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FOURTH & CHURCH

Nashville, TN

 

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A high profile, 265,100 square foot, 20-story office building in the heart of downtown Nashville with on-site parking.  Fourth & Church was extensively renovated in 2008 and is presently 96% leased to a variety of tenants, including anchor ServiceSource, a San Francisco-based technology company that is under a long-term lease through 2022.  Fourth & Church is located in close proximity to Central Business District amenities in the MSA that led the nation in job growth last year.  Nashville ranks fifth nationally in terms of office markets with the lowest market-wide vacancy, and it ranks third in terms of employment recovery from the recession.

 

ADDRESS: 201 Fourth Avenue North, Nashville, TN
SIZE: 265,126 SF
ASSET TYPE: Urban Office
PURCHASE PRICE: $33,700,000
SPONSOR/GP CAPITAL: Albany Road Real Estate Partners
LP CAPITAL: Individual High Net Worth & Family Office Investors
LENDER: Cantor Commercial; $28,000,000; 10-year fixed rate debt with 3 years of I/O payments; all-in rate of 5.08%
ACQUISITION DATE: April 4, 2014

 

Investment Overview

Albany Road purchased this property for $33,700,000 ($127/sf). This price represents a 60% discount to replacement cost, ensuring that the property will not have to compete (from a rental rate perspective) with any new development projects. Replacement cost for Fourth & Church is estimated to be between $300 and $350 per square foot.

The property is currently 96% occupied with an average remaining lease term of six years.  Fourth & Church boasts a strong rent roll that includes a diverse list of professional tenants (law firms, insurance companies, financial advisors), in addition to anchor tenants ServiceSource and CapStar Bank. In fact, the 7 largest tenants, which make up 76% of the building, have a weighted average lease expiration of June, 2020.

The property’s lead tenant, ServiceSource, has a rent that is roughly 20% below market.  This tenant occupies about 45% of the property under a long-term lease and has a current lease rate of $17.50/sf in a building that most recently achieved $21.50/sf.  This below market rent, which is flat through 2018, provided a more favorable per foot acquisition pricing without necessarily compromising the going-in yield.

In core markets across the country (i.e., NY, Boston, San Francisco), institutional buyers clamoring to acquire office properties have driven cap rates (the initial, unleveraged yield) down to below 5.0%.  In the case of Fourth & Church, our pricing reflects a 7.4% going in cap rate, despite the general real estate consensus that Nashville is on the cusp of being recognized as an institutionally-recognized city, and one that could command lower cap rates in the future.

Notably, in the recently released 2014 Emerging Trends in Real Estate®, Nashville found itself ranked 12th out of the 50 major United State markets that are evaluated in terms of investment and development potential.  This represents a six-place improvement over a year ago and enabled Nashville to move just behind Boston, Orange County, and Denver in the rankings, and well ahead of typical stalwarts like Washington, D.C.  Emerging Trends in Real Estate®, a collaboration between PwC and the Urban land Institute, is one of the most highly regarded and widely read forecast reports in the real estate industry.

Health care, conventions and tourism, publishing, finance and insurance, technology, higher education, and transportation are all leading industries of Nashville.  Nashville’s location, diverse economy, high-quality workforce, unique tax advantages/incentives and the overall low cost of doing business are significant features further solidifying the city to be one of the premier business centers in the Southeast.  In 2012, Nashville ranked number one in the nation for employment growth, with an impressive 3.9% year-over-year growth rate.  The strength and vibrancy of the market has made Nashville one of the most sought after destinations for educated young people and the creative class of office users.  These trends portend the city’s continued strength and success over the long-term.