Nashville Suburbs Draw
Tenants from Downtown

The Nashville, Tenn., region has been on the winning side of numerous corporate relocations in recent years, but some commercial-real-estate submarkets, largely the southern suburbs near ritzy residential neighborhoods, have benefited from the good times more than others.

Clarcor Inc., a filter and packaging manufacturer, chose suburban Franklin, about 20 miles south of downtown Nashville, when it relocated from Illinois in 2004. Healthways Inc., a disease-management company, will move from Nashville into a new headquarters in the same suburb next year. Next summer, Nissan Motor Co.'s Nissan North America Inc. will move out of more than 240,000 square feet of leased space in downtown Nashville into a new 460,000-square-foot facility, valued at more than $100 million, which is under construction in Franklin.

The gap between the health of the city and the premier outlying office submarkets could widen as new buildings come on line and pull some tenants out of existing buildings. "The natty problem for us is going to be backfilling the central business district," said Tom Frye, managing director of the CB Richard Ellis Group Inc. Nashville office. The cost of parking in downtown has partly damped demand, while easy access to high-end residential neighborhoods in Williamson County, which is popular with executives and country-music stars, have helped the south suburban submarkets, Mr. Frye says.

The central business district's office submarket, which had a third-quarter vacancy rate of 13.9%, is certainly in better shape than those of many other Southern cities, such as Atlanta, where roughly one-quarter of the central business district's office space is vacant. Still, the performance of downtown Nashville pales in comparison to the Brentwood and Cool Springs submarkets, where the office-vacancy rate was 9.0% in the third quarter and average rents of $20.87 a square foot were well above the $17.22 commanded downtown, according to Property & Portfolio Research Inc., a Boston-based real-estate research company.

To be sure, downtown is a popular location for service-oriented businesses, such as law firms. In 2004, downtown lured building-materials supplier Louisiana-Pacific Corp. to locate its headquarters there. The higher downtown vacancy rate also is largely a reflection of older, outdated buildings that don't compete well with the modern office space coming on the market, says Barry Smith, president of Nashville-based Eakin Partners LLC. This month, Eakin completed the SunTrust Plaza building, which is about 80% leased, he says.

Downtown supporters also say they believe an increasingly vital downtown will ultimately boost the appeal of the central business district's office market. The country-music capital, famous for the cluttered glitz of the Grand Ole Opry, has also added cultural offerings in recent years. Last year, the $124 million Schermerhorn Symphony Center, home to the Nashville Symphony, opened downtown, and a new library designed by Robert A.M. Stern opened nearby.

Perhaps the most dramatic change has been the growth of the urban-residential market, which is bringing more retail. The number of residents living in the core of Downtown Nashville, which anchors a metropolitan region with a population of about 1.5 million, has doubled to about 3,200 in the past 10 years, according to Thomas Turner, president of the Nashville Downtown Partnership. Still, a slowdown in the residential market has delayed the start of construction on the 70-story Signature Tower, a condominium and hotel tower billed as the soon-to-be tallest building in the Southeast. Tony Giarratana, president of Nashville-based Giarratana Development, says he has presold 102 of the tower's 400 condo units and expects to start construction next summer, about one year later than planned.

As the downtown skyline rises higher, Mr. Turner says he expects the city will gain more traction as the place that businesses want to be. "I'd like to think that, in the future, we'll get more than our fair share," he said.

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