Multifamily housing is booming in Nashville, Tennessee, which boasts strong employment and population growth, high-tech jobs, and lifestyle appeal.
“It’s a dynamic city that offers a good quality of life—major sports teams, culinary, arts, and music—as well as a strong employment base and a business-friendly climate,” says Matt Olson, vice president at Freeman Webb, the largest multifamily owner and operator in the Nashville metro area with nearly 10,000 units.
Olson says he is seeing an unprecedented amount of demand on the multifamily investment and development side in the metro area. In the first three quarters of 2021, the firm saw a record number of sales in dollar volume.
According to Greg Willett, who recently joined Marcus & Millichap as first vice president responsible for spearheading the firm’s Institutional Property Advisors multifamily research, nearly 100 multifamily communities traded hands during 2021 in the metro, with the value of those assets coming in around $4 billion.
“That’s significantly more sales activity than has been recorded in any other single year,” says Willett, who grew up a couple of hours from Nashville. “Likewise, pricing is setting a new high, with the norm reaching more than $200,000 per door. The typical cap rate is running in the mid-4% range.”
Willett says developers started to ramp up apartment deliveries in the metro area in 2015, with about 42,000 units being added during the past seven years; these completions account for 35% of the area’s entire inventory.
“The building frenzy is getting even more heated now. Just over 21,000 units are under construction, so stock growth of nearly 13% lies ahead during the next couple of years,” says Willett.
In addition, renters are snapping up these new apartments. Willett says the local vacancy rate is down to 2.%%, which is half of the historic norm that tends to run around the 5% mark. The average monthly rent also is up to $1,500.
“Rents for move-in leases surged about 19% during calendar 2021,” he says. “While that pace of increase won’t be sustainable moving forward, rent growth this year should continue to surpass the healthy average of about 4% annually posted over the past decade.”
Olson says that to a Nashville native, “it’s a sticker shock of where rents are today, but I think it’s still an affordable market relative to other large coastal metros.”
Looking ahead, Willett says one downside risk for multifamily investors is that the growth pace could get too intense too quickly. “There could be some hiccups in immediately absorbing all the housing product that’s on the way,” he says.
Both Olson and Willett agree that with the city’s rapid growth, the bigger issue to watch is the transit infrastructure in place to accommodate the influx of residents over the next five years.
Olson adds that his other concern is around affordability. “We are an affordable metro today, but as this new product comes online at a higher price point, it is becoming more and more difficult to keep housing affordable,” he says.
