Q3 2018 had a bright start with Nashville’s famous Fourth of July festivities, including free concerts downtown and a phenomenal fireworks show accompanied by the music of the Nashville Symphony. The later half of the quarter saw the return of a large portion of Music City’s college population as nationally acclaimed universities, Belmont University and Vanderbilt University, started their fall semester.  

The National Economy

The national economy proved strong again in Q3 2018. Job growth remained steady around 2%, complemented by a tight labor market.

The National Multifamily Commercial Real Estate Market

The national multifamily market is growing considerably. More apartments are being built this cycle than last; last cycle absorbed just under 150k units while this cycle absorbed closer to 225k units.

Due to a steady decline in homeownership, the national market is seeing a larger shift into renter demand coupled with a flight to the urban core -- especially among baby boomers and millennials. A prevailing thought for the millennial flight to the core looks at student loan debt as a factor driving millennials to prefer the walkability rather than be dependent on a car.

National vacancies have compressed in 2018 so far with drops in vacancies of around 1%. Nashville has seen one of the largest vacancy compressions in the nation.

That being said, different cities are seeing very different market trends. Certain key cities are currently supply-heavy. Nashville, for example, has increased inventory by about 35% this cycle with a lot still set to deliver. Music City is currently #1 in terms of deliveries at 8.5% of inventory as new deliveries. Miami is at #1 with 12% of inventory as new deliveries.

On the other hand, Memphis and Cleveland have seen light supply growth with relatively few new deliveries; Memphis new deliveries represented just 0.8% of total inventory while new deliveries in Cleveland represented 1.1% of total inventory.

National rent growth has picked up again, slightly over 2017 numbers at around 3% growth. The markets with the highest multifamily rent growth this quarter were Las Vegas (+7.2%), Phoenix (6.9%), Orlando (5.8%). On the opposite end of the spectrum, the lowest rent growth markets still grew but saw lower growth rates: Houston (1.4%), Kansas City (1.5%), Nashville (2.2%).

4&5 star growth is on the upswing and Class A/new construction multifamily projects are performing very well. Y/Y growth for luxury product is at about 3% for new construction. Unfortunately, rent is growing at a faster rate than incomes. In 2010, a multifamily unit was worth about $80k/unit to an investor. In 2018, a unit is traded at $140k on average.

The Nashville Market

Nashville employment growth is slowing a bit, but unemployment is still remarkably low. Our office sectors are still outperforming the national average and office employment is actively growing in Nashville. Our income growth has remained steady, including in Q3. Music City’s population growth is slowing, but we are still one of the top 15 cities in the US in terms of household growth.

Over half of Nashville renters make $50,000, while 21% makes $75k+. The category of renters by choice has outperformed expectation, with 162% growth in this group in Nashville and 73% across the country. The ‘renters by choice’ group is comprised of people who make more than $75k and could likely buy a house but don’t care to - they want to walk to work, live in town, etc.

Supply has not quite outpaced demand, but we are getting close as population growth is starting to slow. Looking at year over year changes for Q3, multifamily absorption has been flat and completions have slowed. Vacancy has declined 90 basis points but construction is picking up. Rent growth has picked up by 80 basis points. Sales prices have increased by an impressive $68k per unit.

This quarter and this entire cycle has seen a market increase in multifamily construction -- representing one of the largest increases in the US in this cycle in terms of percentage of inventory. Last cycle, 1,000 units were delivered per year. This cycle, that number increased by 4x to 4,000 units delivered per year.

Demand has been solid, at 3,500 units absorbed per year. Vacancies have declined steadily, from 9% in 2017 to 7% in 2018. Note, our vacancy rates are still higher than historical averages, but much better than last year. Also, the higher-than-normal vacancy rates are understandable in context of the high construction deliveries.

Lease-ups of new space is strong but slowing. In 2017, 20 units/month leased. Now, we are sitting closer to 15/units per month in most submarkets. Vacancies are compressing in most submarkets. West End has seen the largest drop in vacancy, from 18% vacant in 2017 Q3 to 13% vacant in 2018 Q3.

Music City’s construction pipeline has slowed but remains robust as we are seeing about 10,000 units currently under construction (versus 12,000 in 2016). While construction is slowing in West End/CBD, Madison/Rivergate, and Williamson County, construction is increasing in Charlotte, Murfreesboro, and Sumner County.

Rent growth is picking up, increasing at a slightly faster rate than the US average in Q3 2018 -- around 2%. We are, however, no where near the peak levels of rent growth that Nashville saw in 2015 of 6%. Rent growth is slowing in some markets, but increasing in Williamson County. Madison/Rivergate is also strong. Rent growth has declined (year-over-year) in Smyrna, Charlotte, West End/CBD. Rent growth is picking up in Class A inventory to just under 2%. Note, these spaces are still underperforming compared to Class B and C spaces, but have still increased for the Class A category.

The Class A market is highly competitive and very concentrated in the urban core with some projects offering as much as 2 months of free rent. These projects have seen solid pricing gains, with an average price per unit of $150k. 2018 YTD sales volume is at $140 million. Pricing is the highest in West End/CBD at $230k/unit but also particularly strong in Bellevue at $167k/unit on average.

The most expensive projects traded this year have been: Niido Nashville, $90 million sale representing a 4.5% cap rate; Ashton Brook, $221k per unit at a 5.4% cap; IMT 8 South, $76.7 million, at $223k per unit.

Market forecasts predict Nashville’s rent growth to continue to slow but stay above the US average. Our rent growth will undoubtedly be strengthened by the recent Amazon and Ernst Young location announcements.

Interested in other types of commercial product? Take a look at our 18Q3  office report, industrial report, retail report.

Data courtesy of Costar.