The Supply and Demand Paradigm Continues To Shift in the Sun Belt

Article originally posted on CoStar on March 13, 2023

Nowhere in the United States has the impact of in-migration been felt more acutely over the past few years than in the U.S. Sun Belt. This area, stretching from Phoenix to Florida and up to Tennessee and the Carolinas, experienced a surge in population beginning in 2020 that is only now beginning to subside, declining by a mild 0.1% in the past year.

The resulting demand for housing has fueled an historic rate of new development activity, which in turn, fueled record rates of apartment rent growth across the region through early 2022.

But vacancy rates in the 14 multifamily markets across the Sun Belt with at least 100,000 units of existing inventory are up 240 basis points over the past year, with some high-growth markets including Atlanta, Phoenix, Tampa and San Antonio rising between 2.5% and 3%.

Vacancy is rising throughout the region as population growth is beginning to cool. This is partly attributable to the impact that rising rents have had on disposable incomes, with fewer Sun Belt markets offering relative affordability after more than a year of accelerating rent growth that outpaced income growth.

Rent growth across the Sun Belt has risen by nearly 20% in the past three years, with rents in Florida rising at the fastest pace. Consumer insecurity regarding recessionary concerns is also resulting in a slower pace of demand as fewer potential renters are willing to commit to lease obligations during a time when layoffs are becoming more common. Consequently, new household formation is down across the region.

Population growth drives the need for development, and it is beginning to slow in several key markets that were pandemic-era favorites a few years ago. The rate of population growth in these 14 Sun Belt markets is now down nearly 1% since the end of 2020, and collectively they are expected to grow at a more measured pace of roughly 1.1% through 2024. With that said, the region remains well ahead of the projected rate of population growth of 0.45% for the nation as a whole.

That’s quite a change for some markets that grew quickly in 2020, including Austin and Raleigh, which were up 2.8% and 2% respectively. Those same markets are expected to grow by 1.8% and 1.1% in 2023, with the rate of development activity surpassing anticipated population growth. Vacancy rates should rise in these markets by default, considering headwinds to occupancy from rising interest rates, inflation, asking rents that are still near record highs and recessionary pressures.

Of course, there are outliers, including Miami and Fort Lauderdale, which lost population in 2020 and have grown by 1.2% and 0.7% respectively as of March 2023. In Miami, nearly half of the total units underway are being built in the urban core, and all units under construction are in four- and five-star properties.

For now, new development continues at a record pace across the Sun Belt. Thirteen of these markets have more new units underway now than they did one year ago. Only the Tampa market has seen a slight decline in its active construction pipeline, which is down by roughly 700 units year over year.