Since the 1950s, Americans have moved in one direction: south. Cities in the Sunbelt, a region known for warm weather, high quality of life, lower taxes, and affordability, have been the top US region for inward migration for decades.
From 1945 to 1975, the population in the Sunbelt, also known as the Smile States, grew 30%, and in the mid-1970s, the only four major US cities to see any population growth were located in the Sunbelt. The trend has held through the 2020s. In the last decade, the region has once again been the top destination for relocating Americans.
The pandemic supercharged the trend. With people detached from their physical workplace, they were free to take up a new residence anywhere in the country—and they overwhelmingly chose the Sunbelt, spurring a record wave of migration into the region. Sunbelt cities captured significant population growth in 2020 and 2021, with all 10 of the nation’s top growth markets located in the region.
The migration patterns have fueled a surge in apartment rents. The Sunbelt generated an impressive double-digit rent growth during the pandemic and reached occupancy levels in the high-90% range. This level of exuberant growth, of course, can’t go on forever, and now, the Sunbelt is entering a period of deceleration.
As a result, fundamentals are shifting with waning population and rent growth. As developers plan projects in the region, there are a few important emerging trends to consider.
Sunbelt Real Estate Fundamentals Are Shifting
For years, population growth in the Sunbelt region has outpaced the national average. That trend began to reverse in the second half of last year.
Research from JLL shows that Redfin user migration into the top Sunbelt markets—Miami, Phoenix, Las Vegas, Sacramento, Tampa, Dallas, San Antonio, and Atlanta—waned at the end of 2022 compared to the fourth quarter of 2021 and in some cases significantly. In Miami and Phoenix, for example, migration fell by more than half.
It isn’t unusual to see market growth slow and stabilize after a period of robust growth, but the waning migration trends are contributing to decreased demand fundamentals, decreasing rents, and lower occupancy. For at least the last decade, the Sunbelt has also outpaced the nation for apartment rent growth, often significantly.
At the end of 2022, however, research from CoStar shows the Sunbelt matched national rent growth, and in the fourth quarter, the region lagged behind US average rent gains. According to data from Yardi, Sunbelt hotspots Phoenix, Las Vegas, Austin, and Atlanta have the slowest rent growth of the nation’s top 30 metros.
Research from Markerr shows a similar trend, with apartment rents in the region decelerating by 1,150 basis points, with demand cooling most significantly in Las Vegas, Tampa, and Phoenix. In these markets, occupancy has dropped by 2.5%, 1.9%, and 1.9%, respectively. By comparison, occupancy has fallen by an average of 1% in the top 30 metros.
These trends clearly illustrate a change over the accelerated growth during the pandemic, but industry experts say that it isn’t unexpected. Doug Ressler of Yardi Matrix told GlobeSt.com that because rent growth has exceeded the industry norm for the last two years, the research outlet was anticipating a slowdown. It’s also important to note that although growth has slowed, rents and population are both still increasing year-over-year.
Does This Mean a Return to Coastal Markets?
It’s true that fewer people aren’t moving to the Sunbelt, but they don’t seem to be moving anywhere else, either. The coastal markets, which saw the most significant exodus during the pandemic, have not seen any noteworthy inward migration in the last year.
In 2020, 2021, and 2022, the coastal market population fell by an average of .9% annually, and not a single coastal city has seen an increase in population in the last year, according to the latest data from Markerr. San Francisco, New York, Los Angeles, and Seattle, the four largest coastal markets, have each had declining population trends over the last three years.
Despite outbound migration patterns, apartment rents in coastal markets have rapidly recovered after experiencing double-digit declines during the pandemic. Los Angeles, Seattle, New York, Orange County, Sacramento, and San Francisco have all seen significant rent growth in the last year. San Jose had the second highest rent growth in the country, following Indianapolis, at 8.1%, and New York also ranked in the top 10 markets, with rents up 6.7% in 2022.
This rebound in rents, unfortunately, hasn’t been enough to renew investor confidence in the coastal markets. A 2023 survey from CBRE forecasting investment trends in the coming year found that investors still prefer secondary markets in the Sunbelt, with Los Angeles as the lone coastal city on the preferred market list.
The Sunbelt Continues to Lead Multifamily Activity
Although fundamentals are shifting in the Sunbelt, the region continues to show its strength. Both PWC and CBRE rank Sunbelt markets as the top cities for multifamily investment in 2023, despite what pwc describes as a “normalizing” of market fundamentals.
There is a shake-up in the list of usual Sunbelt suspects. Notably, Phoenix, Raleigh, and Charlotte have all fallen to the bottom of the ranking, while Nashville, Dallas, and Atlanta sit at the top of the list. Although Sunbelt migration trends have slowed in the last year, the Sunbelt remains the only US region with positive population growth.
The change in fundamentals—along with higher interest rates and economic dislocation—will certainly deter investment volumes in 2023. CBRE reports that 60% of investors across the country plan to reduce acquisition activity this year. However, multifamily remains undersupplied nationwide, giving developers a good incentive to continue to search for opportunities.
The National Apartment Association estimates that the US needs to add 4.3 million apartment units to the current building stock by 2035 to meet current demand, and Florida, Texas, and California account for 40% of those units.
Although changing fundamentals will certainly mean revising underwriting standards, developers will continue to find ample opportunity to build apartment products in Sunbelt markets, considering the undersupply, sustained rent growth, and continued inward migration of renters.
New technologies can help developers manage market headwinds and shifting fundamentals to strategically pursue these development opportunities—and make them pencil.
Automation and predictive analytics, like the technology backing Northspyre, allow developers to streamline workflows, program administrative tasks, and forecast market changes that could impact pricing and scheduling.
The results are more predictable outcomes, reduced budget overages, and fewer scheduling errors. This is a critical tool for developers to remain active and mitigate new market risks as they arise.
The Sunbelt has been a favored region for decades, both for people planting new roots and for investors chasing opportunity. Although fundamentals are shifting after a period of record growth, the region continues to have strong demand dynamics and a shortage of supply. That should still provide developers with plenty of reasons to smile.
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Real Estate Development