Real-estate investors flee South for Midwest. Rental growth for the Sun Belt in 2023 is projected at 0%.

By Aarthi Swaminathan

Investors are seeing profitability drop in the Sun Belt, according to reports, pushing them towards Midwestern markets

Renters in the Sun Belt may soon see some relief as investors flee the market amid an oversupply of apartments.

The number of apartments under construction in major cities in the Sun Belt — from Atlanta to Austin — is expected to exceed the number of tenants expected to occupy them, and that is pushing rent growth down, according to new data from CoStar Group(CSGP).

Investors who are seeing rent growth fall are consequently shifting their money into Midwestern markets, the company added, where they are still finding slow but steady growth.

After a months-long surge, rents are finally cooling off — particularly in the Sun Belt, as a result of supply hitting the market.

Before and during the pandemic, the Sun Belt led the nation in rents. The average annual rent growth in 2018 for the region was 3.3%, as compared to just 2.4% in the Midwest, CoStar data showed.

During the pandemic and in the second quarter of 2021, rent growth in the Sun Belt surged to 16.1%, according to CoStar, as millions of Americans moved to the south. Many people were able to work from anywhere due to the coronavirus pandemic shuttering offices. Maricopa County in Arizona and Collin County in Texas were the two counties in the region that saw the highest level of net domestic migration, according to the U.S. Census Bureau, in 2022.

Homebuilders and developers piled into the Sun Belt hoping to match the flow of people moving to the state. Looking at building permits through November 2022 and comparing it to the year before, the National Association of Home Builders found that home builders were most active in the south

“Everybody got the idea of, ‘Hey, we need to build more units,'” Chad Littell, national director of U.S. capital markets analytics, told MarketWatch, as the construction of apartments, or multi-family units, also ramped up.

But the dynamic has since changed and supply is now poised to exceed demand, which will be helpful for millions of renters

Nationally, the U.S. is poised to see a glut of apartment rentals, Littell said.

Before the pandemic, there were around 725,000 units under construction nationwide, CoStar data revealed, with around 337,000 “absorbed” over the last 12 months. The term absorption refers to how much space — or units — are leased in a given period. It essentially is a metric investors use to track when a tenant occupies a space and when the space is unused.

The pandemic years were a boon: During the pandemic in 2020, the number of housing units under construction didn’t change much, but there was higher demand, and absorption rose to just under 400,000. In 2021, that demand exploded, and absorption rose to nearly 700,000. Developers ramped up and 839,000 homes were under construction.

And they kept ramping up. As of the first quarter of 2023, 1.08 million apartments were under construction. But only 131,310 units are being absorbed — a far cry from where we were just a year ago, Littell said.

Unlike the broader housing market which is facing a major shortage of homes for sale, in the apartment rental space, “there’s not a supply issue,” Littell said. “The supply issue would be, we’ve got too much coming.”

“In Austin today, we have 44,000 units under construction, while we have 6,200 units absorbed,” Littell said. In Atlanta, the market is poised to see negative absorption, he added. Negative absorption refers to when the rental unit sees no tenants for a lengthy period of time.

The lengthy timeline of building an apartment complex is part of the reason why supply couldn’t catch up fast enough with tenants. It takes considerably longer to build apartments than single-family homes, which in part explains the lag in supply. The average length of time to complete construction of an apartment building is roughly 18 months, according to the NAHB. It takes less than half of that time to build a single-family home.

But an oversupply is a good thing for renters.

CoStar is expecting rent growth in the Sun Belt region to be flat — 0% — in 2023.

Rents in some parts of the Sun Belt are already negative, according to a separate report by Apartment List. In April, rents in Phoenix fell 3.8% compared to the year before, and in Las Vegas, rents fell 3.7%. The report also noted that “multiple other previously booming Sun Belt metros have now seen their year-over-year growth rates turn negative.”

With rent growth stalling, some multi-family investors are fleeing the Sun Belt, seeking refuge in Midwestern real-estate markets.

Looking at the change in investor purchases between the first quarter of 2020 and the first quarter of 2023, there was a double-digit percent increase in certain Midwestern markets, according to data from real-estate data company Parcl Labs.

Real-estate markets in Cleveland, Detroit, Milwaukee, and Richmond were seeing a sizable jump in investor interest between 2020 and 2023, the company said.

When looking at sales of apartments over the last 12 months, CoStar found the biggest jump in Akron, Ohio, followed by Grand Rapids, Mich., and Peoria, Ill.

For renters in the Sun Belt, this data could present an opening to reevaluate your finances.

The typical household is paying nearly 30% of their monthly income on rent in 2023, according to Moody’s Analytics. Renters from New York to Los Angeles — and even in Florida cities like Miami and Fort Lauderdale — were paying a high share of their income towards their rent, the report said.

With a glut of apartments now set to hit major cities in the South, “you now have the opportunity to negotiate with your owners, or potentially move,” Littell said.

Though renters may not necessarily see huge price declines in rent, he added, it’s an opportunity to look at new properties and find rental concessions such as getting a few months free on a lease.

Renters can “actually find a place that they want to live and maybe have a little bit of room to negotiate some concessions,” Littell said, “versus having to be told that there’s nothing available and I just have to renew at my current spot.”

-Aarthi Swaminathan

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05-23-23 1412ET

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