Real estate is a hyper localized asset class. What do we mean by this? While the talking heads on financial news outlets and Wall St. economists often refer to real estate as if it were a singular national market, seasoned real estate investors know better. Each market (or MSA as we call it) experiences its own unique dynamics in terms of growth and contraction at different times in the business cycle. That’s why during economic episodes like the 2008 financial crisis, cities and regional economies experienced widely different fortunes. Take Miami during the 2008 financial crisis for example which saw prices fall ~62% from peak to trough. Compare that to Dallas, where prices barely budged during the same time period. Clearly, these markets exhibit different risk profiles (see below chart). What this means is that the an investor’s fortune is in many ways tied to the market in which they invest. As we’ve heard from a number of much wiser and more experienced investors, it’s better to swim with the tide (by investing in a market on the upswing) than against it (by investing in a market on the decline).
“Great”, you say. “But how do I know which markets to invest in or which economic factors I should pay attention to?” Luckily we’ve written a past article on just this subject available HERE. We have combed through tons of data over the past year trying to find our own favorite real estate market within the radius of a 3-hour plane ride. Earlier this year, we came to the following conclusion: Nashville, TN is just that market. Why do we like the Nashville multifamily real estate market so much? Below we lay out the rationale for this investment thesis.
Why We’re Crazy About the Nashville, TN Real Estate Market
If you’ve read our piece (last time we’ll plug this, we promise) on identifying attractive real estate markets, the factors we discuss below will come as no surprise to you. We like Nashville for the following reasons:
Business Friendly State
Supply & Demand
Population Growth At >1.934 million people, Nashville is a mid-size metro experiencing staggering growth. In fact, from 2015-2019 Nashville saw a population growth of 9.6%, the 5th highest rate among large MSA’s according to U.S. Census Bureau data. Only Austin, Orlando, Las Vegas, and Phoenix saw higher rates. Not only are people flocking to the area, but a lot of those folks are Millenials—a demographic whose migration patterns really matter long-term. In fact, Business Insider ranked Nashville as the US’s #4 City For Increase in Millenial Population. It also ranks No. 6 in overall millennial concentration at 29.6%, the same concentration as very trendy Austin, TX. No wonder the median age in Nashville is 34 years old vs. the Tennessee median age of 39. Regardless of age cohort, new movers list the following as their top reasons for relocating to Nashville: lower taxes (including no state income tax), lower cost of living, vibrant music and arts scene, and the availability of good-paying jobs. Which brings us to our next point.
It all comes down to the three most important words in real estate: Location, location, location. Jobs, jobs, jobs. Nashville is attracting companies in droves even amidst the pandemic. In 2020, it ranked #2 in the nation for y-o-y job growth in the US according to the BLS. See the below chart for a few of the more notable corporate expansion announcements in Nashville for 2020.
The Wall Street Journal earlier this year named Nashville the second hottest US job market in 2019, again just behind Austin, TX. The report states that companies have been drawn to Nashville in search of advantages such as lower tax exposure, a business-friendly culture, prestigious universities churning out top talent, and access to major US markets within a few hours’ drive.
Just as important as job growth in a market are the types of jobs that are being created there. That in mind, you may have noticed in the previous “2020 Notable MSA Job Announcements” chart that the employment sectors/industries that are expanding and hiring in the Nashville area are quite diverse. You have tech, financial, logistics, auto, manufacturing, and business services firms all choosing to locate themselves or expand their existing footprints within the MSA. Just as one might limit risk and diversify their stock portfolio through ownership of different industries, we as real estate investors take comfort in a diverse employment base in the areas in which we choose to invest.
More than simply job diversity, we should also examine the composition of those jobs. Ideally, we want to be investing in areas with employers whose industries are likely to grow in the coming years. This growth hopefully will translate to more jobs. We have taken the time to analyze these factors for Nashville and have come up with the following sector-specific take-aways:
Nashville is fast becoming a tech hub. Nashville’s tech-talent pool is growing, bolstered by out-of-town workers and a population highly concentrated with millennials. The number of tech workers employed in Music City grew last year by more than 2,000 jobs, according to real estate brokerage firm CBRE Inc.’s 2020 Scoring Tech Talent report. Nashville employed 31,190 tech workers in 2019, according to the report, compared to 29,120 the year prior. Taking a step back for a moment, Nashville’s tech employment has grown 29.9% from 2014 to 2019! Looking ahead, Nashville continues to be successful in recruiting tech talent to the area. The city graduated more than 4,100 students with tech degrees from 2014-18, and added 7,180 tech jobs from 2013-18, giving Nashville a “brain gain” of more than 3,000 workers. Furthermore, Nashville was one of 16 markets out of the 50 studied that attracted more talent than it lost (it was 10th overall). See later bullet on area universities for further information on this.
Nashville has a large number of healthcare-related companies, a historically recession-resilient sector. More than 250 healthcare companies are headquartered in Nashville and 17 of those are publicly traded. Combined, healthcare has a $39Bn economic impact on the local economy every year. Not only is this a recession-resilient sector as mentioned, but it’s also set to grow immensely in the coming decade. In fact, the BLS projects that healthcare will be the fastest-growing sector in the economy through 2029. This is due to increased demand from the aging baby-boom population, longer life expectancies, and continued growth in the number of patients with chronic conditions. Mark J. Foley, president and CEO of Revance Therapeutics, moved his biotech company world headquarters from Silicon Valley to Nashville last month and had this to say about the decision: “We are thrilled to be relocating our corporate headquarters to Nashville as the area will provide the foundation for our new, world-class training and education center and growth initiatives going forward. Nashville is one of the top business growth areas in the U.S. offering an educated, diverse, and growing population along with a favorable tax and policy environment for companies like ours, making it an ideal, centralized location for Revance’s future growth. We anticipate our corporate relocation to be part of an increased investment in Nashville from other biotechnology and healthcare companies, as innovation and growth defines the city.” Mic drop.
Nashville’s access to major US markets makes it an ideal location for logistics and distribution centers. Nashville is truly a logistical bull’s-eye. In fact, going back to Nashville’s founding it was known as a railroad and river port town because of its central geographic location. 12.5 million people live within a 2.5-hour drive and a full 40% of the US population lives within 600 miles of the city. Nashville is also one of only six cities in the nation where three interstates connect: I-65, I-40, and I-24 connect the city directly to the cities of Louisville, Indianapolis, St. Louis, Chicago, Birmingham, Mobile, Montgomery, Asheville, Knoxville, Chattanooga, Atlanta, Memphis, Little Rock, and Oklahoma City. This may all be a reason why logistics companies like Amazon are choosing to invest heavily in Nashville. The city’s logistics industry is poised for growth as online shopping becomes more ubiquitous due to COVID.
Nashville is a center of higher education and the region retains many young people post-graduation. With 123,000 students enrolled annually in its 24 colleges and universities, the higher education sector in the Nashville MSA has the largest concentration in a four-state region. Notable schools in the area include Vanderbilt, Belmont, Tennessee State, Middle Tennessee State, and Tennessee Tech Universities. Equally as important as the sheer number of institutions is the fact Nashville also retains 60% of its graduates annually. This means a steady flow of young, educated knowledge workers for corporations in the area.
Any intelligent investor looks to place their capital where it is appreciated. For many, that means investing within business-friendly states with less bureaucratic red tape, lower taxes, and a common-sense regulatory environment. For these reasons and more, Tennessee ranks as the #7 strongest state in the country for business according to Forbes. Real estate investors have begun to take notice as well**. Nashville ranked as the third-best place in the country for real estate investment and development according to the “Emerging Trends in Real Estate 2020” report from PwC and ULI. ** Now, obviously each city has its own housing ordinances & landlord regulations which may supersede state law, but Tennessee is generally considered to be fairly landlord friendly.
Supply & Demand Dynamics
When it comes down to it, choosing a real estate market is simple. You want to choose areas where demand is out-stripping supply and will continue to do so for the foreseeable future. In Nashville’s case, this is definitely true. Strong renter household growth over the past 10 years has contributed to relatively low vacancy rates and rising rents in the metro area (see graph to right). The population and jobs growth sections above make this point obvious, but strong renter demand looks like it will continue unabated. On the supply side, the story is much the same. While building activity has grown over the past few years (see chart below), there’s still not enough housing being built to meet the demand.
How do we know? Looking at the latest vacancy data for the Nashville MSA, we see that apartment vacancy rates were 5% in Q2 of 2020 off from a low 4% in Q2 of 2019. The worst pandemic in a generation, economic shut-downs, 20 million unemployed, and the vacancy rate fell only 1%? Not only that, but average rents actually grew 2% since last year! With supply coming to market at such a rate and the pandemic creating a pause in the economy, the fact that vacancies and rents remain largely intact is a signal to us that the Nashville supply/demand picture is still very strong. In fact, reports from the Mayor’s office predict that the affordable housing (much of which is multifamily housing) shortage will rise by nearly 31,000 units by 2025.
It’s because of these positive supply and demand dynamics locally that Nashville’s price performance has been so stable historically. Unlike more volatile coastal markets such as LA or Miami, the Nashville real estate market has been on a steady rise over the past 30 years with only a relatively minor blip in 2008 (see below chart). One of the reasons for this stability may be the area’s relatively low cost of living. While in the past 10 years home prices have appreciated demonstrably, the area’s housing affordability is still reasonable at 5% lower than the national average.
Our Nashville investment thesis is best summarized by Mitch Roschelle, partner at PwC and co-publisher of the report referenced above:
We couldn’t agree more. That said, if you have more questions or for a list of further resources that we’ve compiled on the Nashville MSA, please don’t hesitate to reach out.