Last year, the Sun Belt seemed to be multifamily royalty. Businesses moved to the area, searching for cheaper and less regulated places. People follow the jobs. That meant a need for multifamily housing.
But, at least in REITs, there's been a turnaround. "Coastal-focused apartment REITs outperformed Sun Belt heavy peers by 17 percentage points in the first half of '23, on the heels of substantial underperformance for the better part of the last three years," wrote Green Street analysts John Pawlowski, Alan Peterson, and Robyn Luu, in a new report.
What has brought REITs focused on coastal multifamily back around is a combination of cheaper valuations, coming off peak pricing, and a convergence in operating fundamentals across regions. For several years, there was significant higher performance in rent growth in the Sun Belt than in older coastal metro areas, boosting the former's relative fundamentals.
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But that has begun to evaporate. Prices have continued to rise in many parts of the Sun Belt and there are limits on how high rents can increase. That puts a damper on potential profitability and also has created a convergence in top-line growth in REIT portfolios, as the Green Street authors note.
"First quarter and intra-second quarter operating updates from the REITs showed slides in occupancy in Atlanta, Austin, and Phoenix into the low-94% range in May, down from the 96% – 97% range a year ago," they wrote. "Third-party web aggregated trends in June showed continued softness in these metros, along with incremental weakness in Miami, Tampa, and Orlando, as these markets potentially hit a near-term affordability ceiling."
Looking forward, the authors are concerned about the impact of multifamily deliveries over the next two years, which could take the air out of the industry's sales in the Sun Belt. While multifamily permits as a percentage of regional inventories are 1.8% in the West Coast and 2.4% in the East Coast, the Sun Belt is seeing 4.3%. A lot of units are going to come online, and that would put additional downward pressure on rents.
"Web-aggregated rent trends in June are showing sequential deterioration in many markets," the authors wrote. "Tech-heavy markets continue to languish, but newer surprises include softness in several Florida markets – namely Miami, Palm Beach, Orlando and Tampa."
At the same time, year-over-year asking rent growth in the Sun Belt and West Coast passed into negative territory in March 2023 and now are falling by nearly 5%. East Coast rent growth is a bit above zero, so doing better in comparison.
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