Multifamily Sector in Music City Hits All the Right Notes
In Homer’s Odyssey, Odysseus resisted the Sirens’ beguiling music by lashing himself to the mast of his ship. But few relocating businesses, ambitious young people from the Midwest and Mid-South or multifamily developers have been able to resist the charming sounds wafting from Music City these days. Nashville’s pro-growth disposition, competitive operating cost structure, high quality of life and vital cultural scene make it a formidable competitor for investment and business relocation among U.S. growth markets.
Beverage marketer Icee, e-commerce unicorn SmileDirectClub and Mitsubishi North America were just a few of the nearly 100 companies that elected to move headquarters operations to or expand in the Nashville area last year. The moves were emblematic of Nashville’s emergence as the go-to spot for major industries — Tennessee now ranks second among states for automobile manufacturing employment after Michigan — and fast-growing tech-focused start-ups. The pipeline is just as robust in 2020.
Employment statistics speak for themselves. Nashville added 30,000 or more payroll jobs in each of the last eight years: one of only two U.S. metros in the under 1.5 million-job weight class to check that box (Austin is the other.) While the unemployment rate was only 2.8 percent in January, the average hourly wage increased at an annual rate of just 2.2 percent in the six months that ended in February, proving Nashville is equipped to chalk down rapid growth with minimal input cost friction.
Naturally, the degree of household formation implied by economic growth of this magnitude attracted the attention of multifamily developers. Builders delivered over 7,000 multifamily units in 2018, representing a 6.5 percent increase in the metro inventory and followed with about 4,500 units last year.
The market readily digested this abundance of riches. According to data published by Yardi and tabulated by RED Research, the occupancy of properties stabilized for at least 12 months recorded average occupancy of 94.79 percent in February, increases of 39 and 17 basis points over the same months of 2018 and 2019. Indeed, total occupancy among all properties, including those in lease-up and under renovation, was higher over the same periods, regardless of the supply burden.
Lease-up among new properties continued at a promising pace through February. Of 18 infill Nashville properties (4,294 units) receiving final certificate of occupancy in 2018 and 2019, 17 were 86 percent or greater occupied in February, and 3,973 (92.53 percent) of the units were leased.
New suburban space leased nearly as quickly. Of 17 assets (4,426 units) completed in suburban areas in 2018 and 2019, 16 were 86 percent leased or greater, the sole exception a Murfreesboro asset completed in June.
Based on our slow output growth/low inflation economic forecast circa February 2020, RED Research econometric forecasts of Nashville rent and occupancy trends were very constructive. Rent was expected to increase at a 3.4 percent compound annual growth rate, and occupancy was projected to decline only about 50 basis points by 2024. Annual unlevered investment returns were projected to average 8.5 percent over five years, on par with Charlotte and within hailing distance of Dallas (9.1 percent), the growth market aristocrat.
But COVID-19 happened and all the best laid plans of mice and men and Odysseus were undone. Reason leads one to believe that the growth markets with high octane economies and tidal force construction pipelines are likely to be most affected by a virus-caused economic downturn.
But our forecasting models suggest otherwise. Although Nashville payroll employment is likely to be lower at this time next year, the metro economy should roar back in 2021 and 2022, as the metro labor market tends to outperform the nation when the economy is running significantly below capacity (i.e., the output gap is large). Apartment performance will follow accordingly, with rents ultimately rising nearly as fast as they would have otherwise and occupancy trends will perhaps be a bit better as supply levels are likely to be lower than previously anticipated.
Our models suggest that Nashville is better positioned than nearly every other large market in the U.S. to withstand the economic stress likely to evolve from the coronavirus epidemic. In fact, only largely insulated Washington, D.C. is projected to deliver higher returns to investors over the next five years.
— By Daniel J. Hogan/RED Capital Research. Hogan is ORIX Real Estate Capital’s Managing Director for Research. RED Mortgage Capital, a division of ORIX Real Estate Capital LLC, is a content partner of REBusinessOnline. The views expressed herein are those of the author and do not necessarily reflect the views for RED Capital Group or of the author’s colleagues at RED. For further analysis from RED Capital Group, click here.