Massive amounts of new apartment supply are taking a toll on Nashville’s apartment market, as completions are coming much faster than renters can fill them.
The Music City metro received 10,513 new units in the past year, growing the metro’s apartment stock 8.0%. That expansion rate was easily the highest among major U.S. markets since at least mid-2010, the start of the multi-decade high development cycle.
Over the past three years, a total of 20,261 units came online in the Nashville market. Those new units grew the metro’s existing unit base 16.6%. Though demand has remained solid over that time, it has not been enough to keep pace with such large amounts of new supply. The market absorbed 15,412 units over the past three years. Annual demand levels of roughly 3,800 units to 5,900 units have fallen short of new supply in each of the past five quarters. As a result, occupancy and rent growth levels have dropped off.
The occupancy drop-off over the past year was severe. The 10,513 units delivered were nearly double the market’s absorption volume, sending occupancy down 3.0 percentage points year-over-year. That was the largest drop nationally and took the overall occupancy rate to a seven-year low of 93.4%. By comparison, from 2012 through 2016, Nashville recorded occupancy of roughly 95% to 97%.
Likewise, rent growth levels also dropped off. From 2012 to 2016, annual rent growth averaged 5.2%, reaching highs of roughly 7% throughout much of 2015 and 2016. But in the year-ending 3rd quarter 2017, rent growth fell to a seven-year low, at just 1.1%. The cooling in both occupancy and annual rent growth levels caused revenues to fall 1.9% over the past year. That was Nashville’s first annual revenue loss in seven years.
The drop-off in fundamentals was most prevalent in the Central Nashville submarket, which has seen the bulk of deliveries over the past three years. Large supply volumes have dragged on occupancy and operators have cut rents on a year-over-year basis in each of the past three quarters. As a result, revenues were down nearly 15% over the past year.
Apartment expansion is expected to remain elevated in Nashville, but cool somewhat from recent levels. In the coming year, a total of 6,772 units are scheduled for completion with inventory growth set to clock in at 4.8%, a top five expansion pace. As such, Nashville occupancy and rent growth levels are likely to be suppressed until supply subsides.