Buying Occupancy in Nashville's Apartment Market

In normal times, neighborhoods registering the tightest apartment occupancy tend to likewise post the strongest rent change performances. But we all know these aren't normal times. Today, then, it's not unusual to see areas with comparatively strong occupancy taking the biggest hits to rent positioning. Apartment owners and operators in those locales, then, are essentially buying occupancy. A look at metro Nashville's stats on the neighborhood level provides one of the clearest examples of that pattern.

The strongest occupancy figure logged across Nashville as of mid-2009 was the 94.1 percent rate in Williamson County, the largely upscale suburbs like Spring Hill and Franklin that lie southwest of the urban core. Williamson County occupancy topped metro Nashville's average performance of 91.5 percent by 2.6 percentage points as of June. However, effective rents in Williamson County came down by 5.9 percent during the year-ending June. That was a meaningfully bigger hit than the 3.6 percent effective rent loss recorded for the metro as a whole.

Similarly, the more blue-collar suburbs in Sumner County -- places like Hendersonville and Gallatin -- at the northern edge of the metro realized higher than typical occupancy of 93.3 percent, but effective rents took a bigger annual cut of 6.4 percent.

Reversing that pattern, mid-2009 occupancy was just 88.4 percent in Rutherford County, the growing suburbs like Murfreesboro that are found along Nashville's southeastern periphery, where much of the metro's recent construction has occurred. Even with that considerably lower occupancy, annual revenue change in Rutherford County looked pretty much like the shifts in Williamson County and Sumner County, since rents only backtracked a little bit. Effective prices in Rutherford County edged down an even 1 percent in the same-store sample surveyed by MPF Research.

Given revenue change over the past year was about the same in Nashville's high occupancy but low rent areas and the low occupancy but high rent areas, who made the right choice? The answer will be different depending on the apartment market characteristics of a given metro, but for metro Nashville the path taken in Rutherford County seems like the best bet.

Economists generally think that Nashville will rank among the nation's stronger job production centers as we move into the next phase of the cycle, and employment growth should provide the underlying support for apartment occupancy to bounce back fairly quickly. Furthermore, since Nashville hasn't experienced home price deterioration of the magnitude seen in so many other metros, there's still enough of a premium to buy versus rent to suggest that loss of renters to purchase won't be especially severe once job creation does return. Rutherford County, then, looks well positioned to gain ground in terms of occupancy. 

In contrast, it might prove harder for apartment communities in Williamson County and Sumner County to recover their lost rental rate momentum, since Nashville is a metro that historically has experienced modest rent growth barely over the general consumer price inflation rate even when occupancy has been at essentially full levels.

Originally published on September 21, 2009, by Greg Willett

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