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  • The Multifamily sector in the U.S. has strongly benefited from sociodemographic change
  • Sun Belt states have seen a particularly large population influx
  • Current pipeline does not meet the excess in demand – an opportunity for investors

As outlined in our first 777 View on the U.S.,  the attractive U.S. real estate market is benefiting strongly from the rapid recovery following the COVID-19 pandemic. The multifamily market is also being buoyed by sociodemographic macro factors. Demand for multifamily housing is strong and will remain so, experts say. The reasons for this quickly become apparent upon closer inspection.

Increasing demand for multifamily housing

The multifamily housing market in the USA is generally very attractive for investors. According to Jones Lang LaSalle, the transaction volume for multi-family housing has risen steadily over the past few years, to $138 billion in 2020, and the trend is continuing upward.

Transaction share by sector
multifamily housing
Source: JLL Research, Real Capital Analytics (Transactions bigger than 5,0 Mio. US-Dollar)

One of the key drivers of this growth are Millennials and Baby Boomers. Millennials are predicted to have to rent much longer than previous generations, both because housing prices continue to rise in all states and because student debt has reached a record high of $1.7 billion. dollar.

If we look at this as a percentage of household debt, we see that while mortgages have largely remained flat, student debt has increased dramatically, making it increasingly difficult to buy homes, especially in the generally more expensive Northern states.

Student debt as a percentage of household debt
Student Loan
Student-Loan
Mortgage
source : Zillow, Acceleration in Student Loan Debt Could Block Millions from Home Ownership

As a result, homeownership by Millennials will remain subdued and BTR systems will continue to flourish.  Experts predict that as Millennials age, they will opt for rental housing in lower-cost cities and suburbs. Similarly, baby boomers will continue to drive growth in rental households. By 2030, all baby boomers will have reached retirement age and will want to cut back on their financial obligations in exchange for more disposable income.

Multifamily housing in Sun Belt states is particularly well-suited to benefit from the above factors. The Sun Belt States are becoming increasingly attractive to “White Collar Workers”, especially in the back-office and technical professions. 17 Sun Belt cities rank among the top 50 cities for technical talent, offer a lower cost of living and a pleasant climate all year round. This results in disproportionately high immigration and population growth in these states.

Sun Belt states are popular

Engel & Völkers even speaks of an “end of the metropolises”. New York City, Los Angeles and San Francisco are expensive places. “More and more Americans are turning their backs on the big cities and settling in smaller towns,” predicts the brokerage house. One of the clear winners is Florida. There prices for housing are relatively low, furthermore, the state is one of the few, in which no income tax is due. A mild climate and a variety of recreational opportunities round-up the overall package of location advantages for many Americans.

Change in Migration 2020 vs. 2019
Source: USPS; CBRE Research, 2021

Tampa, Orlando, Charlotte, Austin and Dallas lead the way in net moves. There also, low taxes, good weather and low cost of living are among the main drivers of this trend. According to moving company, United Von Lines, 7 of the top ten cities for relocations are in the Sun Belt states[1]. A more recent April 2021 study showed similar results for mid-sized cities in Tennessee (3 in the top 10) and Florida (6 in the top 20). Many of the traditional cities are becoming less important partly due to the high cost of living but also during the pandemic, it became clear that most employees could work from home offices. Accordingly, moves from San Francisco to Sacramento increased by a full 70 percent in 2020. Those moving inland, away from Los Angeles, increased to 14 percent.

Realtor.com and the Wall Street Journal identified the top markets of 2021 in the first ‘Emerging Housing Markets Index’ In addition to strong housing demand, critical factors include a robust economy, well-paying jobs and amenities such as restaurants, bars and stores. Danielle Hale, chief economist at Realtor.com says, “These areas are great places to live. Many of these areas are smaller and offer great recreational activities nearby – places to hike, boat and enjoy the outdoors.” Mark J. Parrell, president and CEO of Equity Residential, also anticipates “considerable positive momentum,” saying, “Given the strong demand, rental rates will increase.”

Great potential for multifamily housing

Yardi Research expects rent increases of 2.4 percent for the high-growth southern states. This applies in particular to the metropolitan regions in the states of Texas, Georgia, North Carolina and Florida. Cities such as Austin, Atlanta, Raleigh, Charlotte and Tampa are even expected to achieve 2.7 to 3.9 percent. These prospects are already prompting the first investors and project developers to act. According to Yardi, an overall increase in completions of 15.3 percent is expected for 2021. Dallas, Miami, Houston and Austin in particular are expected to see increased completion numbers.

Core real estate numbers also continue to trend positively for the Sun Belt states. Looking at overall investment growth, we find that of the 10 fastest-growing cities, 8 are from Sun Belt. In terms of multifamily investment, the number increases to 9 out of 10 cities.

Investment Volume Growth By Metro & Property Type – Year Ending Q2 2021
source: CBRE, Q2 2021 US Capital Markets Figures

The high volume of investment will continue to fuel markets and drive prices higher. It is important to note that there is still room for further growth and yield compression as demand exceeds supply in all markets in the Sun Belt states. For example, Florida’s major cities of Miami, Tampa, Orlando and Jacksonville added a total of 34,200 units, while net absorption was 50,500 units. Another booming market is Texas. Houston, Dallas/FT Worth, Austin and San Antonio, together added 51,400 units while 60,400 units was absorbed. This resulted in strong rental growth, even reaching double digits in Tampa (12.3%), Atlanta (11.5%), West Palm Beach (11.4%) and Jacksonville (11.2%). The other 14 Sun Belt states listed all posted year-over-year rent growth. This should set the Sun Belt states for success in the coming years. Large states like Texas and Florida appear particularly well positioned to take the lion’s share.

Completions vs. net absorption by end of Q2 2021

source: CBRE, Q2 2021 US Multifamily Figures
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