The multifamily market in America’s Sun Belt once seemed like one of the surest bets in commercial real estate investment. It’s not anymore, but that doesn’t mean the clouds are going to spoil the party.
Multifamily demand throughout the sunny Southeast and Southwest was propelled by large migration trends over a decade-long period that went into overdrive during the height of the COVID-19 pandemic as remote working trends took hold, arming workers with increased flexibility to relocate from gateway cities. The expectations for how many rental units would be needed to keep up with population growth soon crashed into a reality check, though, with loads of new supply suddenly hitting the market without enough demand.
SEE ALSO: Advanced Real Estate Secures $60M in Freddie Mac Financing in Orange CountyData from analytics firm Yardi Matrix showed the Sun Belt gained 673,000 new multifamily units between 2021 and 2023 with migration-fueled demand hiking rents by 30 percent from the beginning of the pandemic to the first quarter of 2024.
The large-scale growth in supply was the biggest driver in multifamily rents declining year-over-year through March 2024, according to Yardi Matrix.
- Yardi statistics show rents fell by 1.2 percent in the Southwest and 0.2 percent in the Southeast compared to a 3.8 percent growth in the Northeast during that same period.
. . .Indeed, it should be noted that the Sun Belt is a big chunk of the U.S., and not all parts of it have been performing exactly the same, particularly when talking about South Florida. HGI has selectively targeted long-term multifamily acquisitions in certain Sun Belt markets over the past year despite immediate oversupply risks.
. . .A historically low interest rate environment that existed until the Federal Reserve began aggressively hiking interest rates in early 2022 contributed to overdevelopment of multifamily projects throughout the Sun Belt, even in markets experiencing major population growth, according to Brent Jenkins, managing director at real estate investment company Clarion Partners.
Jenkins stressed, though, that the higher borrowing costs have limited new construction projects from taking shape over the last two years, which should help ease much of the oversupply dynamics. “We expect any excess supply to really kind of burn off throughout the 2024 and early 2025 time frame with the combination of supply being muted and demand still being there,” Jenkins said.
“It’s really important as an investor to understand the specific supply-demand dynamics of each submarket, and then really price properties appropriately and don’t overpay for growth in the absence of supply constraints when you’re looking at the long term.”
- Paul Fiorilla, director of U.S. research at Yardi Matrix, noted that the Sun Belt encompassed roughly two-thirds of all U.S. multifamily transactions from 2020 to 2023, but some investors now are either avoiding or being extra cautious in markets with high supply growth. Yardi
- Matrix is projecting Austin, Nashville, Phoenix and Miami will have 10 percent more units coming online over the next two years with “weak” rent growth in some of these metro areas through the end of 2025.
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