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Nashville's Unfolding Tale of Economic Renaissance and Urban Evolution

The Nashville MSA is one of our favored apartment markets. For more than a decade, Nashville has embarked on a remarkable journey of growth and prosperity. The narrative continues to unfold with rapid population growth and dynamic economic strength, fortifying the apartment market long-term despite short-term excess supply.


Highlights


  1. Population: Nashville’s population grew 21.6% between 2010 and 2021 and continues to outshine the U.S. average.

  2. Jobs: The fortitude of Nashville’s labor market is reflected in its 2.9% unemployment rate (v. the 3.8% U.S. average) and the diversity of its employment. The metro grew by 96,000 jobs in the last three years.

  3. Economy: Corporate relocations and expansions by AllianceBernstein, Amazon, Oracle, GM, and others are reshaping the real estate landscape with new facilities and the promise of future job growth.

  4. Apartment Demand and Supply: Demand has remained strong at 5,720 units in the past 12 months but short-term is not keeping pace with 11,000 new units delivered.

  5. Vacancies are at a 20-year high of 10.9% overall and 14.8% for Class A, which is burdened with new construction lease-up. Stabilized vacancies are a better 6.4%.

  6. Rents increased 1%+ in H1 2023 after losing ground in 2022. Expectations for the rest of 2023 range from a 2.3% increase to 1.7% decreases in both Q3 and Q4.


Nashville's Economic Transformation


Nashville's population surged an astounding 21.6% between the 2010 census and 2021 – nearly triple the national average – and data from July 2021 to July 2022 revealed 36,000 new individuals sought to be part of Nashville's evolving story.


Nashville's unemployment rate of 2.9% (v. the national rate of 3.8%) is a symbol of its economic vibrancy. As of Q2 2023, nonfarm employment swelled beyond pre-pandemic levels by 96,000 jobs. Its jobs growth rate of 5.6% over the 12 months ending in February outpaced the national average of 3.4%. Nashville’s job growth in 2023 is expected to be 0.9%, still outshining the nation's expected growth rate.


This growth was palpable across various sectors, especially in trade, transportation, utilities, and professional services. The professional and business services sector added 9,700 new positions, paralleled by a construction boom of modern developments such as Nashville Yards, Circle South, and the mixed-use project at 5 City Blvd., all scheduled for completion by 2024.


Nashville's office job count soared by 80% since 2010, a notable divergence from the national average. AllianceBernstein played a pivotal role in this transformation when it moved from Manhattan and created 1,000 Nashville jobs with annual salaries between $150,000 and $200,000. Amazon’s 2021 completion of its inaugural Nashville office building was the first step in its plans for a Center of Excellence expected to employ 5,000 people. Oracle's ambitious vision for an 8,500-job mega campus promises to enhance Nashville's appeal. Concurrently, Capgemini's new delivery center at the Broadwest development is expected to inject 500-1,000 new jobs, further strengthening the city's economic foundation.


The city's southeastern region is an automotive hub positioned to capitalize on the growth of electric vehicle manufacturing. Prominent players such as GM, Nissan, Mitsubishi, and Bridgestone Americas have established significant offices and manufacturing facilities in the area. GM's groundbreaking $2.4 billion partnership with LG Energy Solution is set to establish an electric vehicle battery plant that will employ over 1,300 workers by late 2023 – an endeavor with the potential to stimulate demand for auto parts suppliers in the region. Similarly, Tritium has created 500 EV charger manufacturing jobs in Wilson County.


Nashville's industrial sector has also gained momentum, fueled by growing demand for distribution space and a robust trade workforce in the aftermath of the pandemic. And healthcare also plays a crucial role in Nashville’s economy by contributing over $45 billion annually and nurturing 275,000 jobs across 500 healthcare entities.


Apartment Dynamics


The Sun Belt and Mountain regions accounted for over 75% of net U.S. apartment demand in the first half of 2023, with Nashville among the leaders of the pack. Nashville’s absorption of 2,586 units in Q1 2023 defied seasonal trends and trailed only Phoenix, AZ.


Nashville residents embraced 5,720 apartments in the past 12 months, closely aligned with the five-year average of 5,793. Affluent professionals drawn to the region's burgeoning job opportunities fueled the absorption of over 4,500 high-end units in that period.


The current vacancy rate of 10.9%, however, marks a two-decade peak and casts a shadow over the apartment market. Projections hint at a further increase of 130-140 basis points as developers expect to deliver over 13,000 new units throughout the year. Class B and Class C showed more favorable vacancy rates at 8.1% and 5.0% respectively, compared to Class A at 14.8%. The vacancy rate for stabilized properties is currently 6.4%.


Urban Evolution


Central to Nashville's story is real estate development that is reshaping the city. Over the past decade, the delivery of 58,000 new housing units constituted a staggering 50% increase. Nearly 40% of the Downtown submarket’s inventory has materialized since the dawn of 2020. Among the nation's 50 largest markets, Nashville ranked fifth with 12.0% of units under construction relative to existing inventory, far surpassing the national average of 5.3%.


In the past 12 months, 11,000 new units contributed to the city's landscape, representing 6.0% annual growth in Nashville's housing inventory as of March. This growth was driven by the affluent “Lifestyle” or “Renter-by-Choice” segment, which accounted for 86% of units under construction. Another 19,000 units are currently in progress, about half of which are Downtown. Eleven Downtown neighborhoods are hosting at least two ongoing projects each.


Rental Realities


Nashville's asking rents rose just over 1% in H1 2023, marking a recovery from 2022 losses. The rhythm varied across submarkets, however, with 75% of them experiencing growth of 2% to -2% from Q3 2022 to Q2 2023. While the Downtown submarket witnessed a 3% decline in rents, southeast submarkets Smyrna and La Vergne saw a surge of over 4% driven by low vacancies. High vacancies prompted concessions in one in three Nashville communities, a significant increase from one in 20 two years prior.


The working-class Renter-by-Necessity segment led rent gains with a 0.5% increase on a trailing three-month basis through April. Meanwhile, the Renter-by-Choice segment climbed slightly by 0.1% – the first increase in six months.


With a projected 12.3% overall vacancy rate by year-end, conflicting views have formed about 2023 rent growth. Marcus & Millichap expects a 2.3% increase in effective rent in 2023, while CoStar predicts rent declines of 1.7% in both Q3 and Q4.


Capital Markets and Challenges


The impact of rising interest rates reverberated throughout the multifamily landscape and continues to persist. After a period of robust liquidity in 2021-2022, the market realigned itself to pre-pandemic levels, shifting from 170 deals in mid-2022 to 75 deals by Q2 2023.


The average price per unit for multifamily properties dropped by 12% through April 2023, coinciding with an expansion of the average cap rate to 5.1% to date, a leap from the 10-year low of 4.5% last seen in Q2 2022. Expectations point toward cap rates reaching 5.7% in 2024 before trending back down to 5.1% in 2027.


The Tapestry Unfolds


The city's diverse and thriving economy sets a solid foundation for the apartment market's long-term prospects, although the absorption of new supply will undoubtedly require time. The dynamics show that vacancy rates for Class B and Class C properties will likely remain more moderate compared to Class A properties, many of which face the challenges of leasing-up new construction.


The rise of the retail trade, transportation, and utilities industries, coupled with a robust growth rate among the 20- to 34-year-old demographic, is laying the groundwork for a blossoming Class B and C leasing market. Meanwhile, the growth of the professional and business services sector promises sustained demand for luxury apartments.


The absence of state income tax and a steady stream of skilled graduates entering the workforce from prestigious universities like Vanderbilt and Belmont have been inspiring companies to move high-value operations to Nashville. This mutually beneficial relationship encourages college graduates to build their careers in the city, igniting a cycle of growth and stability that illuminates Nashville's promising future.


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