By Vincent Lefler, Senior Vice President, Nashville Capital Markets, JLL Tennessee
The numerous cranes visible on the skyline are a sure sign that multifamily construction is booming in Nashville.
Construction data certainly corroborates that impression. The number of apartments delivered in Nashville jumped from an average of 1,330 units per year from 2008 to 2012 to a total of 3,035 units in 2013. And the pace of construction continues to accelerate: Nearly 8,000 units are currently under construction in the metro area.
With multifamily construction reaching unprecedented levels in some submarkets, people have begun to ask me whether the multifamily sector in Nashville is in danger of becoming overbuilt.
The answer is no, for three key reasons:
1. Construction activity is concentrated in two previously underserved submarkets.
More than 60 percent of the new units under construction are in two submarkets – Downtown/West End and Brentwood/Franklin, two highly desirable areas that were previously hampered by multifamily construction moratoriums.
The moratorium on new housing construction was lifted in Downtown/West End in 1999, but it wasn’t until the completion of a pioneering project in 2009 that developers discovered it was possible to command the rental rates necessary to underwrite large multifamily projects. That project, 1700 Midtown (subsequently renamed Bell Midtown following a $27.4 million sale), leased up in a surprisingly quick six months at $1.80 per square foot – significantly higher than the previous $1.50 per square foot high water mark.
Brentwood/Franklin is known for its award-winning school system and access to a wide variety of retail, restaurants and entertainment. The neighboring cities of Brentwood and Franklin are also experiencing unprecedented economic growth and numerous high-profile corporate relocations.
The lifting of a multifamily construction moratorium – which was in place for approximately a decade – has demonstrated the pent-up demand for rental units in this submarket. A total of 758 units were added to the submarket in 2013, and 1,433 units were under construction as of late 2013.
Average occupancy increased from 92.3 percent in fourth-quarter of 2012 to 95.1 percent in fourth-quarter 2013, while rental rates increased 6.5 percent.
We can expect both the Downtown/West End and Brentwood/Franklin submarkets to absorb the new supply because those submarkets have only begun to catch up to pent-up demand that has existed for more than a decade.
2. A growing number of people are choosing to rent vs. own.
Stricter lending requirements for home loans play a factor in this demographic shift, but the desire for flexibility is a bigger reason. Millennials in particular seek dynamic work-live-play environments, and they want to be able to move easily if they get a new job. In addition, the stigma about renting has been debunked, and it’s increasingly the option that people of various ages and socioeconomic backgrounds are choosing. This demographic shift will contribute to the ongoing healthy demand for apartments in Nashville.
3. Fast-growing Nashville is one of the best job markets in the U.S.
The metro area’s resurgent economy has been the subject of national headlines, including a Time article that dubbed the city “The South’s Red-Hot Town.” Nashville’s net job gain ranked No. 2 in the nation in 2012 and No. 6 in 2013, and the city also ranks in the top 10 nation-wide for population growth. Demand in the multifamily sector is directly tied to job and population growth, and Nashville’s projected growth in these areas bodes well for the absorption of the new apartment units coming online.
Occupancy rates metro-wide have increased to more than 95 percent and rent growth is averaging 6 percent annually. These strong fundamentals combined with the key trends I mentioned place Nashville’s apartment sector on very solid ground.
For more information about the Nashville office’s Capital Markets services, visit the JLL Tennessee website.