REGIONAL MARKETS: SOUTHEAST

APARTMENT FINANCE TODAY • FEBRUARY 2008

Gettin’ the Twang Just Right

Nashville’s multifamily market finally playing in tune.

By Liz Enochs

What’s bigger than a 10-gallon cowboy hat and in better shape than a beatup old pickup truck with a hound dog hanging out the passenger window? The occupancy rate in the apartment industry in Nashville.

At about 95 percent, the occupancy rate in the country music capital is the highest it’s been in at least five years, according to data from Reis, Inc., a New York City-based real estate research company. On top of that, rent growth in Nashville is healthy, job growth is steady, the construction pipeline is slender, and there’s no shadow market competing for renters.

What’s next? Will our country-and- western singer finally get the girl?

“It’s kind of holding together with everything you want to see,” said Greg Willett, vice president of research and analysis with M/PF YieldStar, a Carrollton, Texas-based apartment market research company. “We really like Nashville going into 2008. It’s our top pick in the Southeastern part of the country.”

In fact, Nashville is in even better shape than that, according to M/PF’s own numbers. The company has the central Tennessee metro ranked as the No. 4 apartment market in the country, up from a No. 5 ranking for 2007. That’s out of 57 markets the firm ranked in a recently released research report.

Gettin’ the dog back

“The potential for revenue growth is the real factor there,” said Willett. To be more precise, as he said in M/PF’s report on the top markets, “The stage appears set for the already healthy apartment occupancy rate to be sustained and for rents to take another substantial upturn.”

Rents jumped 3.9 percent in 2007, rising by $28 to an average of $751 for all units, said Brad Cather, president of the Greater Nashville Apartment Association and president and CEO of Lighthouse Residential Group, a locally based apartment developer and property manager. Occupancy rates rose half a percentage point over that time, he said.

Reis put the vacancy rate at the close of 2007’s third quarter at 4.9 percent, markedly better than the U.S. average of 5.6 percent. It was also the lowest since at least 2002, when the metro’s vacancy rate was higher than 8 percent, Reis data shows.

The north Nashville submarket is the area’s strongest, with a 98 percent occupancy rate, said Cather. Other strong submarkets: Mt. Juliet, Lebanon, and Smyrna/La Vergne.

The Smyrna/La Vergne/Murfreesboro area, where Middle Tennessee State University—with 23,000 students—is located, has the best upside potential, according to Cather. The average rent in that area is 68 cents per square foot, 12 cents lower than the market average of 80 cents. That means there’s plenty of room for landlords to raise rents and still be competitive.

Rutherford County, where those cities are located, was the second-fastest growing county in Tennessee from April 2000 to July 2006, with a population gain of 25.7 percent, according to U.S. Census Bureau statistics.

Demand is so strong that one developer is building a 504-unit property in the area, said Cather, adding, “You rarely see a 500-unit deal going up anymore in this part of the country.” Developments with unit sizes of around 300 are more typical, he said.

Gettin’ the girl back

One contributor to the market’s health is the fact that home prices are still rising “meaningfully,” according to Willett. “So there’s not any competition from the shadow market of single- family home rentals.”

Investors are taking notice. Nashville registered a record sales volume of existing multifamily properties in 2007, said Cather.

The association recorded 33 sales totaling more than $579 million in 2007. About 8,300 units traded hands, at an average price of almost $70,000 per unit.

Real Capital Analytics, a New York City-based research firm, put the market’s weighted average cap rate at 6.6 percent, more than a percentage point higher than the national average. A capitalization, or cap, rate is a gauge of a multifamily property’s projected yield, as measured by dividing the net operating income into the purchase price.

A recently completed 250-unit apartment complex in Mt. Juliet changed hands in December at a price of $29.4 million, or $177,900 per unit, according to Cather. That’s two-and-a-half times the market average and the highest per-unit price paid for a multifamily property last year.

LeCraw & Co., LLC, of Atlanta was the buyer of the property, known as Aventura at Providence, and St. Louis, Mo.-based developer MLP Investments, LLC, was the seller, Cather said. “My daughter and her husband actually live in that community,” he added. “I know it intimately.”

Gettin’ the dang truck fixed

That anomalous transaction aside, though, most of the Nashville-area resales of existing multifamily properties are of complexes built in the late 1980s and early ’90s, with purchasers aiming to make value-added improvements that will help them push rents higher, according to Cather.

“The flavor of the week is value-add,” he said.

That fits the theme hit hard by country music singers all over: That somebody in the dang song needs fixin’. These days, however, Nashville might just be the apartment market equivalent of a country music record played backward.

You know what happens when you play a country song backward, right? You get your dog back, you get your girl back, and your beat-up ol’ truck gets fixed.