Over 5.6 Million Square Feet of Office Space to be Developed

Research & Forecast Report

NASHVILLE | OFFICE3rd Quarter 2016

Key Takeaways > Demand for Class A office space remains strong, contributing to declining vacancy and increasing rental rates. Record-high rental rates for new construction continue to pull the average Class A market rate for existing product upward across the Nashville market.

> Construction is underway on 3.4 million square feet of office space around Middle Tennessee, set for delivery by the end of 2017. Nashville has over 5.56 million highly anticipated square feet in the development pipeline.

> 67% of the new construction that will be delivered is pre-leased. Over 1.07 million square feet of backfill vacant space will hit the market between now and the end of 2017, when tenants relocate.

Market Conditions

Office markets nationwide have continued to improve throughout 2016, despite slowing job and GDP growth and uncertainty surrounding Brexit and the upcoming U.S. presidential election. Class A properties in both Central Business Districts and suburban areas posted rising rents, and office markets across the U.S. are experiencing declining vacancy rates and positive absorption. Heightened demand is creating tighter markets, resulting in historically high rental rates. Construction levels have remained stable throughout each quarter of 2016, contributing to the downward pressure on vacancy.

The Nashville market has mirrored the nationwide trends, as market interest and leasing demand remained strong during the third quarter. Downtown Nashville’s existing Class A rents continue on an upward trajectory, as asking rates for new construction are ushering in higher rental rates than ever before.

Nashville’s office market netted positive 506,287 square feet of move-ins during the third quarter, bringing the year-to-date absorption to 809,665 square feet. The Nashville market is the tightest it has ever been, closing the third quarter at 4.8% total vacancy. Nashville’s highest post-Recession vacancy rate was 11.5% in Q2 2010.

Downtown Nashville experienced an uptick in leasing during the third quarter. New leases totaling a combined 87,250 square feet included tenants Burr & Forman, Manier & Herod, Qualifacts Systems, and Smile Direct Club. Of note, Colliers International, CBRE, Cushman & Wakefield, and Avison Young are now all located in the bustling downtown Nashville core.

Nashville led the nation in creating the most white-collar jobs according to a July research study conducted by Forbes. Since 2010, Nashville has experienced business service employment growth of 47.2% to 152,000 jobs, with 7.7% growth last year alone. In addition, 54,900 new jobs from company relocations and expansions were announced in the Nashville Chamber of Commerce’s 2016 Annual Report for FY 2015-2016. Nashville remains a prime location for companies to relocate and expand, and new development continues to race to meet the demand for Class A space.

Market IndicatorsRelative to prior period 3Q 2016 4Q 2016*

VACANCY

NET ABSORPTION

CONSTRUCTION

RENTAL RATE

*Projected

Summary Statistics 3Q 2016 Nashville Office Market

EntireMarket Downtown Suburban

Vacancy Rate 4.8% 8.2% 3.5%

Change From 2Q 2016 (basis points) -30 -140 -80

3Q Absorption 507,037 78,571 428,466

New Construction 266,356 0 266,356

Under Construction (Square Feet) 3.4M 2.02M 1.4M

Asking Rents Per Square Foot Per Year

Average $23.56 $25.63 $22.68Class A $27.11 $27.95 $26.90Class B $21.30 $25.02 $20.30

Unemployment Jul-15 Jul-16 Nashville 5.0% 3.9% Tennessee 5.6% 4.3%U.S. 5.3% 4.9%

Job Growth Annual Change # of Jobs Nashville 3.4% 31,000Tennessee 2.1% 61,000U.S. 1.7% 2.0M

Job Growth & Unemployment

201820172016

New Construction - 713,409 SFBackfill Space - 802,500 SFTotal Vacant- 1,515,909 SF

New Construction - 223,993 SFBackfill Space - 274,630 SFTotal Vacant - 498,623 SF

New Construction - TBDBackfill Space - 382,000 SFTotal Vacant - 382,000 SF

2 Nashville Research & Forecast Report | 3Q 2016 | Office | Colliers International

Vacancy & Availability Nashville’s total market wide vacancy rate declined to a record 4.8% at the close of 3Q 2016, down from 5.0% from last quarter and 5.6% from a year ago. The largest decrease in overall vacancy occurred in the Downtown submarket at 8.4%, down from 9.0% during the second quarter.

Nashville is undergoing an office development boom, and multiple tenants that occupy large blocks of mostly Class A space are relocating to newly constructed buildings over the next two years. Consequently, there will be significant space to backfill across the market. In addition to vacant space of nearly 940,000 square feet that is coming onto the market, existing space totaling over one million square feet will become vacant. This is a consideration that has the potential to alter the Nashville office market in 2018 and 2019.

Downtown’s Class A direct available rate of 5.1% equates to only 236,317 square feet. Options for large blocks of existing vacant available space are limited. Downtown’s Class A vacancy rate decreased to 8.7% at the close of the third quarter, the lowest since 2007. The delivery of 1201 Demonbreun next quarter may bring a slight increase in Class A vacancy next quarter as tenants move into the space through the next 3-6 months. Downtown will welcome 475,000 square feet of Class A space with 222 2nd Avenue development and 615 Third during the second half of 2017, and vacancy is likely to remain relatively unchanged until then.

The average suburban Class A vacancy rate closed the quarter at a new market low of 2.7%. The high-demand submarkets* posting the lowest Class A vacancy during 3Q 2016 are Cool Springs (0.6%), followed by West End (2.3%), and Brentwood (2.8%).

*Suburban submarkets with total Class A inventory totaling over 2M square feet.

Rental Rates Nashville’s overall rental rate is at its highest point to date, closing out 3Q 2016 at $23.56 per square foot. This represents an increase of 2.3% since last quarter, and an 8% increase since 3Q 2015.

New construction added to the inventory over the last 12-16 months with asking rates in the low to mid-$30 range has contributed to consistent elevations in rent for existing product. Class A office rents have increased by 6.5% over the last year. Downtown’s Class A asking rental rate of $27.95 is a record high for this submarket. The Brentwood submarket experienced the largest rent increase at 3.2% for Class A space over last quarter, bringing the rate to $27.37 per square foot.

Absorption & Leasing ActivityThe momentum of positive absorption is likely to quicken in the Nashville office market over the next two quarters as tenants that signed leases in the first half of 2016 move or expand into new space. The largest absorption during the third quarter was AIG’s 172,550 square foot move-in at its new 203,000 square foot building in Brentwood, Seven Springs West. The delivery of 1201 Demonbreun to the market next quarter will result in over 200,000 square feet of move-ins over the next six months. Nashville’s ten-year average annual absorption is 933,787 square feet. The Nashville office market can expect to hit this absorption by year-end 2016.

Nashville Market Rental Rates*

New Supply, Absorption, and Vacancy

New Supply Net Absorption Vacancy

Vacancy RateSqua

re F

eet

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

2000000

201620152014201320122011201020092008200720064%

6%

8%

10%

12%

$19

$26

$33

$40

Q3-16Q2-16Q1-16Q4-15Q3-15Q2-15Q1-15Q4-14Q3-14Q2-14

New Construction Class A Market

Future Class A Vacancy

*New construction includes buildings delivered after 2014 and buildings that are currently under construction.

3 Nashville Research & Forecast Report | 3Q 2016 | Office | Colliers International

Office Development Nashville MSA has over 3.4 million square feet under construction. Demand for Class A office space remains a primary driver for new development as vacancy remains below 2% in target markets. By the end of 2017, 2.02M additional square feet will be delivered in the Downtown submarket and 1.4M square feet will be added to the suburban submarkets.

DOWNTOWN

1. Construction continues on 615 Third, a LEED Certified 120,000 square foot Class A building in the exploding SoBro district. Barge, Waggoner, Sumner and Cannon, Inc., Colliers International, R.C. Mathews Company, and The Mathews Company will occupy 80,000 square feet at this location. 39,000 square feet remain available at this location.

2. Eakin Partners’ 1201 Demonbreun is under construction in the Gulch. This 285,000 square foot Class A development is 82% pre-leased and will be the newest multitenant building to deliver downtown during the fourth quarter.

3. HCA Capitol View, the 500,000 square foot building that will house HCA subsidiaries Parallon Business Solutions and Sarah Cannon Research Institute, is under construction. Over 374,000 square feet of backfill space will be vacated throughout the market following HCA’s move-in at Capitol View.

4. Construction is underway on Lifeway Christian Resources’ 270,000 square foot headquarters at Capitol View, with an estimated delivery during 4Q 2017.

5. In SoBro, Bridgestone Americas’ 500,000 square foot headquarters is under construction. The 30-story tower in SoBro will bring 1,700 jobs downtown and join the Nashville skyline in 3Q 2017.

6. Hines & C.B. Ragland Co.’s 222 2nd Avenue is under construction and will bring 350,000 square feet of Class A office space to the market in 3Q 2017. The building is nearly 40% pre-leased. Gresham, Smith & Partners and Burr & Forman will occupy a combined 130,450 square feet.

SUBURBAN

Nashville MSA has over 1.4 million square feet under construction in suburban submarkets. Nashville currently boasts 5.6 million square feet of office in the pipeline, and 80% of these proposed office developments are in the suburban submarkets. Cool Springs has nearly 2 million square feet of Class A space in the pipeline, followed by 1.27 million planned for the West End Submarket.

> AIG’s Seven Springs West (203,000 SF) completed this quarter in the Brentwood Submarket. AIG will relocate from its current location at 2000 American General Way. HCA Parallon will backfill this space next year.

> Two Greenway Centre and Two Franklin Park, two Class A speculative office developments under construction in the Cool Springs submarket, are both scheduled for completion during Q1 2017. Schneider Electric and CKE Restaurants signed leases at One Franklin Park earlier this year and will occupy 82% of the building.

> Office development in Brentwood has reached a post-recession high with 428,000 square feet of Class A office space under construction. Hill Center Brentwood (168,000 SF) is set to deliver next quarter. Brentwood Commons (130,000 SF) and Seven Springs II (130,000 SF) will complete during the first half of 2017.

Nashville Market New Deliveries

615 Third Rendering

Deliveries 10-Year Average Deliveries

Squa

re F

eet

0

500000

1000000

1500000

2000000

2500000

3000000

2017201620152014201320122011201020092008200720062005

10-year average deliveries = 737,000

2018

5.56

Mill

ion

SF

Pla

nned

Pre-leased

56

12

43

Under Construction - Downtown

INVESTMENT ACTIVITY

PROPERTY BUYER SF PRICE PRICE/SF SUBMARKET

Corporate Center 3-7 Stockbridge 750,000 $165,000,000 $220 Cool Springs

Commerce Center East Albany Road Real Estate Partners 239,525 $42,500,000 $177 Airport North

Metropolitan Airport Center I & II 2875 Holdings LLC 80,675 $12,000,000 $149 Airport South

205 Miller Springs Court 205 Miller Franklin LLC 52,000 $9,000,000 $176 Cool Springs

LEASING ACTIVITY

PROPERTY TENANT LEASE TYPE SF SUBMARKET

Former Sears Building - Antioch Bridgestone Americas New 77,218 Airport South222 2nd Avenue South Burr & Forman, LLP New 26,450 DowntownUBS Tower Qualifacts Systems New 25,000 Downtown

Bank of America Plaza Smile Direct Club New 20,444 Downtown

Terrazzo in the Gulch Avison Young New 16,250 Downtown

1201 Demonbreun Manier & Herod New 15,360 Downtown*Bold text denotes Colliers International transaction.

4 Nashville Research & Forecast Report | 3Q 2016 | Office | Colliers International

3Q 2016 Office Transactions

DEFINITIONSColliers Inventory - Statistical set consists of all office properties of more than 20,000 SF, including owner-occupied. The data set excludes properties that are for educational, medical and government use. While Colliers attempts to provide the most accurate data at the end of every quarter, revisions are made throughout the year accounting for discrepancies in past reporting.

Class A Building - Most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high quality standard finishes, state-of-the-art systems, exceptional accessibility and a definite market presence.

Class B Building - Buildings competing for a wide range of users with average rents. Building finishes are fair to good for the area, and systems are adequate; but the building does not compete with Class A at the same price.

Class C Building - Buildings competing for tenants requiring functional space at rents below the average for the area.

Net Absorption - The net change in occupied space between the current quarter and the previous quarter, calculated by summing all the positive changes in occupancy and subtracting all the negative changes in occupancy.

SF - Square Feet

Vacancy Rate - Percentage rate of the total amount of physically vacant space divided by the total amount of existing inventory.

579

6

1

2

3

4

8

1. Airport North2. Airport South3. Brentwood4. Cool Springs5. Downtown6. Green Hills/Music Row7. MetroCenter8. Rivergate/Hendersonville9. West End

Nashville Office Market

MARKET BUILDINGS INVENTORY (SF) DIRECT VACANT (SF)

SUBLEASE VACANT (SF)

TOTAL VACANCY RATE

3Q NET ABSORPTION

YTD NET ABSORPTION

AVG RENTAL RATE PSF (GROSS)

AIRPORT NORTH

Class A 12 2,297,092 107,497 3918 4.9% 17,513 60,621 $21.59

Class B 36 2,444,319 131,383 11403 5.8% 1,312 10,789 $18.01

Class C 5 156,517 5,742 0 3.7% -3,627 -3,009 $12.88

Total 53 4,897,928 244,622 15321 5.3% 15,198 68,401 $19.74

AIRPORT SOUTH

Class A 1 96,000 0 0 0.0% 0 0 $23.50

Class B 47 3,755,041 386,097 0 10.3% 29,590 45,230 $18.32

Class C 27 1,027,844 122,822 0 11.9% 10,475 18,794 $17.45

Total 75 4,878,885 508,919 0 10.4% 40,065 64,024 $18.62

BRENTWOOD

Class A 26 2,758,068 22,395 53,700 2.8% 201,519 215,438 $27.37

Class B 51 3,151,859 42,499 0 1.3% 21,353 42,958 $23.51

Class C 6 239,552 0 0 0.0% 1,550 3,397 $22.10

Total 83 6,149,479 64,894 53,700 1.9% 224,422 261,793 $24.91

COOL SPRINGS

Class A 35 5,264,615 17,524 14,872 0.6% 80,930 71,656 $28.59

Class B 53 2,144,720 25,415 0 1.2% 16,208 29,260 $22.83

Class C 5 148,865 0 0 0.0% 0 0 $21.16

Total 93 7,558,200 42,939 14,872 0.8% 97,138 100,916 $26.92

DOWNTOWN

Class A 13 4,648,442 320,864 81,264 8.7% 28,745 81,790 $27.95

Class B 45 4,630,869 539,869 0 11.7% 32,826 49,112 $25.02

Class C 30 3,225,858 93,299 0 2.9% 17,000 14,927 $21.83

Total 88 12,505,169 954,032 81,264 8.2% 78,571 145,829 $25.63

GREEN HILLS/MUSIC ROW

Class A 8 1,296,678 55,310 7,396 4.8% 12,132 90,559 $34.33

Class B 37 1,604,094 42,230 0 2.6% 200 -10,314 $25.34

Class C 15 669,234 5,308 0 0.8% 7,990 4,735 $22.55

Total 60 3,570,006 102,848 7,396 3.1% 20,322 84,980 $27.69

METROCENTER

Class A 2 346,235 13,675 0 3.9% 0 0 $20.00

Class B 15 1,128,608 127,585 0 11.3% 1,685 25,983 $18.79

Class C 6 327,607 0 0 0.0% 0 0 $13.50

Total 23 1,802,450 141,260 0 7.2% 1,685 25,983 $18.02

RIVERGATE/HENDERSONVILLE

Class A 9 620,512 44,881 0 7.2% 0 4,547 $23.63

Class B 13 373,301 2,366 0 0.6% 6,726 2,594 $21.42

Class C 16 850,455 28,582 0 3.4% -411 -5,458 $17.04

Total 38 1,844,268 75,829 0 4.1% 6,315 1,683 $19.19

WEST END

Class A 18 3,023,304 47,169 23,357 2.3% 8,086 49,807 $30.99

Class B 26 1,717,708 12,668 0 0.7% 15,150 17,815 $21.56

Class C 15 771,251 1,714 0 0.2% 1,770 1,770 $19.54

Total 59 5,512,263 61,551 23,357 1.5% 25,006 69,392 $29.60

MARKET

Class A 124 20,350,946 629,315 161,150 3.8% 348,925 574,418 $27.11

Class B 323 20,950,519 1,310,112 11,403 6.3% 123,365 213,427 $21.30

Class C 109 7,417,183 228,885 0 3.0% 34,747 21,820 $19.49

MARKET TOTAL 556 48,718,648 2,168,312 172,553 4.8% 507,037 809,665 $23.56

5 Nashville Research & Forecast Report | 3Q 2016 | Office | Colliers International

Copyright © 2016 Colliers International.

The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

About Colliers InternationalColliers International is a global leader in commercial real estate services, with more than 16,000 professionals operating out of 554 offices in 66 countries. Colliers International delivers a full range of services to real estate occupiers, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. Colliers International has been recognized and ranked by the International Association of Outsourcing Professionals’ Global Outsourcing 100 for 10 consecutive years, more than any other real estate services firm.

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MARKET CONTACT:Janet Miller CEDC FMCEO & Market Leader+1 615 850 2704janet.miller@colliers.com

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REGIONAL AUTHOR:Katie Barton CPRCDirector of Research+1 615 850 2758katie.barton@colliers.com

PARTNER - OFFICE TEAM:Chris Grear CCIM, SIORPartner | Nashville+1 615 850 2702chris.grear@colliers.com