Nashville is striking the right chord with investors
Nashville may have risen to fame as the country music capital of the U.S., but this growing metro is proving that it is more than a one hit wonder. The city has emerged as a hot-spot for commercial and multifamily real estate investment over the past few years thanks to a booming economy and growing population.
Nashville has ranked among the top 10 U.S. cities in job growth for the past six years. The MSA has added more than 23,000 jobs in the last year, and has an unemployment rate of 2.2%, one of the lowest in the country.
Jobs and low cost of living are two key factors driving population growth, with nearly 90 people moving into the metro each day. People also are attracted to the Nashville lifestyle, with music, entertainment, good food and an overall vibrant creative culture making it one of the top picks for places to live.
Nashville has popped onto the radar for both multifamily and commercial real estate investors. In fact, PwC ranked Nashville as #9 on its list of top emerging markets for investment and development in its Emerging Real Estate Trends 2018 report. According to Reonomy, total commercial and multifamily sales appear to have peaked at $12.5 billion in 2016, but remained elevated in 2017 at $8.3 billion. This year is off to a slower start with year-to-date sales at $3.6 billion as of early June.
While that dip could be due to interest rate volatility in April and May, investors are watching to see how the market absorbs a flurry of new commercial and residential development. According to the Nashville office of Colliers International, approximately 13,000 new multifamily units were built in 2016 and 2017, with another 6,400 that are expected to open this year. Thanks to its population growth and a large pool of students that attend the two dozen local colleges and universities, the market has a big appetite for rentals. However, vacancies are starting to creep higher under the weight of new supply with the vacancy rate moving to 5.9% in first quarter, according to Colliers.
Reonomy data shows that multifamily investors have been on a shopping spree, with acquisitions topping $1 billion annually for the past four years. After hitting a high of $1.7 billion in transaction volume last year, however, multifamily sales have dropped to $342.5 million in year-to-date sales recorded as of early June.
Major projects take shape
Developers are changing the Nashville skyline. Three major mixed-use projects underway in and around downtown are creating new location options for employers and residents, as well as new entertainment, retail and hotel venues to explore for the 15 million-plus people who visit Music City each year.
Nashville Yards is a $1 billion mixed-use project being built on several blocks at the western entrance to downtown. The master plan for the projects calls for the construction of more than 4-million square feet of entertainment, retail, office and residential space, including 1,000 residential units. Construction is currently underway on the first parcel, a 591-room Hyatt Regency that is scheduled to open in 2020.
Fifth & Broadway is a $400 million mixed-use project being developed downtown on the site of the former Nashville Convention Center. The project will add 235,000 square feet of retail and entertainment space, 385,000 square feet of office space, 300 apartments and a new National Museum of African-American Music.
The Capitol View mixed-use project sits on 32 acres in the North Gulch area of downtown. Early phases of the project are already open, including a new 258,000-square-foot headquarters for LifeWay that opened late last year. When it is fully built, Capitol View will encompass 1.1 million square feet of office space, 130,000 square feet of specialty retail and restaurants, a 169-room Hampton Inn & Suites and a 378-unit luxury apartment building.
Investors weigh market challenges
Rising land costs are pushing developers to go vertical and add more density to projects.
In addition, Nashville faces the challenge of building space to accommodate future economic development, while still preserving the history and culture that make it a desirable location for employers, residents and visitors. One tool the city recently approved is a new financial incentive program aimed at encouraging the preservation and revitalization of historic buildings within targeted commercial corridors.
Nashville also faces some growing pains ahead, including a tight labor market that could restrict expansion and growing traffic congestion. Even though Nashville made Amazon’s Top 20 “short list” for its new North American HQ2 location, some observers believe that the city’s infrastructure is not equipped to handle such a major addition that would bring thousands of new jobs to the region.
Transit has been a priority for the current city administration to better position the metro for future growth. However, the $5.4 billion “Let’s Move Nashville” proposal that would significantly expand the city’s transit infrastructure hit a major roadblock recently when voters failed to approve a funding referendum. A core part of the massive transit plan calls for building 28 miles of light rail lines and also expanding rapid and enhanced bus service throughout the metro.
Some economic forecasts are predicting more modest job growth ahead for Nashville, with annual job growth falling between 1.1 and 1.5% over the next three years. That translates to about 12,000 to 15,000 new jobs being added annually. So, while the outlook for Nashville remains positive, investors are proceeding more cautiously in the near-term as they watch to see if the metro can maintain its economic momentum, as well as determine how the new space being built impacts occupancies and rent growth.
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