 20.5% and 15.5%, respectively.
Although vacancy rates have risen, asking rental rates in the area have remained largely stable, according to market reports. Average rental rates in Cool Springs have risen to $31.25 per square foot as of late 2020, up from just over $25.97 in 2015. James said Williamson County is still a draw for employers, which has created enough demand to keep prices stable.
“Cool Springs and Williamson County are growing and are a very desirable place even given the pandemic,” James said. “It’s a place where people want to relocate, so I think for that reason, our rental rates are going to hold steady and slowly increase as the population increases.”
Additionally, those asking rent figures may not include leasing incentives, such as rent discounts or other allowances given to prospective tenants, McArthur said.
“So really, what the true effective rent is, as far as what somebody’s actually paying, may be different than what the quote rent is,” he said.
Future needs, expected recovery
While it is not yet clear if or when office work will return to pre-pandemic levels, local developers and economic experts said they are optimistic for Williamson County’s future.
Results of a survey conducted by Williamson Inc. and presented during the chamber’s Jan. 21 Williamson Business Barometer event indicate that while few companies with more than 600 respondents in Williamson County expect their office needs to increase in the next year, companies remain hopeful about what is to come.
When asked how their need for physical office space would change in the next year, 66% of respondents said their needs would likely remain the same, and 8.7% said their needs would increase. However, when asked the same question with a five-year outlook, nearly 30% of respondents said their space needs would likely increase.
“This shows that we’re still a growing economy and the office market may not be disrupted long-term as much as we’re led to believe,” Williamson Inc. President Matt Largen said.
About 40% of respondents said they expect to have increased remote work for employees over the next year.
It is not yet clear what effects the pandemic will have on office space needs in the long term. However, McDaniel said, unless employees work from home full-time going forward, offices will still need space for employees that work there even part-time.
“For a tenant to reduce their square footage—they can really only do that if the employee who has been working from home is never going to come back to the office,” he said. “If you want to allow for that employee to come back to the office at times, you still need the same desk that you needed when they were there 100% of the time.”
McDaniel said developers are starting to see tenants slowly return to the market, which signals some stabilization. And while construction saw a slowdown in 2020, at least 14 new office spaces with more than 1.8 million square feet of space have been proposed for the area as of the start of this year, according to CoStar.
“We are now seeing pretty good activity today, and we’re getting some leases and transactions signed, and tenants are coming back to the market again,” McDaniel said. “Entering 2021, we feel pretty optimistic about where things are.”