Bust Isn't Following Boom In Nashville Apartments: Just A Little Less Boom

Nashville's apartment market has seen one of the nation's more robust building booms in the multifamily space nationwide in the last few years. Conventional wisdom would say that a bust is coming on the heels of overbuilding. That is not going to happen, according to the speakers at Bisnow's recent Nashville Multifamily event.

Instead, there will be some softening of rent growth, and demand for more concessions. But Nashville's population and job growth are too strong to let the apartment market go bust, speakers said. 

Nashville Area Chamber of Commerce President and CEO Ralph Schulz, who gave the opening remarks, said economic development has changed fundamentally in the last 10 to 15 years, and Nashville is reaping the benefits of the new way of doing things.

It used to be that communities would draw jobs to their market for strictly economic reasons, he said.

"Now jobs grow in cities that have a workforce, and a workforce is attracted to cities that have two things," Schulz said.

"One is not economic. It's culture, while the other is economic performance. Nashville is strong in both of these categories, and that's why we're growing at a rate of 35,000 new residents a year — 70 people a day. Jobs are growing at almost 40,000 a year."

Metro gross domestic product growth has been growing at 4.8% this year, Schulz said, and the chamber predicts the growth rate will be from 4.5% to 5% for the next three to five years. 

At the same time, the cost of living is still lower in Nashville than the national average — about 95% of the average — and certainly lower compared with larger coastal markets, though housing and transportation costs have gone up in recent years.

"A younger workforce is being drawn to the area. About 34,000 prime working-age adults moved to Nashville from outside Tennessee last year, from virtually every part of the country. There are very few cities Nashville is losing people to, rather than gaining people from them."

The greatest challenge new residents face when they get here is the transit system, Schulz said. Many are coming from places where they do not need to own a car. They would prefer not to have one here, either, but Nashville's transit is not up to that standard.

There will be a referendum on transit in May, and if it passes, there will be movement to establishing a transit system, Schulz said.

The first panel discussed multifamily development in Nashville and other Southeastern markets. Demand is strong enough to keep developers busy, but the boom has slowed down a bit as new product, especially Class-A, enters the market, they said.

Crescent Communities Senior Vice President Benjamin Collins, who has developed over 10,000 apartments in his career, said that 2017 has been about the same as last year, with Crescent starting nine new developments in its markets, the same as in 2016. 

"Underwriting has stayed the course as well this year, which has helped keep markets stable," Collins said.

He also said Crescent has been increasingly focused on asset management efforts as it has opened new properties, and as concessions have become more prevalent, especially in urban markets.

Lennar Multifamily Communities Vice President of Development Steve Gorning, who has developed over 3,000 apartments, said in Nashville in particular, rents started dropping and concessions started building in mid-summer of this year, but not dramatically. 

"We're getting our fair share of leases at our lease-up properties in Nashville, so we're pretty happy about that."

Gorning said prospective residents are more informed about the market.

"They know what they're looking for. They walk in with spreadsheets detailing all the competition, all their rates and concessions, and they're looking for the best deals."

For new developments, construction labor is tight in Nashville and other markets, Gorning said.

"We were able to complete our development on time this year, but it was more difficult than it has been."

Cooper Carry Associate Alysha Buck, who has designed master planned communities, high-rises and other kinds of properties, said coming into 2017, she had expected a steady year, but by midyear, new development had kicked into a higher gear. 

"We've seen seven new projects in our multifamily/mixed-use group alone get the green light to move ahead," she said, referring partly to Atlanta, but also other markets such as Nashville.

In terms of unit design, flexibility is in the greatest demand, Buck said.

"In two-bedroom design, for instance, we're seeing a variety of uses for that second bedroom as an office or a guest room. We're rearranging unit designs to accommodate a wider variety of tenants, who have a wider variety of uses for their space."

TDK Construction President Tim Keach, who has overseen construction of $1B in multifamily and developed over $700M worth, said 2016 and 2017 were roughly the same in terms of development volume, though the timelines for development has gotten a little longer.

"In construction, I don't see how prices can get any higher," Keach said. "But the market is more orderly than it has been."

The next group of speakers represented the operational side of multifamily. On the whole, demand is strong enough to keep occupancies high, but not quite high enough in some markets — and especially among Class-A properties — to keep concessions at bay, they said.

Southeast Ventures principal Tarek El Gammal said the Nashville apartment market is at the mature stage, with concessions returning to the market. There are plenty of apartments, but there is also plenty of demand. 

"We're probably looking through to next year to reach equilibrium," he said.

Downtown Nashville is evolving into a residential market that will be healthy in the long term.

"Look at all the other things that are happening in the core," El Gammal said. "Office, hospitality, retail — Nashville is getting a true live-work-play environment. That's not only going to attract millennials, but retiring baby boomers. That all bodes well for apartments in the core in 2018 and beyond."

The industry will also be able to take advantage of up-and-coming sources of revenue in the future, El Gammal said.

"Parking income is a real source of potential income. To the extent that [a] tenant has more than one car per unit in some properties, they're being charged."

But that is just in the short term. In the longer run, there will be less ownership of cars, as people use more ride-sharing services.

"As a result, there will be less parking developed with multifamily, and more of an opportunity to charge a premium for the parking that does exist," El Gammal said.

Elmington Property Management President Daniel Ford said going into the spring, he expects a similar leasing volume, especially in Class-B, though Class-A will do well enough, despite concessions emerging in that segment.

"In Class-B, we're still seeing strong rental growth, because the demand is there. Occupancies are at 95% or 96% or even 97%, depending on the submarket, so it's still a landlord's market in that regard," Ford said. 

Ford said Elmington is not interested in managing a property with a high volume of Airbnb or other short-term rentals.

"We used to manage a smaller property on Second Avenue in which some units were dedicated to short-term rentals, and it was hugely disruptive to the existing residents," he said. 

"In terms of getting keys to short-term guests and getting them in and out, it was a mess. It was operationally difficult. So eventually the owner turned the whole property over to short-term rental, which was better than a mix of short- and long-term residents. We don't actively seek short-term rentals at our properties any more."