Sunbelt to Feel Multifamily Headwinds the Most
Rents and occupancies are expected to soften the most in the Sunbelt.
Multifamily is facing negative headwinds this year and into the next in the form of outsized supply growth and weak demand drivers, according to PGIM Real Estate’s Quarterly Insights report.
Housing rent growth is compressing across market types. Occupancies in higher supply barrier markets are holding up well, while many Sunbelt markets are showing deterioration.
Sunbelt market occupancies are now farther below pre-pandemic levels than elsewhere, and rental growth is converging across Sunbelt and non-Sunbelt markets. Rental growth in metros located across the Sunbelt has been higher than other markets since 2013. However, PGIM expects a temporary shift, with rents and occupancies softening the most in the Sunbelt.
The supply outlook is a headwind in many low density markets in the Sunbelt, far above recent construction trends. At the same time, developers have responded to the double-digit rent growth in the last couple of years. Construction activity is much higher in many Sunbelt markets and set to outpace new demand to a greater degree than elsewhere. Prime examples of this include Austin, Charlotte, Nashville, Phoenix and Raleigh, which face potential supply growth this year of more than double the average of the past five years.
Supply growth is typically higher in these metros since demand growth, driven by employment, is also stronger. Despite significant volatility in both apartment demand and employment growth over the last few years, the link between the two across markets remains strong. However, near-term employment forecasts suggest that construction at its current scale is excessive because job growth in the Sunbelt markets will decelerate over the next year and match that of non-Sunbelt markets, PGIM predicts.
Despite this short-term, cyclical mismatch between supply and demand, the sharp pullback in debt availability will curtail multifamily supply deliveries beyond 2024, as developers find it more costly to finance projects. At that point, apartment leasing will benefit from an improved economy at the same time supply recedes. In this environment, Sunbelt apartment market performance will once again benefit from continued strong job growth.