Executive Insights: Michael McNally, Southern Land Co.

By Eliza Theiss, Associate Editor

Southern Land Co. recently rocked the Nashville real estate market with the $95.1 million sale of Elliston 23 Apartments, a mixed-use luxury multi-family development, which it owned in a joint venture with institutional investors advised by J.P. Morgan Asset Management. The sale price paid by buyer The Connor Group was not only the highest ever for one multi-family development in Nashville but also broke the previous record of $220,000 per unit by $65,000, reaching a staggering $287,300 per unit. CPE asked Southern Land Co.’s vice president of mixed-use development, Michael L. McNally Jr., what the sale means for the company and for the white-hot Nashville apartment market.

McNally joined Southern Land in 2007 and currently oversees all aspects of multi-family and mixed-use development in Tennessee and Texas. He has more than 15 years of experience in the real estate industry, with the majority of his time focused on multi-family developments and investments. Prior to joining to Southern Land, he served as vice president of real estate private equity firm Covenant Capital Group.

CPE: Elliston 23’s sale just broke all price records for the Nashville apartment market, an outcome that was regarded as fact some months before it happened. What do you attribute this to? What are the community’s most outstanding characteristics that contributed to the record-breaking sale? And how much of a factor do you believe E23’s eco-friendly features to have been?

McNally: Elliston 23’s success can be attributed to many factors. Among them is a location second to none—with a walk score of 91, E23 is situated just off West Avenue and within walking distance to Vanderbilt University, restaurants and entertainment venues, an “eds and meds” job base with four hospitals within one mile and a strong job market, as well as close proximity to interstates and downtown Nashville.

Design was also a factor. The architecture of the building, the unit plans and mix, the amenities (specifically the 2,000-square-foot heated saltwater pool) and streetscape all came together perfectly to make E23 a very attractive development and place to live. In a market where most multi-family is stick construction and higher end, marketing leading finishes and construction quality is a major selling point. In the case of E23, construction quality was achieved with the use of post-tension concrete. And the Silver LEED certification reflects not only sound construction quality but also sustainability, which was important to our renter demographic.

With 15,000 square feet of retail and restaurants, the mixed-use environment was not only a benefit for the neighborhood but specifically to the residents, thanks to a very well-balanced merchandising plan consisting of both local and national retailers, such as Dunkin Donuts, Massage Envy, Jamba Juice, Fresh To Order, Nama Sushi Bar, Juel Salon and Dailey Method (barre).

Professionally, management was also a factor. At Southern Land, we handle all of our property management, and the lease-up of E23 was outstanding: We achieved rents well over pro-forma, and lease-up velocity averaged more than 30 units per month. E23 was 75 percent occupied and 82 percent leased at closing. The 15,000-square-foot retail component was also fully leased.

CPE: Why sell now? Was it the question of the right buyer, the right market conditions or a combination of both?

McNally : The investment strategy for Elliston 23 was always to consider a sale at stabilization. That plan played out well as we delivered the best-in-class project in the hottest multi-family market Nashville has ever seen, so the timing worked in our favor.

CPE: Lately, the Nashville apartment market has seen one sale record topping another. Do you see this trend continuing or believe that E23 will hold on to its title for the near future?

McNally : Elliston 23 traded right at or just under a 5 percent cap rate because it’s a Class AA asset in terms of construction quality, location and amenities and has demonstrated a strong lease-up velocity. Rents have continued to improve in recent months, and I would think the new owners will have continued success as they stabilize and achieve continued rent growth. E23 obviously set some records, so it is a fair question to ask, but I think this asset will continue to perform well in the market as a leader. There are some mid-rise projects under construction that will bring a big price per unit should they elect to sell, and another project just went condo (Hensler/Stiles’ Twelve Twelve project in the Gulch, which opens in the summer).

CPE: How would you describe Nashville’s current apartment market, and what are Southern Land’s predictions for the market? Is there a fear of a market bubble, of too much activity in the apartment sector locally?

McNally : In general, Nashville is comparatively undersupplied in its core housing stock when you look at certain metrics and sister cities. As with all facts and figures you hear, you have to take it in context, but I think that if Nashville continues to add 20,000-plus jobs per year and the population continues to grow, specifically in the urban core, as projected, then we should be able to absorb the new product. I think developers need to be aware of the pipeline and starts (as well as non-starts) and maintain sound underwriting assumptions, build quality assets with amenities and other features that distinguish the property in A-plus locations. Not every deal can achieve over $2.20 per-square-foot rents, so you’d better make sure the deal has realistic and even conservative underwriting in case the music starts to slow down or stop.

The other factor to watch is construction costs and labor shortages, which we are seeing escalate across all of our markets. All of these projects coupled with office and hotel starts are putting a heavy demand on labor and materials that Nashville has never experienced.

CPE: What are Southern Land’s future plans in Nashville?

McNally: Quality sites are getting tougher and tougher to find in Nashville. We continue to look for opportunities, but it is much more competitive now than it was three to five years ago. We obviously monitor the Nashville market closely and pay specific attention to the downtown/SoBro, West End corridor, 12South, Berry Hill and Cool Springs submarkets.