The migration of thousands of apartment dwellers from New York, Los Angeles and other major cities to cheaper alternatives in the suburbs or lower-cost areas like Denver and Phoenix during the pandemic is spurring major multifamily developers and investors to follow the renters.
Executives at some of the nation’s largest real estate investment trusts said this trend either catalyzed their intent to invest in, or bolstered their commitment to, one region in particular: the Sun Belt.
“These migratory patterns are the direct funnel out of the East Coast, West Coast and middle America into the Sun Belt has been going on for quite some time, but it certainly does look like it is accelerating even more currently,” Alex Jesset, chief financial officer and executive vice president of finance at Houston-based REIT Camden Residential, said on the company’s most recent earnings call.
Almost a year into the effects of the pandemic, many of the largest, most influential apartment companies including Equity Residential and Mid-America Apartment Communities said on their most recent earnings calls that they are planning to hold or increase their footprint in the southern United States in ways that could outlive the health crisis. While the warm weather area has been luring migrants, that movement has accelerated as urban dwellers working at home leave high-cost, high-density cities for lower-cost alternatives which, in the United States, can mean heading south.
Real estate companies that deal in multifamily properties as varied as garden apartments and luxury high-rise buildings are, at the very least, exploring ways in which they can capitalize on this strong migration trend, or otherwise diversify away from the major urban cities that have suffered most in the past year after a pause in real estate activity when the pandemic hit.
“Investors came back strong in the fourth quarter — but their focus had clearly changed,” said John Affleck, CoStar Group’s vice president of market analytics. “Atlanta, Phoenix, and Dallas led all markets, attracting twice as much investment as past fourth quarters and supplanting perennial leaders New York and Los Angeles. On the other hand, deal volume in New York fell by $3 billion compared with typical fourth-quarter levels, and deal volume in other premier markets was also down from past years.”
Sun Belt cities — such as Dallas, Atlanta and Phoenix — can offer more room for growth for apartment renters and companies alike than many major coastal cities. Southern states in the Sun Belt often have more business-friendly tax rates and incentives and have attracted corporate relocations and job growth at an increasing pace. This has translated into, among many things, growing housing demand and rising rental rates.
Demographic shifts are also driving Sun Belt growth. Those under 40 are seeking out the region’s affordability, as well as aging retirees moving to the South’s more temperate climates represent “huge” populations gravitating toward the Sun Belt, Eric Bolton, CEO of Mid-America Apartment Communities, said in the company’s most recent earnings call.
“As those two age demographics evolve, I think the Sun Belt stands to benefit more so than some of the higher-cost coastal markets,” Bolton said.
From 2019 through 2029, the Sun Belt region’s population is projected to expand by 19 million people, representing 13% population growth, compared to non-Sun Belt states’ projected growth of 3 million residents, or 2% growth, according to IREI, an industry research firm based in Sam Ramon, California. It’s an acceleration of a trend that had already been underway. Between 2009 and 2019, the Sun Belt region accounted for 75% of all total U.S. population growth, the report said.
In a sense, the migration is a reversal of the steady influx of young renters and homebuyers from the suburbs to urban cores that had been taking place in the years before the pandemic.
Shortly after the dust settled from the Great Recession, urbanization swept the nation as young adults opted to pay a premium to have a smattering of restaurants, shops and workspaces within walking distance from their downtown apartments. Between 2010 and 2013, population growth in big cities outpaced those cities’ growth rates set between 2000 and 2010, according to a report from think tank Brookings Institution.
Developers in the suburbs tried to replicate an urban living experience by developing mixed-use developments that billed themselves as microcities, in which residents could similarly walk to the development’s restaurants and entertainment if they lived in the project’s multifamily offerings. The pandemic could be poised to help make those seemingly prescient efforts bear more fruit than originally anticipated and more quickly as former big city dwellers seek the activity and offerings of a downtown hub but the price point of the suburbs.
Camden Residential, a REIT that develops high-end properties in the Sun Belt, has benefited from the latest migration trend despite other difficulties brought about by the pandemic. In its fourth quarter 2020 earnings report, the company reported 1.1% more year-over-year revenue growth in 2020 compared to 2019.
And on its earnings call, executives noted that six of the top 10 states for one-way U-Haul truck rentals are states in which Camden operates. They also cited a 60% uptick in New York residents searching Google for apartments in Atlanta between February 2020 and December 2020.
Executives at Equity Residential, a Chicago-based REIT that focuses on apartments in high-density, urban cities such as Boston and San Francisco, said on the company’s most recent earnings call that they’re exploring more investment and development opportunities in Denver, which would be funded by selling off some properties in bigger city centers.
The investments are reflect a national trend of more cities urbanizing into dense population nodes, Mark Parrell, president and CEO of Equity Residential, said on the call.
“New York will continue to be a great urban center, and San Francisco will eventually recover. But, I think places like Denver now have an urban center,” Parrell said on the call. “The trend towards urbanization, I think, is inexorable over the whole world and in the United States. … There’s just going to be more cities.”
Parrell noted that Seattle, a market that would be considered a major, high-density city by all metrics today, only started urbanizing around 15 years ago.
And Essex Property Trust, a REIT that focuses primarily on major West Coast markets, is acutely affected by the pandemic’s effect on urban cores. In the fourth quarter, preliminary three-month trailing job losses in the company’s markets were 7.9% year-over-year; in the third quarter, that figure stood at minus 9.4%, executives said on the company’s most recent earnings call.
Executives also said they saw a high degree of outward migration from its urban centers in the West Coast.
“In our experience, people make different housing choices during recessions, and it’s not surprising to see many in the large baby boomer cohort monetized the value of an expensive California home to move to less expensive areas as part of the retirement plan,” Michael Scnhall, CEO of Essex, said on the call.
Though the company did not express any plans to invest in the Sun Belt, executives did note that the company’s properties in more mid-sized cities, compared to cities like Los Angeles and San Francisco, have benefited from migratory trends toward more affordable cities.
“Communities with private outdoor space or more affordable residences outside the urban core continue to experience greater demand, which benefited many of our properties in Ventura, San Diego, Orange County and the East Bay in Northern California,” Angela Kleiman, chief operating officer of Essex, said on the call.
Nationally, suburban rents exceed their pre-COVID levels after growing since May last year while downtown rents fell 7% year-over-year at the end of last year, according to CoStar.
Investors have taken notice. The largest sales last quarter happened in the suburbs of primary markets, such as Bellevue, Washington, outside of Seattle.
Meanwhile, sales in the Sun Belt cities of Atlanta, Phoenix, and Dallas-Fort Worth more than doubled their normal levels in the fourth quarter last year to make them the top three cities for deal volume, displacing the typical leaders of Los Angeles and New York. Sales in those gateway markets fell. In New York, for instance, sales were down about 75%, according to CoStar.
More firms are already jumping into the Sun Belt. In November, Bain Capital Real Estate, a Boston-based subsidiary of investment firm Bain Capital, and Chicago-based real estate investment manager Magnolia Capital said they plan to invest $900 million in multifamily properties needing renovations in large and midsize Sun Belt cities.
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