Office to Hotel Wave Hits Nashville

Developers are gearing up to convert nearly 2 million square feet of Nashville office space into hotels, plunging the city into largely uncharted real estate territory.

The scale alone is new for Music City. Nashville has never seen this many office-to-hotel conversions underway at once, nor projects of this size, with several exceeding 500,000 square feet. The deals are fueled by deeply discounted office sales, but the execution is proving far more complicated than simply swapping cubicles for guest rooms, the Nashville Business Journal reported.

Tucker Herndon, a partner in Birmingham-based Burr & Forman’s lending practice, told the outlet that the situation is amounting to a Pandora’s Box.

“When you open it up, you need to know exactly what you’re buying because a small mistake could turn into millions of dollars worth of additional expense.”

Many conversion candidates have traded at steep losses over the past year, including the Fifth Third Center, Philips Plaza, Parkway Towers and Citizens Plaza, according to the publication. Buying an existing building at 20 percent to 40 percent below replacement cost can be cost effective — if its bones cooperate.

Nashville’s older office stock, much of it built between the 1940s and 1970s, poses challenges that can derail quickly. Developers are scrutinizing floorplates, elevator cores, ceiling heights, plumbing capacity and utility layouts long before closing. Core drilling in thick concrete slabs to reroute plumbing, for example, is neither cheap nor easy.

“You have to think about what you’re trying to accomplish and what product you’re selling,” Herndon said, adding that due diligence can stretch six months to several years on complex projects.

Office-to-hotel conversions are still relatively new in Nashville, which has less office inventory than peer cities, according to the publication. One of the first high-profile successes is Dolly Parton’s Songteller Hotel, a 245-room conversion of the 211 Commerce Building, slated to open soon.

The concept gained traction after the pandemic upended office demand, leaving downtown buildings with yawning vacancies. But early on, the math didn’t work. Construction costs surged and exit pricing was uncertain. That’s starting to change, the outlet reported.

“Now the numbers are at least plateauing,” Herndon said, allowing developers to underwrite deals with more confidence, as hotel and residential pricing stabilizes.

“If you know how to do it and you are successful, there is a great return,” Herndon said.

— Eric Weilbacher