The Nashville Boom Abides, But Brings Its Own Challenges
The boom endures, with a continued influx of people and businesses to the metro area. That was the main takeaway at our 2017 Nashville State of the Market event. But there are always caveats, even when it comes to a boom. They do not last forever, and overbuilding especially — in the hotel market — is now a concern.
Booms tend to bring their own set of challenges, such as labor shortages and less affordable housing, both of which are evident in Nashville. Even so, Nashville's growth remains the envy of a lot of other metros, our speakers said.
The Urbanization of Nashville panel discussed what about the city attracts people and businesses. The quality of life and the cultural assets are no small considerations. Nashville's famed entertainment industry long ago evolved from its country music base into something much more diverse, and the world has taken note.
At the heart of the city's attractiveness in site selection is math. Speaker Matthew Wiltshire, director of the Mayor's Office of Economic & Community Development, said an office of 200 people in New York costs — in terms of rent and wages — $6M/year more than a location in Nashville. The difference in cost between Nashville and Los Angeles, San Francisco or Chicago is similarly large.
There is upward pressure on rents and wages in Nashville, as there would be in any growth market, but the speakers said the math, along with a long-standing pro-business attitude in the city, favors continued growth for the market in the years ahead.
Growth comes with its headaches. The speakers said the rush to develop has caused a shortage of skilled construction workers in the market, especially among subcontractors. In the hospitality and restaurant trades, finding and keeping workers is also a challenge.
The city is not only facing a shortage of affordable housing, as many growth markets do, but of workforce housing. Most of the Nashville multifamily developed during the recent boom is upper-end product, and there is only so much that the market can absorb. At the same time, the workers who support the burgeoning hospitality and restaurant industries find it hard to live anywhere near their jobs.
The rollout of Metro's inclusionary zoning, which amounts to a subsidy to include affordable units (rather than an unfunded mandate), ought to help the situation, but it is only starting.
Hospitality has been a particularly hot market in Nashville in recent years. Our hospitality industry speakers kicked things off by citing some STR numbers to illustrate the strength of the local market. There are about 27,200 rooms in the city, and nearly 40,000 rooms in the metro area. The industry is supported by a surge of visitors: 13.9 million visitors in 2016, contributing about $5.7B to the local economy, totals that are up every year so far since the end of the recession.
Among metro Nashville hotels, occupancy was up from 79% in Q1 2016 to 82.6% in Q1 2017; average daily rate was up six points to about $146 over the same period; and RevPAR was up 9% to almost $121.
Can it last? The speakers did not come to complete agreement about that. There is a case for overbuilding: two years ago, there were 329 hotels in metro Nashville and 38,000 rooms, with seven hotels underway or planned at the time. As of December 2016, the market had 337 hotels with 40,000 rooms, and 83 hotels underway or planned. That is a lot of new hotels for a metro area with 1.8 million people.
On the positive side, there are only a few places with as much authenticity as Nashville, with its long urban history, music and business climate — and all of these factors will continue to attract both leisure and business travelers to the city. Those travelers will want new hotels and the experiences that some of the boutique properties are now offering.
Eventually there will be a softening of demand for hotel rooms, even in Nashville, probably as a result of the next recession. A lot will also depend on the severity of the recession, but it will probably be then that Nashville hotel owners and operators will find out just how resilient the local market is, and whether the current boom represents overbuilding or not.
