Nashville has been a popular market of interest for investors and industry participants of all stripes in recent years thanks to strong growth in the area. Similar fast-growing markets like Austin, Denver, Boise and others have been a bit of a mixed bag through a turbulent 2020. With that in mind, let’s see how Nashville multifamily has looked in recent months.

As always, numbers refer to conventional properties of at least 50 units unless stated otherwise.

Greater Nashville Overview

About 5,500 new multifamily units have been delivered in the Nashville area in the last 12 months. That represents an increase from the previous 12 months in which only around 3,500 new units were introduced.

In markets around the country, one development in 2020 has been that new supply has generally acted as a headwind to occupancy and rent because overall apartment demand remains lower than in previous years. This lower demand trend held true for Nashville. Net absorption, the net change in the number of rented units in a period, was about 3,400 units for the area over the last year. This fell short of the 5,900 absorbed units from the previous 12-month period.

The net result of more new units and less absorbed units was an average occupancy decline through the last year of 1.6% down to 91%. For context, in the previous 12 months, average occupancy had climbed 2.1%.

The impact of all this on average effective rent for the region was substantial. The average multifamily unit ended October renting for $1,252 per month after a 0.8% gain from the close of last October. That 0.8% gain followed a 4.4% gain in the previous 12 months. Helping to suppress rent growth was an increased reliance on rent concessions. About 19% of conventional properties ended October 2020 offering a discount after hovering around 12% of properties a year ago.

Digging Deeper

So, at the market level we know that new supply increased as apartment demand decreased, and the result was a retraction in average occupancy and much more tepid rent growth. But can we get more specific about where the movement actually occurred?

Of course, and the answer begins with a view by price class. Comparing the net absorption totals for the last 12 months to those from the previous 12-month period shows some dramatic shifts in resident demand. As with much of the country, there has been a noticeable move toward affordability.  The strongest demand in the Nashville area two years ago was in Class A. These properties absorbed more than 2,300 net units. Over the most recent 12 months, absorption for Class A properties was negative by about 25 units. Class B demand fell by more than 50% after net absorption of only around 650 units in the last year. The reverse is true for the lower two tiers. Class C demand over the last 12 months was 35% higher than in the previous 12 months. For Class D properties, demand more than tripled – from about 250 net absorbed units to just under 900.

And Deeper

Another view of the market that adds some clarity is breaking out the subset of properties that entered the last 12 months already stabilized. Stabilized properties lost 1% in both average occupancy and average effective rent in the last year after net absorption was negative by nearly 1,000 units. Because market-level net absorption was positive, this indicates new properties were somewhat cannibalizing the stabilized properties. And yet, we’ve already seen that Class A demand was negative during this same 12-month period. Just about all new supply will enter the market as Class A typically, so how can new properties be cannibalizing existing properties if Class A demand has been negative?

The answer lies in the flight to affordability phenomenon. One factor is that new units are coming into the market well below the average rent of existing Class A properties. The average effective rent of a lease-up unit in Nashville was $1,638 to end October. For a Class A unit in Nashville, the average was $1,897. Part of this gap is due to the fact that operators generally phase out the more generous lease-up concessions on subsequent renewal leases, driving up the average rent of the property from its lease-up level. Another piece of the gap is explained by less aggressive pricing on the part of operators for these new lease-up properties. What has happened in Nashville over the last 12 months is a move by some residents away from the more expensive  stabilized Class A properties into either the lower price tiers, or a new lease-up property. Net absorption for Class A properties that were already stabilized as of 12 months ago has been negative by almost 700 units in the time since.

Takeaways

Multifamily in the Greater Nashville area has certainly been impacted by a rough 2020, though not to the extent seen in various other markets around the country. A benefit in that regard has been the relatively strong position the market entered 2020 in. Average occupancy turned negative over the last year thanks to lower apartment demand and increased new supply, but the area did manage a little rent growth.

There has been a clear shift toward affordability, evidenced partially by progressively stronger demand moving down the price tier ladder. Additionally, the most expensive units in the market, stabilized Class A, were hardest hit.