Nashville: Economic Update June 2014

Matt Kwasek Principal Broker matt@kwasekcre.com 615-512-3880 (c)

• Investment Sales • Mortgage Brokerage

The secret is out! Nashville is the investment world’s “It” city right now. Media outlets are announcing new projects on a daily basis. Nashville is named a top American city again and again by an endless list of national surveys and media.

Do you ever stop and ask why? Is it sustainable? Short answer: YES! There are substantial reasons for Nashville’s boom. Keep reading and you will see for yourself!

Nashville benefits from a unique blend of tangible and intangible forces. Nashville’s creative class and the resulting culture are often cited for making Nashville stand out. First, a brief history lesson and explanation on how we got here.

In 1925, National Life & Accident Insurance Company started what is known today as the Grand Ole Opry. As a result, the music business flourished in Nashville and the creative class began to cluster in the city. Today, artists from around the world travel to Nashville with the hopes of making it big. The entertainment business and robust creative class makes Nashville unique.

This “vibe” is attracting people and jobs to the region (or our tangible benefits). Add to the mixture pro-business state and local governments and it is easy to see why people are attracted to the city.

Our diverse and dynamic economy keeps creating jobs and our population keeps growing. Those jobs and people seeking those jobs need places to work and live. So back to the initial question: Are we over-building? Or just keeping up with demand?

Unemployment Rate

Job Growth

Source – U.S. Bureau of Labor Statistics

February 2014 (Seasonally Adjusted)U.S TN Nashville

Labor Force 155,724,000 3,037,200 842,100Employment 145,266,000 2,827,300 795,100Unemployed 10,459,000 209,800 47,000Rate 6.7% 6.9% 5.6%

- Civilian Labor Force – 842,100 - Employment - 795,100 - Unemployment Rate - 47,000 - Unemployment - 5.6%

From January 2013 to January 2014 the Nashville MSA

added 28,800 new nonfarm jobs. The positive ripple effects

create a demand for housing and are felt throughout Middle

Tennessee.

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National (April 14) 6.30%State of TN (April 14) 6.30%Nashville MSA (March 14) 5.40%

Year Total Nonfarm % Increase13-Jan 783,90014-Jan 812,700 3.67%

New Jobs: 28,800

Nashville MSA - Nonfarm Employment

Civilian Labor Force

Source: TN Department of Labor & Workforce Development

KEY ECONOMIC STATISTICS

Davidson County unemployment has seen a strong decrease

from year over year February:

- February 2013: 6.6%

- February 2014: 5.6%

Nashville continues to outpace the nation in labor force

statistics. Williamson County is leading the way in

Nashville with a 4.7% unemployment rate for February

2014.

Source: TN Department of Labor & Workforce Development

Top 5 Private Employers:

118,000 - Number of students enrolled in Nashville colleges & universities

UnitsConstruction Underway 7,777Speculative Construction 6,213

Nashville MSA MultifamilyPipeline

Year Average Rent % Inc2013 $882 6.39%2012 $829 4.80%2011 $791 2.06%2010 $775 4.03%2009 $745 -0.80%2008 $751 0.13%2007 $750 3.88%2006 $722 3.14%2005 $700 0.72%2004 $695 0.72%2003 $690 1.62%2002 $679

Nashville Overall MarketRent Growth

Year OccupancyDecember 2013 95.66%December 2012 95.10%December 2011 93.80%December 2010 93.30%December 2009 90.20%December 2008 90.80%December 2007 93.70%December 2006 93.20%December 2005 93.50%December 2004 92.70%December 2003 92.30%December 2002 92.60%

Nashville Overall Market Historical Vacancy

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For fourth quarter 2013, the GNAA reported a market-wide occupancy rate of 95.66%. The average rent for all units was $882 per month or $0.94 per square foot.

Source – Greater Nashville Apartment Association

Supply Pipeline From 2008 to 2013, 9,685 multifamily units have been delivered to the Nashville market. The bulk of these units have been delivered to the West End/Downtown submarket. For fourth quarter 2013, the West End/Downtown submarket reported occupancy of 96.68%. Demand for housing in Nashville is strong.

There are 7,777 units under construction in Nashville. Another 6,213 units have been announced but have yet to break ground. Not all of these units will deliver at the same time but will be spread out over multiple quarters and years.

Even as 9,685 units were delivered in a six year span, the overall market occupancy increased by 486 bps. We see a worst case scenario as a soft patch where there is a return to historical average in rent growth and occupancy in the low 90s.

Year Units2008 5582009 1,6892010 2,0622011 1,3752012 9662013 3,035

Nashville MSA Multifamily Construction Completed

Source – Greater Nashville Apartment Association

Multifamily Market (First Quarter 2014)

Source – Greater Nashville Apartment Association Source – Greater Nashville Apartment Association

Market # Blds Total RBA Direct SF Total SF Vac %CBD 282 13,924,012 1,602,365 1,717,824 12.4% -17,506 0 0 $19.78Suburban 4,031 62,551,406 4,194,889 4,378,604 7.0% 196,317 239,000 693,751 $19.11Totals 4,313 76,475,418 5,797,254 6,096,428 8.0% 178,811 239,000 693,751 $19.26

Quoted Rates

Existing Inventory Vacancy YTD Net Absorption

YTD Deliveries

Under Construction SF

Market # Blds Total GLA Direct SF Total SF Vac %Bellevue 727 7,131,910 932,376 935,684 13.1% 87,822 69,640 20,000 $12.98Brentwood 206 3,089,185 83,559 83,559 2.7% 56,854 60,000 21,429 $15.05Columbia 404 4,792,352 220,283 220,283 4.6% 29,158 0 0 $9.66Cool Springs 673 11,296,413 507,064 507,064 4.5% 90,528 82,780 0 $19.53Donelson 525 6,504,237 392,050 392,050 6.0% -2,263 0 0 $10.71Downtown 346 3,533,355 183,219 183,219 5.2% 20,167 22,971 0 $22.66Green Hills 203 3,631,289 90,200 102,631 2.8% 5,710 0 0 $25.16Hendersonville 798 8,068,086 501,830 510,066 6.3% 23,587 15,000 80,160 $14.64Mt. Juliet 815 8,179,749 293,799 294,699 3.6% 15,902 12,983 29,200 $12.34North Nashville 1,212 11,215,784 631,324 669,344 6.0% 33,684 10,731 0 $10.67Rutherford 1,155 13,961,388 1,140,242 1,166,376 8.4% 115,746 0 0 $14.75Southeast 1,182 12,532,208 1,592,925 1,825,288 14.6% 15,578 0 45,000 $11.47West End/ Vandy 532 3,849,451 110,083 113,083 2.9% 2,958 0 0 $19.62Totals 8,778 97,785,407 6,678,954 7,003,346 7.2% 495,431 274,105 195,789 $14.00

Quoted Rates

Existing Inventory Vacancy YTD Net Absorption

YTD Deliverie

Under Construction

Market # Blds Total GLA Direct SF Total SF Vac %2014 Q1 4,243 202,747,434 17,119,595 17,430,390 8.6% -240,850 240,000 160,047 $3.852013 Q1 4,236 200,600,606 17,495,265 17,783,270 8.9% 417,067 0 1,906,828 $3.79

Quoted Rates

Existing Inventory Vacancy YTD Net Absorption

YTD Deliveries

Under Construction

Total Retail Market (First Quarter 2014)

Total Office Market (First Quarter 2014)

Total Industrial Market (First Quarter 2014)

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Office space in the central business district is tightening. The limited supply of office in the core is causing rental rates to increase. With rental rates increasing and supply tightening development of new office space is starting again.

Green Hills remains the undisputed leader of Nashville retail. High-end retailers continue to select the submarket. West End/ Vanderbilt and Brentwood continue to perform well, however, due to supply constraints are not retail shopping destinations.

The industrial market is stable to improving. Speculative development has not returned to the market yet. Build to suit need based development is leading the industrial sector out of the recession.

Source – CoStar Group

The apartment boom lead Nashville out of the recession, however, we are starting to see other sectors turning the corner. Multiple investors are even starting to say “Condo”! My research shows a condo pipeline in excess of 850+ units. Most notably Twelve Twelve and the Turnberry project in SoBro.

Making sound calculated investments in a competitive market is paramount to success. For success one must intimately know the market and where it is headed.

Following a national trend, Nashville’s core is witnessing a renaissance. Historically, Nashville is a city of neighborhoods. Most of these neighborhoods became neglected during America’s urban exodus. Now neighborhoods like Hillsboro Village, 12th South, Germantown, Sylvan Park, East Nashville, Melrose and upstart the Gulch are booming. Retail is following the rooftops to these communities.

As these neighborhoods continue to flourish, the Nashville CBD becomes more viable. First, the commute from these neighborhoods is easier. Second, large scale office development is not feasible in most of these inner ring communities.

Over the next decade neighborhoods like the Gulch, Midtown, Music Row and SoBro will continue to grow together. An investor can still find value by buying ahead of the path of development. There are strong macroeconomic and fundamental reasons to continue to invest into the Nashville market. Let Kwasek Commercial help you evaluate if you are marking a smart investment or if you are buying into the hype.

Sincerely,

Matt Kwasek

1507 16th Ave South

Nashville, TN 37212

Phone:

(615) 298-9321(O)

(615) 512-3880 (C)

E-Mail:

matt@kwasekcre.com

Web Site:

www.kwasekcre.com

June 2014 � WWW.KWASEKCRE.COM � (615) 298-9321