AMZN Amazon.com Inc

By Esther Fung 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 21, 2018).

Nashville received the consolation prize in the hotly contested bid for one of Amazon.com Inc.'s new headquarters, but real-estate investors are already gearing up to invest more in Tennessee's capital city.

After announcing that New York City and North Virginia had won the contest for Amazon's headquarters, the giant online retailer surprised many with the news that it would create an operations center with 5,000 high-paying jobs in Nashville.

For a city of 1.9 million and an office market that is a fraction of the size of the two East Coast hubs, Amazon's decision to invest $230 million may have greater significance for Nashville than the larger investments will for New York and Arlington, Va., outside of Washington, D.C.

"An additional 5,000 jobs in Nashville is more meaningful compared to 25,000 jobs in each of these two cities," said Bernhard Krieg, managing director at Brookfield Asset Management's Public Securities Group.

Officials in Tennessee also provided fewer incentives and concessions to Amazon compared with the two HQ2 cities, which means Nashville could glean more from the jobs created.

The Amazon decision drives even more momentum to property markets in the Southeast and Southwest. These regions, which include newly booming cities like Austin, Texas, and Charlotte, N.C., were largely ignored after the financial crisis but have recently heated up because they offer lower-cost alternatives to expensive coastal cities.

And it isn't just Amazon that is boosting demand for Nashville office space and other property. Ernst & Young LLP said last week it will be investing $20 million in the city to build a facility that will create 600 jobs over the next five years.

Nashville had an office vacancy rate of 10.5% in the third quarter, down from 10.7% in the second quarter, according to CoStar Group data assembled by real-estate firm Marcus & Millichap.

Developers also completed 8,132 apartment units in the city last year, up from 5,874 units in 2016 and the highest number since the financial crisis, said Marcus & Millichap, citing data from RealPage Inc.

"Nashville has about 70,000 people who work downtown every day," said Thomas Mulgrew, press secretary for Nashville Mayor David Briley. "We believe that we are well-prepared to incorporate a few thousand more."

Still, real-estate executives aren't expecting a big jump in the number of cranes in Nashville, given that development is already robust thanks to recent population growth. Amazon could also take up to seven years to create the 5,000 jobs and still qualify for local incentives, which would spread out demand over time.

But Nashville real-estate owners have already noticed a rise in interest and potential activity.

Highwoods Properties Inc., a Raleigh, N.C.-based office landlord with sites in Nashville, said it fielded a dozen or so calls from analysts and investors after the Amazon announcement.

"Amazon's decision keeps the positive attributes of Nashville in the spotlight," said Brendan Maiorana, senior vice president of finance and investor relations at Highwoods.

Amazon's pledge to take up 1 million square feet of office space in Nashville is expected to generate demand for other commercial real estate. Amazon's Nashville operation center will be responsible for customer fulfillment, transportation and supply chain, which could spur other jobs in the accounting, legal and financial sectors.

Nashville also received sudden attention from property investors only a few months ago, when AllianceBernstein Holdings LP said in May it was relocating its headquarters from New York City to Music City and bringing 1,000 jobs there.

While Amazon's move will help with the city's office absorption rates, it is still too early to speculate its impact on property values, Mr. Maiorana and other investors said.

Highwoods currently operates two office buildings in downtown Nashville, and is constructing a 551,000 square-feet building for an insurer near Nashville Yards, a mixed-use development project that Amazon is slated to occupy.

The roughly 15-acre site where Nashville Yards will be developed is near the Gulch, a hip neighborhood known for its vibrant restaurant and music scene.

The influx from Amazon alone may not justify further apartment investments, but it will help take up existing and incoming supply, analysts said.

"Nashville's growth won't hinge on Amazon, so over time, I suspect the rental housing stock will continue to grow," said Heidi Learner, chief economist at real-estate advisory firm Savills Studley.

There have been so many jobs created in Nashville recently that the city needs more affordable housing.

"Amazon's announcement is very favorable to the overall business environment," said Colin Reed, chief executive of Nashville-based Ryman Hospitality Properties Inc. His firm owns the Grand Ole Opry, a country music concert venue, and the Gaylord Opryland Resort & Convention Center next to it. "It's one hell of an endorsement right here in Tennessee."

Write to Esther Fung at esther.fung@wsj.com

(END) Dow Jones Newswires

November 21, 2018 02:47 ET (07:47 GMT)

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