Despite a housing boom that propelled Nashville to supernova status, developers and analysts wonder if 2023 is the year the bubble bursts.
“I’ve been doing this for a long time,” said Bruce McClenny, senior manager of ApartmentData.com. “You think you’ve seen it all, and then it happens. It’s a lot of uncertainty.”
As the single-family housing market takes a hit from rising interest rates designed to rein in high home prices, Nashville developers and analysts say they aren’t too worried about the multi-family market. .
Still.
The Nashville multifamily market has seen a growth spurt in recent years, but supply is only just beginning to catch up with demand. ApartmentData.com has estimated rental growth of 13.1% in 2022 and 19.6% in 2021. Last year, an above-average number of apartments came on the market, with 8,152 units added, according to ApartmentData.com.
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A recent report from national apartment listing service RentCafe estimated that over 9,000 new units would be delivered by the end of 2022. Estimates for 2023 show new apartment communities opening weekly.
But a fog of uncertainty still hangs over the economy, and no one can say for sure how Nashville will fare. McClenny said the long-term outlook for Nashville looks good. But local developers know there are always winners and losers.
The year of the supernova
For the second year in a row, Nashville real estate has reached supernova status.
It is according to Annual report of the Urban Land Institute, released in October. Nashville was ranked #1 for overall real estate outlook. Strong job growth, housing demand and a booming population have all been factors in the rankings. Dallas and Atlanta took the No. 2 and 3 spots, respectively.
Multifamily construction over the past two years is at its highest level in 50 years. Nashville ranks 13th among the top 20 metro areas in apartment construction over the past five years. The the city center in particular has seen tremendous growth over the past couple of yearsand that growth is expected to continue into 2023. McClenny estimates that the Gulch region alone will see 2,500 units delivered.
Soaring demand leads to affordability issues, especially when such a high percentage of new units are on the luxury side of the market. Fewer options in the rental market and soaring home prices have created a pinch for many people in the Nashville area.
Tenants have seen some relief as growth has slowed over the past three months. And while more apartment supply is expected to arrive next year, early signs point to slightly weakened demand, according to Apartment Insiders’ Joel Sanders.
“We’ve seen signs that household formation in the apartment world is slowing due to fear of recession,” Sanders said. “We haven’t seen 2022 college graduates enter the rental market as we would have imagined.”
Sanders said these early signs could show tenants making recession-focused housing decisions. University graduates are returning home and many people are living with roommates, which reinforces the need for additional households. When thousands of new units ship in 2023, Sanders said, they may not be met by the same high demand that has recently pressured the market.
“Luxury apartments are going to have to come up with concessions to be successful,” he said. “People aren’t as keen on spending on luxury things as they were in 2021.”
A tenant market
Increased supply coupled with softened demand could mean one very important thing for Nashville renters: relief.
But this easing of rental prices can be accompanied by hostile economic conditions. Sanders pointed to recent layoffs in the tech world as a cause for concern, but said smaller businesses were also being hit by early signs of a recession.
“You will know when a recession is approaching whenever you personally know someone who has been laid off,” Sanders said. “Small businesses do the same, but they don’t make the headlines.”
Another key clue: loans are starting to dry up. Banks have less money to lend than last year and construction costs keep rising. McClenny said his advice to the industry was to hold steady through the storm.
“Overall, Nashville is going to settle down,” McClenny said. “The industry should be stable in 2023, given the recession, given inflation. Sticking to the price and having a flat year might be a good strategy.
Developer: “Breathe”
Architect and real estate developer Jared Bradley thinks Nashville could benefit from a break.
“All the bad developers come to town and build shitty buildings because the demand is so high,” Bradley said. “Now there’s enough supply, and it’s going back to a tenant market, which is absolutely fine and healthy. … We need to do big plans that will stand the test of time, end of story. .”
Bradley is the leader of a vertically integrated development, architecture and construction company based in Nashville. The company has designed and built several multi-family apartment complexes in the city and has also worked on projects for Fisk University. The most high-profile effort of late is the collaboration with M2 developers on the Ritz-Carlton hotel and downtown residences.
But Bradley said Nashville’s boom over the past few years has attracted too much bad design and construction work. When demand is high, almost any new apartment community will find success.
“We microwaved the city like a bag of popcorn,” Bradley said. “I hope people like us who care about the city can come together and do a good job.”
In Bradley’s eyes, a flat year for real estate development might not be such a bad thing. Tenants will have more choices and developers will be able to “breathe”, he said.
“We don’t chase design trends, and we don’t chase market trends,” Bradley said. “We are a community developer and we look at needs. This is how Nashville developers are going to do for the next few years.”