CRE Market Update: State of the Nashville Multifamily Real Estate Market Q2 2018


Quarter 2, 2018, was a great season for the country and Nashville. Nationally, Dropbox -- the sensational online file-sharing company -- soared after it’s first ever public earnings report after its IPO in Q1 2018. At home in Nashville, Char Restaurant was declared the hottest restaurant opened in the last seven months in Music City.

The National Economy

Nationally, the multifamily market has seen 35 quarters of consistent expansion, ranking this period of growth the second longest in US history for this market. The job market’s growth is approaching a slowdown, simply because unemployment is so low. Overall, there is a national shortage of housing construction. Homeownership rate is rising. These two trends are driving high demand for rental apartments. Nationally, apartment demand is high while vacancies are low. Multifamily deliveries are coming with a lot of space under construction. With the delivery of new space, vacancies are expected to increase but ultimately stay below 7%.

The National Multifamily Market

Multifamily rent now averages about $1200/month nationally. This quarter saw about 3% rent growth. Nashville is in the bottom 20 of rent growth markets due to high number of new construction deliveries. 2017 was a record year with $160B traded in multifamily developments. 2018 is on pace to set a new record for sales volume.

The Nashville Multifamily Market

Nashville currently has 9% of its total inventory under construction. In this last construction cycle, Music City expanded its multifamily inventory by 30%.

Nashville has been a leader for job growth. We have doubled the national average for year over year growth in jobs (4% compared to 2%). Again, we are seeing a decline in job growth since unemployment is already so low; Music City unemployment is 2.6%, one of the top 5 lowest in the nation. We are now seeing a slowdown in construction.

Quarter 2, 2018, was strong over last year. Net absorption was positive at 2,073 units. Completions, however, are down 2,089 units. Consequently, vacancy rates are down 1.5% (decreasing supply relative to consistently high demand). Rent growth is down 0.3%. Units under construction are down 1,125 units (consistent with trend of slowdown in construction). However, total sales volume is up $150 million.

Nashville is currently a top metro area for development. In the last 5 years, our multifamily inventory has increased by 30% -- a growth of about 28,000 units. But these new constructions are being absorbed quickly; our vacancy rate is lower than that of comparable metros with high new construction.

As stated, supply in the last five years has expanded greatly. West End / the Central Business District has seen the majority of building, accounting for 50% of new supply. Williamson has doubled its inventory in this time. Most submarkets have seen high vacancy compression. West End/CBD vacancy is down by nearly 10%, Williamson County vacancy is down by nearly 5%, Charlotte vacancy is down by about 8%.

West End/CBD will see 4,000 new units added over the course of the next few years, while Williamson County expects 2,000. Vacancy is forecasted to remain at about 8% over the next few years.

Rent growth has been picking up in 2018; rent growth is currently about 2% -- slightly above the national average. All submarkets have seen positive multifamily rent growth. West End averages $1777/month, Williamson $1418/month, Charlotte $1,253/month, Wilson $1,166/month. Rent is growing especially quickly in 4-and 5-star assets. 3-star (workforce) rent growth is growing faster than income growth, making workforce housing more difficult to afford since income growth is not on pace with rent growth.

Q2 Multifamily Market Growth Drivers: Company Relocation & High Magnetism from Affordability

Affordability Draws Company Relocation

Nashville is extremely affordable compared to other popular metros like NY, LA, Austin, Chicago, etc. As a result, many companies -- like Alliance Bernstein and others -- are relocating their corporate offices to the greater Nashville area. This has brought us both more people and also many high-paying corporate jobs, causing Nashville’s median household income to grow. The influx of new, high-wage earners has contributed to our extremely high demand for multifamily space in Music City.

Affordability Draws Millenial, Baby Boomer, and Family Moves

Nashville is seeing some of the largest percent growth for household formation in the country. We have seen a 40% increase in the 65+ “baby boomer” generation since 2011. They are thought to be moving to the south for the affordability and potentially because their kids are moving here. On the topic of their kids, millennial growth remains positive, around 2%. All that to say -- Nashville’s affordability is driving jobs to the city which is, in turn, driving young millennials, young families, and their baby boomer parents and grandparents to move to Music City… all of which creates demand pressure on homeownership which in turn has created high demand for rental apartments.

Special Report: Strong Investor Interest in Nashville Multifamily Apartments

Multifamily investment is the strongest commercial real estate market for investors right now (compared to office, retail, or industrial). In turn, multifamily transactions are seeing the lowest cap rates in the commercial market. 2017 was a huge year for multifamily sales volume with $1.3 billion traded. Price/square foot is also increasing, from $118 on average in 2017 to $128/sf in 2018. 2018 is on pace to eclipse last year’s sales volume.

Nashville’s multifamily pricing is strongest in the urban core, followed by Wilson County. The highest transaction volume in Nashville’s multifamily market has been seen in the West End submarket ($347 million).

Large, notable transactions include: the IMT 8 South deal, Peyton Stakes, The Cleo, and the Panther Creek Parc deal. Finally, a lot of Nashville multifamily investment has come from outside the state, with California and New York investment firms in the lead.

Interested in other types of commercial product? Take a look at our 18Q2  office report, industrial report, retail report.

Data courtesy of Costar.