Sun Belt Multifamily Just Lost a Key Revenue Competition to Coastal

One of the advantages that the Sun Belt offered CRE investors has been bigger opportunities, especially in the critical multifamily sector. But that may be slipping away, according to new information out from data and analysis provider Markerr.

According to its 2Q22 REIT Roundup, in which it looks at multifamily, for the first time since the pandemic onset, year-over-year revenue growth was higher in coastal apartments, at 13.1%, than in the 12.4% for Sun Belt apartments. “However, Coastal Markets benefited from the easier comp period as well as the normalization of bad debt,” the firm added.

Major apartment REITs across the board raised their guidance but did warn of a slower second half of the year. On average, they projected about 11% growth for the full year.

Numbers are based on the results from eight REITs that are among the largest multifamily owner-operators in the U.S. They collectively have more than 444,000 units. In one sense, that isn’t necessarily a representative sample, but they form a source of significant real-time market performance.

Individual markets didn’t behave all the same way, for a likely reason. According to the Markerr analysis, high growth markets also saw the highest aggregate income growth. “Aggregate income growth in markets like Tampa and Phoenix have still been growing at an extreme pace,” said the analysis. “This illustrates part of the reason that these markets have been able to sustain their high-flying rent growth.”

All that said, “REITs continue to trade out of Coastal markets, especially New York, in favor of high population growth markets in Texas, Florida, and North Carolina,” Markerr says.

Will that continue/? Perhaps while jobs are moving, leading demographics to newer areas. But the Markerr report for the first quarter brought up an interesting dynamic. One disadvantage that coastal cities had suffered, an affordability gap, was shrinking.  “Markerr measured affordability based on rent-to-income ratio which shows Sunbelt markets to be still more affordable relative to Coastal markets (~23.5% vs ~26% rent-to-income ratios), however the gap between the two continues to shrink as the Sunbelt market sees robust rent growth outpacing income growth,” the report noted.

One of the drivers of population migration has been money. People have wanted better-paying jobs and affordable places to live. If the rent-to-income ratios continue to change, given competition for living space as multifamily construction has a difficult time keeping up with demand, a major impetus for moving could be melting away.