Is Nashville’s Multifamily Market Overbuilt? Maybe, But Not for Long

Gaia Real Estate recently purchased the newly built, 306-unit Carillon in Nashville’s Germantown neighborhood for nearly $250,000 per unit, or $76.4 million.

Nashville has set several notable records in recent years for job growth, rent growth, population growth, tourism and tax revenue, among others. But for the multifamily industry, the most notable benchmarks lately have been related to the amount of inventory that has been delivered.

However, the more interesting and less obvious data point is the record level of renter demand that Nashville is currently experiencing. As of third-quarter 2017, Nashville led the country in relative net absorption, with 4.9 percent of the existing inventory being absorbed. This equates to approximately 6,300 units. This demand is fueled by incredibly resilient job creation, as Nashville has increased its employed labor force by 20 percent over the last five years — more than 160,000 jobs.

Russ Oldham, CBRE

Russ Oldham, CBRE

With that as the backdrop, the big question on everyone’s mind is the impact of new supply. In short, yes, there are pockets of oversupply, with approximately 8,500 units delivered in 2017 compared with net renter demand of roughly 6,300.

However, with urban deliveries projected to drop off 40 percent in 2018, and 80 percent in 2019, and no slowdown in renter demand on the horizon, the current imbalance is likely to correct itself in relatively short order.

Supplying the Suburbs
The suburban market has remained balanced, and will average 3,000 new units each year through 2019, with occupancies expected to remain stable in the mid-90 percent range. These deliveries are generally concentrated in the six major suburban submarkets of Williamson, Sumner, Rutherford, Wilson, West Nashville and Southeast Nashville.

Rutherford County will lead the way with 4,000 units delivered during this time period, although the bulk of deliveries here occurred in 2015 and we are now seeing a dramatic tail-off of new inventory in this submarket.

Given the steady levels of new inventory delivered to the market, the pace of rent growth has slowed, especially at the top end of the market, where most of the new projects are competing.

Rutherford County outpaced all other submarkets in 2017 with average rent growth of 3.2 percent, while increased concessions in urban Nashville caused effective rents to back up 3.3 percent.

Occupancies remain strong with seven of the 11 submarkets logging 95 percent or better in 2017. Urban Nashville currently shows the lowest average occupancy for 2017 at 93.2 percent.

Investment Sales
Investor demand in 2017 was robust, and the market expanded slightly compared to 2016. There were approximately $1.6 billion of apartment sales in 2017, compared to $1.4 billion in 2016. Class A transactions increased moderately, accounting for $700 million of the volume, versus $600 million the year prior. Class B volume was flat versus 2016, accounting for roughly $570 million of the volume.

Despite the temporary softness in the urban market, investors with a mid- to long-term outlook made well-placed bets. One notable transaction was Carillon, which was developed by Embrey Partners. Gaia Real Estate paid just under $250,000 per unit for this marquee asset in the thriving Germantown district.

High-Rises on the Horizon
Class A sales volume will continue to increase as a percentage of overall sales volume, as value-add plays are becoming increasingly difficult to source despite the increased competition. Given the amount of urban deliveries that came on line in the fourth quarter of 2017, we expect to see some continued softness in this space.

However, we look for this to rebound as the year progresses, more quickly in certain areas where lease-ups are nearly stabilized. Several new high-rise projects will begin to alter the skyline during 2018 and 2019, most notably the Whole Foods-anchored, 26-story tower being developed by Endeavor Real Estate Group on Broadway, as well as the 45-story 505 CST building developed by Giarratana Development, which now stands as Nashville’s second tallest building.

— By Russ Oldham, Executive Vice President, Multifamily Investment Group, CBRE. This article originally appeared in the February 2018 issue of Southeast Real Estate Business.

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