Market Snapshot: Nashville’s Booming Economy Spurs Rent Growth Across All Market Sectors, Continues to Attract Out-of-State Investors

By Eliza Theiss, Associate Editor

Nashville – Apartment Supply and Demand

Nashville, Tenn.—Exceeding the national job growth average for a fifth year in a row, with a 2.4 percent expansion accounting for 20,000 new jobs, Nashville is an increasingly attractive market for both multifamily and commercial investors alike, Marcus & Millichap data shows.

Music City’s strong economic growth, lower entry costs and higher than average first-year ROIs are sparking robust interest from out-of-state buyers, many of which are transposing capital from getaway markets. Targeted properties are generally worth $10 million and have 80 to 100 units. The dearth in these types of properties is further sharpened by many owners holding assets off the market until further value increases. Due to increasing competition, investors are expected to branch out into Nashville submarkets such as Franklin and Germantown and/or increase investment parameters.

2014 is bringing more than 7,300 new healthcare and education jobs, which will spur demand for Class A units, while a 7,000-job increase in the hospitality department is expected to grow demand for Class B and C properties. Though the economy is expanding, vacancies will increase as 4,100 units are delivered. The 3.7 percent inventory expansion represents a 70 percent deliveries growth compared to 2013. This will spark a 40-basis point increase in vacancies. Despite decreasing occupancies, rents are on the upswing, growing 3 percent to a monthly median of $937.

Nashville – Office Trends

Job growth is pushing the local office market up as well with a 1.3 percent, or 820,000-square-foot, inventory expansion. Demand is outpacing supply, which will bring vacancies down 70 basis points to 11.1 percent, Marcus & Millichap estimates. With contracting vacancies, rents are expected to go up. 2014 will bring the median asking rent rate to $20.92 per square foot, a 4.1 percent increase.

Rent and occupancy growth are attracting an increasing numbers of investors, who will target submarkets such as Franklin and Brentwood due to the presence of major employers. Despite growing buyer interest, owners are holding onto office properties, expecting value increases, similarly to multifamily owners. As such, Class B and C assets with higher vacancies located in North Nashville and the Airport Corridor are expected to attract speculative buyers. The toughest competition is expected in the medical office sector, where institutions and REITs will battle over high-credit medical office buildings, for which cap rates start in the low 7 percent.

Nashville – Retail Completions

Nashville’s retail market is also on the upswing. In 2014, 303,000 square feet of new retail space is being delivered. Despite the inventory growth, vacancies will continue to decrease, according to Marcus & Millichap. Following 2013’s 50 basis point contraction, vacancies in 2014 will go down an added 80 basis points. Rent growth will be more than four times higher than in 2013, climbing 3.1 percent to a median asking rate of $14.04. New leases in the Greater Nashville Area will result in more than 1 million square feet of net absorption, a threshold not achieved since 2008.

Nashville – Self Storage Vacancy Trends

Nashville’s self-storage market is experiencing positive growth as well, although below national averages, Marcus & Millichap data shows. Vacancies will contract 1.8 percent, reaching 10 percent. Self-storage rental rates will increase 7.7 percent to $132 per climate-controlled unit and 6.8 percent to $89 per non-climate controlled unit.

 Charts courtesy of Marcus & Millichap