MARKET SNAPSHOT: National Buyers Pursue Assets in Music City

Nashville, Tenn.–Year-over-year fundamentals indicate that the Nashville metro area is on the rebound.

The metro area trailed most other cities during the recession, with the economic hit not seen until the first quarter of 2009, according to Vince Lefler, a broker in Apartment Realty Advisors’ (ARA) Atlanta office. During this period, occupancies fell to below 89.6 percent, he reports, but has regained momentum and is now averaging 92 percent across the market.

However, about 2,500 units are currently under construction throughout the metro, though the majority of deliveries are expected in Mufreesboro and Hendersonville.

At the same time, effective rents have gained about 1 percent, as concessions are starting to burn off.

Class A assets have outperformed lower-tier product, particularly in the Southwest, in areas such as Franklin/Cool Springs and Downtown/West End, notes Sean Henry, principal at ARA Atlanta.

Due to its fairly diverse economy—with a high concentration of jobs in the government, education and healthcare sectors—the Nashville metro area economy is faring somewhat better than the state average and is expected to make a strong recovery. The state unemployment rate was 10.1 percent, as of June 2010, while the Nashville-Davidson-Murfreesboro-Franklin metro area saw a 9 percent unemployment rate during the same period, according to the U.S. Bureau of Labor Statistics.

“In our marketing of assets in the first half of 2010 …  the thing we noticed was [that buyers] were pleased to learn how diversified the Nashville economy has become,” notes Henry. “It’s Music City, but it’s not just Music City. There’s a lot going on in that economy that people are pleased to find out about.”

On the transaction side, Henry tells MHN that, nationally, “We have seen a shift recently within the last three months where the demand in the first half of the year outpaced the supply, and that combined with low interest rates, has caused cap rates to drop; the drop in cap rates has caused more owners to consider selling their assets.”

National players have become interested in purchasing assets in the Nashville metro, where cap rates are between 50 and 100 bps higher than the city’s peak. Class A assets are about 5 ¾ to 6, while B properties are trading at between a 6 and 6.5 cap, reports Henry. “From a broad perspective, the spread in cap rates between high- and low-quality is as great or greater than it’s ever been,” he adds. “There was a time, during the heated economy back in 2007, when somebody would pay a 5 1/2 cap for Class A and someone would pay a 5 1/2 for a C. That’s not the case anymore; C is probably north of 7 but could be as high as 9,” though he adds that there aren’t currently any C Class properties on the market.