Charlotte may be the fastest-growing apartment market over the entirety of the cycle. But looking at total inventory growth since 2015, the designation of fastest growing belongs to Nashville.
The apartment stock in Nashville has grown 17.5% with the addition of 22,100 new units since 2015. That inventory growth tops the rates in Charlotte (16.7%) and Austin (15.7%), both of which placed ahead of Nashville on the list of fastest-growing market over the current cycle.
By comparison, the average expansion rate across the top 50 U.S. markets was 6.1% since 2015.
Nashville has not seen a comparable period of expansion in more than three decades. And while fundamentals held up well early in the supply wave, the market is now experiencing stress. The sheer volume of completions over the past three years has weighed on occupancy, and operators have reacted by reining in their pricing strategies.
At the end of 2017, occupancy in the market slipped below the 95.0% threshold for the first time since 2012. Occupancy remains below that mark, at 94.8% as of mid-2018. Driving down occupancy has been numerous vacancies in market segments most vulnerable to competition from new supply. Class A occupancy has remained below 93% since 3rd quarter 2017. In the high-supply Central Nashville and Franklin/Brentwood, rates have been somewhat better but still below the market average.
The softening occupancy comes despite strong demand in the market overall. Nashville has absorbed more than 5,000 units annually since 2016, performances bolstered by favorable demographic trends and an expanding economy with solid anchors.
But even with solid demand in the market, operators haven’t been able to fill units as quickly as developers complete them. In turn, they have pulled back on price increases. Annual rent growth in the market has remained below 1.5% in each of the past four quarters. Those performances stand in contrast to the 5% to 7% annual increases seen across much of 2014 through 2016.
Driving the slower growth in rents have been cuts in Class A product and Central Nashville. Rents for luxury product have declined on an annual basis since early 2017. Apartment rents in the downtown area fell in 2016 and have been declining since. Rent cuts in the urban core are perhaps not surprising, given that inventory there has surged 59% with the addition of nearly 7,700 units since 2015.
While most top-end segments continue to struggle, there are others more insulated from new completions that are performing solidly. Murfreesboro/Smyrna, for example, has maintained occupancy around 95.5% or better and annual rent growth around 4% over the past three quarters. In addition, Class C units remain around 96% occupied. But annual rent growth in those lower-tier units has moderated closer to the U.S. average for that segment (2.4%).
Going forward, Nashville’s apartment market is unlikely to see much relief from elevated supply volumes in the near term, as current construction volumes and scheduled completions over the next year remain more than double their respective long-term norms.