The Nashville multifamily market’s roll continued through the end of 2016 with nearly 6,400 units absorbed, a 10 percent increase compared to 2015, according to Axiometrics. This demand was fueled by steady employment growth of nearly 28,000 new jobs, led by world-class healthcare employers, educational institutions and a burgeoning tech scene. The rate of job growth in Nashville is currently about 50 percent faster than the national level, and as a top destination for young people and the creative class, it’s becoming a cultural and entertainment destination that’s nationally recognized.
Rental rates grew on average by 5.6 percent in 2016, buoyed by the fact Nashville had the nation’s second-highest rate of wage growth at 5.3 percent, behind only the Silicon Valley tech hub of San Jose, according to Headlight Data. Average market occupancy remained tight at an average rate of 96 percent, with the Murfreesboro, Southeast Nashville (Antioch) and Sumner County submarkets being the highest performers to end the year.
Russ Oldham, CBRE
Four submarkets saw rent growth over 7 percent in 2016, including Southeast Nashville, Wilson County/Hermitage, Airport/Briley Parkway and Rivergate/Hendersonville. Submarkets with concentrations of new supply lagged the market average, highlighted by Downtown and Williamson County.
Transaction volume set a new mark in 2016 as well, with over $1.4 billion in transactions. The value-add space led the way in volume with $862 million, while Class A volume totaled $546 million. Cap rates compressed slightly across the board, although time will tell if the spike in Treasuries at the end of 2016 eroded some of those gains.
Cap rates on infill product range from the mid 4s to low 5s, depending on the asset quality, leasing status and location. Several high-rise assets are expected to stabilize in 2017, and the market is eager to see a new high-water mark if these assets come to market.
The suburban Class A market is more nuanced, with cap rates in the high 4s and very low 5s in Williamson County (Cool Springs), and low to mid 5s in the other submarkets of Mt. Juliet, Sumner County and Rutherford County.
The value-add market is also very tied to specific asset upside and location quality. The opportunities in this space seem to be thinning out compared to a few years ago. However, the best opportunities are generally trading in the low to mid 5s, with stabilized cap rates projected into the low 6s.
Not Over-Supplied for Long
Permit activity dropped for the first time in years, falling 10 percent to 6,200 units in 2016, however supply is projected to peak in 2017 with just under 8,500 units on schedule to deliver, according to Axiometrics. Approximately 60 percent of these deliveries will be scattered throughout the urban submarkets, including several new high-rise projects that will cater to the renter-by-choice segment of the market. It’s likely 2017 will be a more challenging year for lease-ups in certain urban pockets, but with renter demand firing on all cylinders and new supply virtually coming to a halt in 2018, this should be corrected in short order.
In the suburbs, supply is being delivered at a much more manageable pace. Entering 2017, Williamson County only had 1,216 units under construction, as lease-ups from 2016 are reaching stabilization, and the submarket is expected to get even tighter in 2017. Rutherford County is seeing explosive growth and there are several new projects set to meet the expanding renter demand, with 639 units expected to deliver in that submarket. It’s worth noting Murfreesboro is under a moratorium for new multifamily rezonings, as city officials examine how to grow more strategically.
Wilson County, headlined by Mt. Juliet, has become a very tight submarket, with population growth pacing Murfreesboro, but with new multifamily projects facing major entitlement challenges. Look for a Class A sale in the first quarter of this year that will put this submarket firmly on the map as a top suburb in Nashville moving forward. Sumner County (Hendersonville and Gallatin) has virtually no new supply on the horizon, so look for this submarket’s fundamentals to outperform the MSA over the coming year.
In 2016, after over a year of debate, Nashville passed an inclusionary zoning policy, which will be adopted in the first half of this year. The net effect of this bill is that in most urban locations of Nashville, new projects that require rezoning must set aside a percentage of its units to meet certain workforce housing income limitations. Although, the city has set up a funding mechanism whereby the developer/owner will be reimbursed on an on-going basis by the amount of foregone rent, this will no doubt make new development more difficult in the near term.
— By Russ Oldham, Senior Vice President, Investment Properties Multifamily, CBRE. This article was originally published in the February 2017 issue of Southeast Real Estate Business.