City Profile: Nashville’s hospitality scene is music to investors’ ears

Nashville is on the move, and that move is taking Music City higher and higher on the list of attractive targets for hotel investors.

“For sophisticated investors, Nashville has been on their radar for 15 or so years,” explains Jan Freitag, national director for hospitality market analytics at CoStar. “The cost of financing is high everywhere in the U.S., so the question is, can you get the required returns despite this high cost of capital? In this town, the investor sentiment is clearly ‘yes.’”

There are a couple factors currently driving visitor demand which are then, in turn, driving investor demand. Nashville International Airport (BNA) broke its passenger record at the end of its last fiscal year (May 2023), welcoming nearly 22 million people. This volume was up 18.7 percent from the previous fiscal year, which had also broken its passenger record. A $1.5 billion airport expansion that included the addition of six international gates and eight satellite gates was recently completed, while another $1.5 billion expansion is expected to wrap up in 2028.

A new stadium for the NFL’s Tennessee Titans will also welcome fans in 2027. Nissan Stadium is expected to bring its own increased attendance, especially due to its dome shape, which will allow for year-around activation. On the convention front, Nashville was ranked the No. 2 convention destination by Cvent.

All this is to say nothing about hotel activity. Occupancy was just shy of 70 percent last year, according to HVS, with an ADR of nearly $180. Nashville had about 58,000 existing hotel rooms at the end of 2023, with an additional 7,600 in the pipeline and planning stages.

Out-of-town investors

The biggest hotel deal to come out of Music City recently involves Host Hotels & Resorts’ acquisition of a two-hotel complex in downtown Nashville in April for $530 million. The all-cash deal includes the 215-room 1 Hotel Nashville and the 506-room Embassy Suites by Hilton Nashville Downtown.

Experts estimate this likely works out to about $1 million per key for 1 Hotel Nashville. If they’re correct, this would be the highest price per key paid for any hotel within the city. James F. Risoleo, president and CEO of Bethesda, Md.-based Host Hotels, believes this property will become a top-25 asset based on estimated full-year 2024 results.

“The newly built property has a prime location in Nashville, a top-performing market,” he said in a press release announcing the transaction. “With meaningful in-place cash flow, multiple demand generators and no expected near-term capital expenditure requirements, we expect the property will generate outsized growth as it stabilizes, enhancing the quality of our portfolio and driving additional value creation for our stockholders.”

Host Hotels projects an expected combined RevPAR of $275, total RevPAR of $435, and EBITDA per key of $58,550 for the two-hotel complex, which opened in 2022.

Freitag believes this significant deal serves as proof of concept for Nashville’s higher-end product.

“New supply, especially on the upper end, is attracting a new customer type that previously did not feel Nashville had the right hotel product for the luxury traveler,” he says. “This, in turn, has fueled investor demand…and this deal shows that investors are looking at the market and expect future growth opportunities.”

He also believes the acquisition speaks volumes about Nashville’s economic drivers.

“It speaks to the resiliency of the market post-COVID,” he says. “It speaks to the attractive labor pool with 16 colleges and universities and plenty of grads who stay in town. It speaks to the combination of solid industries, such as music, healthcare and healthcare technology. It speaks to the attractiveness of demand drivers like the Alliance Bernstein headquarters relocation, the Music City Center convention center and the just-announced move of Oracle’s worldwide headquarters.”

Of course, Host Hotels isn’t the only one getting in on the action, especially in Nashville’s downtown core. Bill Gates’ Cascade Investment purchased the 168-room Dream Hotel for about $82.6 million in July 2023. New York-based Dreamscape Cos. acquired the 191-room historic Holston House hotel for $60.1 million last November.

Even Dolly Parton has jumped into Nashville hospitality. She purchased a downtown office building at 211 Commerce for $75 million in December with plans to convert it into a hotel.

One thing this current wave of hotel investors has in common is that, like their hotels’ guests, they’re also out of towners.

“As with any rapidly growing market, the local investor base is tapped out at some point, and outside money comes in,” Freitag says. “It speaks to the perceived opportunities and the ability to deploy capital at favorable returns.”

Noble Investment Group would be one of those entities. The Atlanta-based travel and hospitality REIT was a net buyer in Nashville in 2023. It picked up the 287-room Holiday Inn Express hotel on Broadway in downtown for nearly $82 million last December.

Dustin Fisher, senior vice president at Noble, appreciates what the city’s become – and where it’s going.

“Nashville as a lodging market has always been regarded for its leisure demand; however, it has evolved into arguably the most balanced market in the country with a diverse mix of large group, corporate, healthcare and university demand to complement a substantial leisure engine,” he says. “We expect to continue our pursuit of opportunistic investments in the market…The fundamentals around select-service and extended-stay products, which are Noble’s core focus, remain appealing.”

Varying Markets

Fisher is careful to note that Noble is looking at select opportunities in select Nashville areas. He doesn’t see the firm investing in ground-up development in the near future, and he is cautious about a few submarkets.

“We continue to like the profile of Downtown, but we do expect some softening in some of the satellite submarkets that have ridden some of the compression coattails that Broadway and the Music City Center have produced as supply gets absorbed,” he continues. “We expect to see some contraction in periphery markets outside of Downtown and West End as inevitable supply growth finds its equilibrium with demand.”

A submarket Freitag sees falling into favor with investors is East Nashville, also known as the East Bank. This area across the Cumberland River will house the Titans and the massive mixed-use developments that will spring up around the new football stadium.

“East Nashville was always the not-so-best-kept secret because of its livability, walkability and food options,” he explains.

It will also serve as Oracle’s global headquarters. The software company had previously relocated its headquarters from Northern California’s Silicon Valley to Austin, Texas in 2021. Its next move will allow Oracle to be closer to major healthcare hubs that are based in and around Nashville.

“"It's the center of the industry we're most concerned about, which is the healthcare industry," said Larry Ellison, Oracle’s chairman, at the Oracle Health Summit in April.

Freitag also thinks outlying areas of Nashville, from Hendersonville to Franklin, will continue attracting development.

“With the steady influx of population, hotel developers follow that demographic surge,” he says. “I expect more limited-service developments along the arteries connecting the outlying counties to Nashville.”

With limited-service in the outlying counties, luxury product in the downtown core and new projects springing up on the East Bank, Nashville appears to be singing a winning ballad for investors, at least for now.