The Anson

Nashville apartment sales have surpassed pre-pandemic levels, topping $2.4 billion with 51 transactions in the the first three quarters of 2021.

“2019 was a record-breaking year for deal volume and sales price appreciation in the multifamily, but those records have been eclipsed,” said CBRE multifamily broker Russ Oldham.

For reference, in the first three quarters of 2019 the sales volume was $1.6 billion — $800 million less than the first three quarters of 2021 — with 44 trades.

Sales in secondary Sun Belt markets like Nashville have been fueled by historically low interest rates and an influx of out-of-state investors, according to Oldham. Gateway markets — the top 10 cities for investment in the U.S. — such as San Francisco and New York have fallen out of favor with investors, due to government-issued rent controls and eviction bans (bans were in place both nationwide and locally), according to brokers.

There are no rent controls in any city in Tennessee and the state Supreme Court ruled that the CDC’s eviction moratorium was "not applicable" here.

In recent months, Nashville has seen the $71.5 million sale of an apartment complex in Sylvan Heights, the $74.3 million sale of a complex in MetroCenter, the $75.3 million sale of an Antioch-area multi-family facility and the $22 million sale of a South Nashville complex — each bought by out-of-state investors.

Anne McGinn of JLL added that the Biden administration’s proposed plan to limit the profits investors can defer from 1031 exchanges to $500,000 also encouraged concerned investors to go ahead and trade assets in 2021. Named for the section in the U.S. tax code, 1031 exchanges allow investors to defer paying tax on real-estate gains if they reinvest the proceeds in other properties within six months of the sale. In addition to capping deferments, Biden’s tax plan could raise the top capital gains tax rate from 20 percent to 39.6 percent.

“Congress is walking back several of Biden’s initial proposed real estate investment restrictions,” McGinn said. “But owners and investors aren’t leaving it to chance. They’re trading now.”

Oldham echoed McGinn’s sentiment, adding that he has seen an influx of generational owners entering the market.

“Families and individuals who have owned for 20-30 years and weren’t seriously considering selling have sold in gateway markets and rolled their cash into Nashville investment properties this year,” Oldham said.

Most 1031 deals are done by individuals rather than corporations, according to a report from the Congressional Joint Committee on Taxation. Publicly traded real estate investment trusts, or REITs, have less need for exchanges because they enjoy other tax benefits, according to the CCIM Institute.

Rental Rates

In Metro Nashville, Class A rental rates have risen by 14.4 percent in 2021, according to Oldham’s data. Workforce rental rates have soared even higher, increasing by more than 15 percent since January.

Nashville’s increase in rental rates isn’t isolated to a single cause, according to Oldham. There are multiple factors pushing rates upward: an expensive housing market that is keeping many renting, global inflation and a rush of inbound migration into Tennessee spurred by remote work set-ups and corporate relocations and expansions.

Second to Texas, Tennessee was a top state for inbound migration in 2020, according to UHaul.

“One landlord last month wrote 20 new leases, 15 of those for people moving from out-of-state who signed site-unseen,” Oldham said.

With slim vacancy rates and steady absorption, Oldham expects rental rates to continue to rise over the next two years, before they flatten or soften slightly.

“It’s cyclical," he said. “There’s roughly a two-year lag in multifamily development. As projects are completed and new units come online, its possible that the pace of rent growth could slow down from the historic levels we are seeing right now, although there are some major demand drivers that will continue the demand side."

Investor Trends

From an investor standpoint, strategies remain largely unchanged. Investors are continuing to move capital into secondary and tertiary markets, and the appetite for smaller, value-add vintage assets continues to grow, according to McGinn.

Over the past 10 years, the prolonged bull run in the multifamily investment market has pushed investors to expand strategies further out into secondary and tertiary markets in search of buying opportunities where there is less competition and more favorable yields, according to data from CCIM.

Capitalization rates, a number used to estimate the rate of return on commercial properties, are compressing even in secondary and tertiary markets, but in many cases, investors are still finding cap rates in Nashville that are 150 to 300 basis points higher than what they can find in the top markets, Oldham said.

Buyers are continuing to deploy capital at an increasing rate for 20-to-40-year-old multifamily assets valued at or below $10 million, McGinn added.

Overall Outlook

Generally, most Nashville multifamily brokers and developers agree that the near-term outlook remains stable and growth will continue. Absorption continues to outpace new supply. Fannie Mae and Freddie Mac have been active lenders in 2020, and it appears that caps for 2021 will be set at comparable levels. Low interest rates providing cheaper capital, and therefore more competition in the market, will likely continue to compress cap rates, Oldham said.

However, investors are also mindful of potential headwinds. If and when construction supply chain issues are resolved and homeownership becomes more affordable again, there could be a level of retraction in rental rates, according to experts.

Additionally, investors are keeping an eye on the preferences of aging millennials (23-38 years old) who drive demand. Will millennials continue to choose to rent instead of own? Will they begin to migrate to more suburban locations? What amenities will drive rental decisions?

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