Jesse Lemos and David Stollenwerk share perspectives on Nashville rental properties in Southeast Multifamily & Affordable Housing Business

NASHVILLE, Tenn. (June 30, 2023) — Jesse Lemos and David Stollenwerk, senior vice presidents in Northmarq’s Nashville office, were recently featured in the Southeast Multifamily & Affordable Housing Business article, “Renters gain upper hand in Nashville.”

As developers continue to build mostly mid-rise or Class A communities in downtown Nashville, supply is overtaking demand and renters are gaining power. In 2022, developers brought 8,175 units to the market — up 40% from 2021 — but only about half of the units were absorbed last year.

“However, we anticipate the concessions will burn off relatively fast as there is not much of a pipeline behind the current anticipated deliveries,” Stollenwerk said. “Developers have hit the pause button due to cost of capital and construction.”

Affordable housing
Lemos said planning for affordable housing is an opportunity for Nashville to calibrate sustainable apartment growth.

“Keeping and building upon Nashville’s rich culture is exceedingly important,” he said. “Having lived and experienced a 20-year growth cycle in Austin, Texas, I understand the important balance between high-growth fundamentals all while maintaining the cherished history that makes Nashville a highly sought after place to call home for young professionals, musicians and families alike. That said, to keep and maintain the culture, Nashville will need to deliver more affordable units.”

Demand in the suburbs
Although tenant demand is strong in the suburbs as well, the barriers to entry are high — keeping developers more focused on downtown.

The suburbs have seen tremendous population growth, Stollenwerk said, but many municipalities outside the city center are making it difficult to develop apartments.

“They are trying to slow the development of multifamily in the suburbs due to their preference for the sale of single-family homes,” he said.

Construction slowdown
Market conditions are expected to slow in the near term. Stollenwerk said the dramatic ramp up in new construction will be followed by an equally dramatic slowdown.

“Apartments typically take three years from planning to delivery,” Stollenwerk said, “and many developers broke ground on new developments during the peak job and rent growth period from 2019 to 2022.

“The number of proposed and planned projects has dropped off dramatically in 2023, which translates to very few units being delivered in 2025 and beyond. We don’t expect to see this trend change until construction costs come down, interest rates decrease — reducing the cost of capital — and lenders loosen their loan-to-cost (LTC) requirements.”

Stollenwerk said most lenders are capping out at 55% LTC, requiring developers to seek large amounts of outside equity — which is very costly and hard to come by today.

“Until these things change or cap rates drop significantly,” he said, “developers won’t be able to hit their required yield on cost necessary to make a new development feasible — resulting in very few future deliveries.”

Additionally, Stollenwerk said sales have decreased — which affects a merchant developer’s mindset of whether it’s the right time to start or pause a project.

“Right now, most are in pause mode and waiting for the right time to hit the start button,” he said.

Other topics covered in the article include:

• Occupancy variations dependent on property location.
• Property owners change their retention approach.
• Barriers to development in the suburbs.

Read the full article.