Nashville apartment sales drop 74%, some developers press pause on new projects
"It all comes down to returns," says Kent Ayer.
Sales of apartment buildings are falling at the fastest rate since the subprime-mortgage crisis.
Investors purchased seven Nashville apartment buildings totaling $294,450,000 in the first quarter of 2023, according to data from CBRE. That represents a 74% decline in sales volume from the same quarter a year earlier ($1,122,383,062).
The recent drop in building sales follows a stretch of record-setting transactions that peaked in late 2021, when the multifamily sector was a top performer in commercial real estate.
Cash-rich investors had a strong appetite for apartment buildings. Nashville and other sunbelt cities such as Dallas, Phoenix and Tampa, — where rents were rising 15% or more annually until last year — were their top choices.
Russ Oldham, Managing Director of Walker and Dunlop’s Nashville Office, insists that “there are no lack of buyers” and demand is still strong, but the market hasn’t adjusted to keep up with the deal velocity the city saw in 2022.
Due to the volatility in the greater economy, buyers are pumping the brakes on their spending spree and taking a more conservative approach to acquisitions. Many are wary of deals with cap rates below 5%. Meanwhile, potential sellers — who over the last two years saw buildings trade at or around a 3% cap rate — are less than enthused at the idea of yielding any basis points. The stalemate has led to the lull in activity.
However, Oldham expects there will be a tipping point for both parties over the coming quarters and activity will pick up. Brett Carr, who serves as Vice President of Investment Sales for CBRE’s Nashville office, echoed Oldham’s sentiment and believes buyers and sellers will begin to meet in the middle.
The economy has also taken a toll on new construction.
Expensive and hard to come by, debt has quickly become the Pappy Van Winkle of commercial real estate as lenders charge sky high interest rates and pull back on borrowers altogether. This upheaval in banking has made financing less feasible and forced some developers to press pause on new projects.
Kent Ayer, president of Murfreesboro-based TDK Construction and Development, a multifamily heavyweight in Middle Tennessee, told tennbeat four of the six construction projects his company was slated to start this year have been delayed. While he suspects two of the four setbacks are in fact, “just setbacks”, he wouldn’t be surprised if the remaining two were scrapped because “the math for investors makes a lot less sense now”.
“It all comes down to returns,” Ayer says. “Projects that made sense at 2-3% debt, don’t make sense at 7%.”
The delays have provided some relief to the historic construction labor shortage spurred by the pandemic. Subcontractors, who could once “name their price,” — thanks to outstanding demand — are now hungry for work and ready to play ball.
For instance, Ayer says, “Last January if I requested a bid for framing, a subcontractor might have quoted me $1.2 million and said ‘take it or leave it’.” Now, “the same contractor will still quote me $1.2 million, but he will call me back in a month or two if he doesn’t hear from me and say, I think I can do it for $950,000.”
Andrew Steffens, Managing Director of Wood Partners Nashville Office, says both of his office's 2023 projects are on “expanded timelines”. Instead of breaking ground this summer, Wood Partners will begin construction on two communities sometime in Q4.
Despite the air of uncertainty, Ayer says seasoned developers won't be deterred and will continue to announce new projects.
Last week, Rise Investors, a development group founded by former AJ Capital Partners Uday Sehgal, released the renderings of its first project, 800 Main, a $210 million mixed-use development which includes 379-units.
Khris Pascarella, isn’t putting his projects on ice either. The Pearl Street principal, whose firm’s portfolio includes more than 3,000+ units across Middle Tennessee, told tennbeat he and his partners will move forward on their two planned communities — a 240-unit complex in Fairview and a 302-unit complex in Century City, near Donelson. Both projects are currently in the design phase, but he expects to break ground on the Fairview project in Q4 and Century City in Q1.
Much to many tenants' relief, whose wages haven’t been keeping pace with inflation, the Nashville market experienced considerably lower rent growth in Q1 than it saw in the same quarter a year and two years ago, according to data from CBRE.
Occupancies have also remained stable amidst the economic turbulence. Nashville posted a 94% average occupancy rate in Q1 — which is down just 2-percentage points from the 96% average the city has enjoyed over the last two to three years.
“So far, stabilized assets appear to be holding firm across urban and suburban markets, while new urban lease ups are trending in the one-to-two-month range,” says David Smithwick, of CBRE Nashville’s multifamily team.
He attributes the slight decline to the season and expects the industry to pick those two points back up during the spring and summer months — which are prime times for new leases. He predicts concessions — which were up in Q1, especially among new lease ups — will plateau with the warmer weather.
“Nashville is only just beginning,” Carr says. “Fundamentals could be challenged in the near term, but Nashville should remain the number one city for job growth, population growth, renter demand, and investor interest.