Wage Growth Has Helped Offset Rent Increases in the Sunbelt

During the pandemic, the Sunbelt region took off. Renters flooded into metros throughout the region, and rents skyrocketed. The higher price tag could put in jeopardy the Sunbelt’s most attractive quality—affordability. However, wages have also increased in the region, helping to offset some of the cost increases.

“We look closely at the rent-to-income ratio. The rent-to-income ratio is up in the Sunbelt markets, but it is only up modestly. So, rents aren’t all of the sudden unaffordable, and that is because wages are helping to offset some of that increase,” Jeremy Katz, co-head of CP Capital, tells GlobeSt.com. Katz adds that wage growth in the region has been at about 5% or 6% in the last year.

Population growth isn’t the only reason why rents are up, however. New household formation generally increases after a recession, and that activity creates new demand for housing. “COVID hits and young people move back in with their parents. So there is a pent-up formation of new households that occurs,” says Katz. “Then, the economy gets back on track and jobs are created, and all of the sudden you have a new cohort looking for a place to live. That new household formation was one of the drivers behind the new spike in rents that we have seen.”

That trend has already run its course over the last year, and as a result, Katz expects that rents will begin to stabilize, although there continue to be some fundamental supply-demand challenges in the market. “It is still going to be strong rent growth in the Sunbelt over the next 12 to 24 months,” says Katz. “We expect—and most of the major market research companies project—that it is going to be more moderate than it has been.”

This isn’t to say that the market is cooling off, merely that rent growth won’t be as aggressive. The Sunbelt region will continue to be a hub for growth with strong inward migration, a trend that was accelerated during the pandemic but actually existing long before. “For the last couple of decades, there has been a steady migration of people from the Northeast and Midwest to the Sunbelt markets,” says Katz. “Some of the really strong rent growth reported in the last year is the result of the pandemic accelerating these migration trends, but it is nothing new. We don’t see any dynamics that are temporary.”

These trends will continue to create supply shortages, which will support rent growth in the market—but only in areas where supply is not meeting demand. “There are certain pockets in Sunbelt markets that have seen plenty of supply, like the Downtown areas, and those areas didn’t see, unsurprisingly, the same level of rent growth as the suburban areas.”