When Gulch impresarios MarketStreet Enterprises and Cool Springs office giants Spectrum/Emery announced they were teaming up to develop five top-notch office properties, it raised an
important, if basic, question.
What happens when 1.5 million square feet of office is dropped into a market?
Over time, the MarketStreet/Spectrum/Emery partnership plans to construct buildings ranging from 100,000 square feet to 600,000 square feet on 11th and 12th avenues as well as Division Street. Combined, they will hold as much office space as is in the Regions Center, the Pinnacle at Symphony Place and Cummins Station combined.
So will the quest to occupy the shiniest, newest thing pull tenants out of the traditional downtown? Will the new towers stem the steady rush of corporate relocations to Cool Springs? Will supply outstrip demand, hamstringing the market for everybody?
Or will — as MarketStreet and Spectrum hope — The Gulch become an altogether sui generis office market?
Spectrum’s Pat Emery said the smart bet on Nashville’s office future is The Gulch, because his new partners deftly executed their famously patient plan.
“In this case, you’ve got a neat neighborhood in what MarketStreet has done. … You can add another component, which is office,” he said.
Jay Turner from MarketStreet said office is, as Emery noted, the next logical step.
“There are positive signs in The Gulch and we are positioning ourselves to that potential,” he said.
So far most everything has worked out in The Gulch. The condos that remain condos are nearly full. Even the failed condo project at Velocity is doing brisk business in its second life as apartments — so much so that MarketStreet is readying to bring another set of apartments out of the ground with Pine Street Lofts. Retail-wise, the district has absorbed 50,000 square feet in the past six months — more space that’s come off the vacancy rolls than did during the entire recessionary period previous. But will The Gulch be able to compete as an office destination?
The partners say yes: by not trying to be downtown and, certainly, by not trying to be Cool Springs.
“These are such different types of neighborhoods. Cool Springs is family-oriented. The Gulch is high-energy, young, high-education type people. . . . I think it can accommodate a lot of different kinds of users,” Emery — who made his bones with Cool Springs success — said.
Thus, Emery — whose company will handle the leasing and property management — is targeting certain industry segments: tech, entertainment and legal, all of which tend to have young, urban employees.
Turner said the goal isn’t necessarily to go head-to-head with downtown, but to extend downtown farther west.
With the Music City Center largely stifling downtown commercial development south of Broadway — at least for the time being — and the river hemming in the business district in the other directions, the only place for downtown to stretch its legs is toward Music Row.
Once the ambitious office development plan is fully realized — and that’s a long-term proposition — it will take the Central Business District from 8 million square feet to 9.5 million, a 19 percent jump.
Were it all to come on-line empty and at the same time — which it isn’t — that would double downtown’s vacancy rate.
It’s a careful line the partnership will have to tread. They’ll want to avoid flooding the CBD with empty space, but rather ease the new square footage carefully into the existing market structure.
“What we’ve seen in other cities is the potential to stub your toe if you drop a development in the middle of town without taking the time to do a good job to find out what Nashvillians want,” Turner said.
But the real success of The Gulch project likely has little to do with what is already in Nashville.
Cool Springs was a success not because it was able to draw tenants already in Williamson or Davidson counties, but because it brought them in from elsewhere.
Competing with downtown — or to a lesser degree, Cool Springs — would make the influx of office space little more than reshuffling the deck chairs.
Emery — who knows a little something about taking a new market from vacant to packed — is gunning for Fortune 500 relocations.
“Nashville’s got a choice it didn’t have a month ago when it comes to corporate relocations. We’ve given the city a good economic development tool; they can compete for some of these relocations,” he said.
While Emery chases the clients, MarketStreet will set up the bait, banking that LEED-certified buildings in a LEED-certified neighborhood, with easy access to arterials and interstates, as well as mass transit, and with enough open space to accommodate parking lots usually seen only in the suburbs, will convince those relocations to come into the city and not to Cool Springs or wherever the next new out-of-town destination springs up.
Ideally, of course, MarketStreet won’t bring any of the five buildings — ranging from 100,000 to 600,000 square feet and from 12 to 22 stories — out of the ground until Emery has a relatively firm taker on the space.
“You can mold that 1.5 million around the current and future demand, which allows you to be flexible. That’s the ideal model,” he said.
And that flexibility should keep the rental rates steady, not just in The Gulch, but throughout the market.
The CBD is starting to see new and extended leases again, and there’s been almost no new construction since The Pinnacle opened in SoBro. Vacancy rates are starting to decline, and the price per square foot is responding as you would expect. Class A rent downtown is climbing, now at an average of $24.55 — affordable when compared to the swankier and fuller markets in West End and Green Hills and comparable to Cool Springs, which has a vacancy rate in the vicinity of 6 percent, far below the high teens seen downtown.
Companies are still willing to pay for the convenience and cachet of being in the urban core.
“We anticipate being able to get Class A office rent. What we are going to be able to offer is suburban-level parking ratios because we own so much land. The occupants of the building will enjoy the neighborhood,” Turner said.
While all of this sounds like a fresh idea from MarketStreet, it was part of The Gulch plan all along, a plan that goes back to 1999 and has slowly but steadily evolved with few speed bumps to become a success even in trying times.
“When we started in 1999, we all along planned a large office presence. The time has not been right,” Turner said.
There have been offices in The Gulch from the beginning — the building that houses The City Paper and its sister publications is 100 percent leased, as is the Bohan Building at the terminus of the Demonbreun Viaduct. The limited office space in The Terrazzo condominiums is filling up, as well.
Turner and Emery have seen the progress and see the momentum — even as tough as it may be to discern with the naked eye.
With a combination of MarketStreet’s innovation — and its renowned patience — and Emery’s track record in opening Class A markets, they hope their Gulch gamble can pay off, even if it does take a decade.