You read that title right: we’re back. Lots has changed since the last time we did one of these, but our bullish attitude on workforce housing in the American Heartland hasn’t.
So today we’re bringing this series back with a trip down South. We’re going to talk about the Country Music Capital of the World, the Buckle of the Bible Belt and Music City U.S.A. — if you haven’t guessed it yet, you’re in the wrong place — it’s Nashville, Tennessee.
The Athens of the South
Nashville wasn’t always a gleaming cultural icon. It began life humbly, as a trading post on the Cumberland River. About a century later, a fort was built in the area, named after Revolutionary War hero Francis Nash. And back then, it went by a different name: Nashboro.
During the 19th century, Nashville became one of the wealthiest cities in the South, owing to farming, livestock, and thoroughbreds — but also significant iron production. By the turn of the century, Nashville’s fortunes were turning, too, as Jefferson Street became a well-known hub for jazz and blues musicians.
But by far the most important development in Nashville’s history came in 1945, when Andre Prince Jeffries opened the first Prince’s Hot Chicken Shack at Jefferson and 28th. (Trust us, you want to click that link.)
This writer’s hot-chicken obsession aside, Nashville’s cultural evolution became an economic revolution as its number-one cultural export undoubtedly became: country music. Nashville’s storied history and vibrant cultural scene attract plenty of itinerant youths and older residents alike.
But Nashville’s really untold story is that it isn’t just about the Opry and the Country Music Hall of Fame. During the 2010s, the city racked up accolade after accolade as a modern boomtown. As of 2017, its population swelled by 100 people every day, and its economy was the third fastest-growing in the country.
Today, Nashville still plays host to the Big 3 record labels and Gibson guitars. But it also boasts a solid meds-n-eds backbone that keeps the city strong when recessions strike. Five Fortune 500 companies call the city home; Vanderbilt University and its associated hospital are among the largest employers in the region; and more than 300 other healthcare companies, including the world’s largest private hospital operator, work out of Nashville.
That combination — a thriving cultural scene grounded in a stable economic base — has proven a potent elixir. And as Nashville continues to soar, it presents real estate investors with some attractive opportunities.
Opportunities and Risks
Strong, diverse economy
Every housing market’s backbone is its local economy. And in Nashville, it isn’t hard to see why real estate is booming.
Let’s start with population growth. While it isn’t an absolute necessity — after all, few investors try to target every demographic — population growth is one important factor in overall demand for housing.
Nashville has that in spades. Over just the last decade, the region’s population has swelled by a massive 20%. And it’s not just the last decade either; Nashville’s demonstrated a consistent upward trend for quite some time.
According to data compiled by Nashville’s Chamber of Commerce, population isn’t the only thing rising: during its pre-pandemic peak, Nashville saw some of the fastest economic growth in the country.
That’s not surprising, given Nashville’s solid economic fundamentals.
- First, take a look at entertainment — a disproportionately massive sector of the economy. When times are good, it reels in sizable tourism revenues — in 2019, something to the tune of $150 million — and keeps small businesses afloat. And while those sectors have yet to fully recover from the pandemic chill, they’re well on their way back. Plus, they’re part of the reason for Nashville’s reputation as a latter-day boomtown. Cool cities tend to attract young professionals looking to relocate — especially in the post-pandemic world of remote work and mass migration to lower-CoL cities.
- Nashville also boasts the resilient meds and eds background that we look to for stability during leaner periods. In fact, healthcare is the biggest business in the city — contributing more than $65 billion to the local economy every year. Vanderbilt University, Vandy’s Medical Center, HCA Healthcare, and more than 25 other colleges and universities might witness comparatively slow growth during economic booms, but they create sustainable, middle-class jobs that keep the economy ticking throughout the business cycle.
- Trade is big business in Nashville, too. Situated at a convenient geographical nexus, within 1-2 days’ drive of 75% of US markets, it’s well-positioned as a trade and logistics hub. Investment from major players like Amazon doesn’t hurt, either. This sector could prove to be an important sleeper, in which case it would reaffirm our central thesis that the Heartland is a great place to be.
Nashville’s economic resilience was on full display in the aftermath of the covid-19 pandemic. While sectors like leisure and hospitality took a beating, the region’s well-diversified economy showed its strength and came roaring back to life much quicker than the US average. As of January 2021, things looked pretty good there. And even now, employment is well above its pre-pandemic zenith.
The bottom line: Nashville has a mighty, well-diversified economy that keeps ticking even when times are tough. And in good times, its potent mix of trade, professional services, and entertainment industry players create realistic upside potential that drives population growth and housing demand.
Spicy Housing Market
Unsurprisingly, Nashville’s rental market is red hot right now. Part of the reason for that is that it’s hot everywhere, but Nashville’s meteoric population growth is driving a tighter-than-usual market. Let’s start with some bite-size statistics from the Census Bureau’s most-recent estimates:
- Average rent in the city is just north of $1800.
- Average home price is just short of $350,000.
- And while some things, like groceries and fuel, cost slightly more than the national average, low healthcare costs bring the total cost of living in the area 3% lower than the national average.
- Nashville rents have risen sharply over the last few years (about 7% annually between 2014 and 2019, the last year for which the HUD has data), but the majority of options remain fairly affordable: a substantial majority of apartments cost between $1,000 and $2,000 monthly.
And Nashville’s lofty home prices — which have risen as much as 31% over the past year — make for an attractive renter’s market, which is why nearly half the market rents (a fraction that rises slightly every year).
While population growth could continue to drive rent prices upward, abundant new construction in the region is projected to absorb most of the rising demand. In fact, new construction has placed some upward pressure on the city’s apartment vacancy rate, which could slightly soften the market overall.
For investors, that situation might prove a double-edged sword. On one hand, Nashville’s population and rents have been rising quickly and steadily for years. Even the pandemic barely slowed the rise. For investors who can get in on the ground floor, appreciation and rising cash flows could mean substantial payouts just a few years down the road. On the other hand, that bubble has to burst eventually. Buying in too late could leave tardy investors holding the bag, as gleaming Class-A new construction loses tenants when the next recession strikes.
But for investors looking to buy workforce housing, the story is a little different. Nashville’s large student population and steady supply of middle-class jobs should preserve demand for affordable housing in most economic conditions. While supply is tight, investors prepared to try a slightly more aggressive approach to acquisitions could wind up finding great deals. A shortage of affordable options also creates opportunity for investors willing to weather the risk of new construction: while initial capital expenditures might be higher, investors prepared to help fill in the gap could benefit from strong demand into the foreseeable future.
For investors interested in the latter strategy, it’s worth noting that Nashville’s rental market isn’t exactly a monolith. The MSA features dramatic variability in housing costs:
It’s also worth pointing out that, while Nashville’s overall rents have risen considerably over the last few years, the lion’s share of that growth has been confined to a few select neighborhoods. But overall, the market should be well-prepared to absorb growing demand while creating opportunities for investors to add value by tailoring their offerings toward demographics within their risk profiles.
What We’re Watching
Nashville presents investors with some compelling traits, but that isn’t to say there aren’t a few items we’re watching.
First, the elephant in the room: boomtowns are risky. Where the low rents, tight vacancy, and high demand of a safer market might reassure investors that their money probably won’t disappear overnight, more-dynamic markets pose inherently greater acquisitions risk. Sure, Nashville’s economic fundamentals are strong. But as money, migrants, and new construction all flood the city at once, investors will have to scrutinize their valuation paradigms more closely than usual.
Next, Nashville is expensive. To be sure, it’s cheaper than traditional hubs like New York and LA — and plenty of its impressive in-migration comes from migrants who want to live in a hip urban hub while giving their living expenses a good, close shave. Cheaper-than-coastal-hotspots but fun-and-trendy is a good place to be.
But too much popularity can prove detrimental. Nashville’s impressive trajectory could very well mean it lands somewhere close to Austin and Miami — popular alternative markets that, over the past few years, have become almost as expensive as the more-established hubs they sought to replace.
It’s also worth noting that, particularly in an inflationary environment, rising demand makes it hard for would-be investors to find worthwhile deals. Especially once you factor in recent and projected rate movements — which could very well depress prices and give current owners more reason to stick with the safer side of the often-marginal sell/hold call — the specter of stagnant cap rates could make breaking into the market more difficult than usual.
For established investors, that might not be much of a problem. But Nashville just isn’t a sleeper the way some other Heartland markets are, which means new investors could face stiffer competition — and potential price wars — with long-time players.
Concluding Thoughts
Booming markets are inherently a little strange. On the one hand, there’s clear line-of-sight to appreciation-based returns. Buy a building at the beginning of a long, steady upswing, and investors should be pretty happy with their results.
But when the boom hits a fairly stable, well-established economy with few major reinventions either in the past or on the horizon — and that boom is more a function of broader cultural and economic shifts than any features intrinsic to the market in question — those prospective returns start to look a bit more fickle.
Then, add in the fact that groundswells are complicated. Like we said earlier, the simultaneous influx of new residents, rising incomes, and new construction creates a complicated environment for acquiring property. Relying on past statistics is inherently riskier when a market is in flux.
Finally, it’s simply harder to add value in a softening market with high demand, abundant new construction, and well-recognized potential. Core and Core Plus funds looking for intact income streams from day one can probably find them — at least assuming they can find good prices. But business models that look for upside on underutilized properties might have a hard time competing.
But none of that is to say Nashville isn’t worth serious attention. It’s one of the fastest-growing metros in the country, by every metric that matters — including population, income, and GDP. And its stellar economic diversity creates abundant upside potential and downside protection, which insulates capital from economic fallout and capitalizes on economic growth.
For investors who are scrupulous about valuation, and savvy enough to hang on to the mechanical bull that is frothy demand, Nashville could be a great opportunity to capture that world-beating growth.
