Sun Belt Metros Lead Multifamily Construction

Famous robber Willie Sutton said he never provided the famous answer to the question of why he robbed banks: “That’s where the money is.” Some reporter apparently made it up. Still, a great line.

At its heart there is a pithy explanation of an economic truth: supply will often chase demand. But people in CRE don’t need an official explanation of why developers will often work in the same hot areas. That’s where businesses and people want buildings. And, in short, that’s why drives Apartment List’s observation that Sun Belt metros have lead the apartment construction boom so far this year.

The site had noted in a previous report a “rapid cooldown” in multifamily rentals with currently “currently more multifamily units under construction than at any point since 1970” and the potential that, with the new inventory, “property owners could be competing for renters to fill their units, a marked change from the prevailing conditions of the past two years, in which renters have been competing for a limited supply of available inventory.”

The new report suggests that “even if demand begins to bounce back this year, it remains likely that rent growth in 2023 will be modest at best … because there are currently a record number of new apartment units under construction, and this influx of new supply should keep prices in check.”

What Apartment List noted was “wide variation in both the relative levels of building activity and in their trends over time.” For example, big coastal cities — New York City, Boston, San Francisco, and Los Angeles, to mention a few — haven’t built nearly enough multifamily housing over the last ten years to keep pace with demand. Too much demand and too little supply has meant an affordability crisis.

There’s been low levels of construction in much of the Midwest and Rust Belt, which is largely a “rational response to stagnant economic growth.”

“In contrast, Sun Belt markets throughout Texas, Arizona and Florida have experienced rapid growth in both jobs and housing,” the report said. “Markets such as Austin and Charlotte – and to a lesser extent Houston, Dallas, and Denver – have been building rapidly for decades, both before and after the Great Recession.”

The supremacy of the south, and of the west as well, comes from building permits. Cities like Austin, Raleigh, Jacksonville, Orlando, San Antonio, Salt Lake City, and Richmond have simply been issuing more permits, measured in permits per thousand residents. Units are skewing toward core urban rather than suburbs as they have been in expensive coastal cities. But throughout the Sun Belt, there is more balance. In some metros, like Raleigh and Jacksonville, more permits are issued in the suburbs.

The patterns give rise to a question of whether continued higher rates of permitting and construction in the Sun Belt will continue to build an affordability gap between there and coastal cities, reinforcing the population shift as people continue to seek less expensive places to live.