Beware These Multifamily Headwinds

The multifamily sector has enjoyed a meteoric rise over the course of the pandemic, but headwinds are beginning to form for the Sunbelt, a region that’s been the target of considerable investor dollars of late.

An analysis from BTIG Research predicts the staggering pace of new leases, which have posted 15 to 25% growth this year, will likely moderate, particularly in the Sunbelt region. Lease spreads appear to be near their peak in several markets, BTIG’s James Sullivan and Ami Probandt note, and affordability “could become an issue” next year.

“The reported rent-to-income ratios for the REITs have remained stable as we have moved into the post-COVID period,” they note. “However, the REITs only collect income data from new tenants. We would expect to see increasing turnover due to affordability in 2022. On the expense side, we expect increasing pressure on real estate taxes as a result of very strong rent growth along with continued wage pressures and insurance rate increases”⁠—though improvements in tech should offset that pressure, at least partially. 

BTIG predicts supply will remain “manageable” next year thanks to lower-than-usual permit activity in 2020, at the pandemic’s apex. However, supply increases could impact results at the end of next year and into 2023, with a greater impact expected in Sunbelt markets than on the coasts (which will likely have the strongest growth rates).

Despite these brewing trends, the multifamily deals keep on coming in the Sunbelt region. Last week, Starwood Real Estate Income Trust announced that it had acquired a multifamily housing portfolio of 15,460 units located in 27 markets across 10 states across the Southeast, including Georgia, Tennessee, and North Carolina.  Around the same time, Kip Sowden, CEO of RREAF Holdings, announced its acquisition of the TransCoastal 21 multifamily portfolio, which includes 21 different multifamily properties in Mississippi, Alabama, Florida, Texas, Arkansas, Louisiana, Georgia and North Carolina.

The region has benefited from inward migration and corporate relocations, according to Roberto Casas, senior managing director at JLL.

“Population gains and job creation in key growth secondary markets dramatically outpaces most gateway cities,” says Casas. “The Sunbelt markets report significantly greater rent and occupancy growth.” Atlanta had 12% rent growth; 9% in Miami and Charlotte and 7% in Austin.