Many multifamily property investors have enjoyed participating in multifamily investments in the red-hot Sunbelt markets over the last several years. Business-friendly environments, accelerating trends in employment, and lower labor costs contributed to in-migration and fueled growth in residential demand and development activity. Investors benefited.

A Unique Confluence of Market Factors

Today, as most commercial real estate sectors undergo valuation resets in the retraction phase of the real estate cycle, many investors wonder if multifamily investments in that swath of active growth states from Florida to Arizona will continue to provide the growth and income they’ve become accustomed to.

That’s a fair concern when factoring in how the multifamily housing investment market is contending with higher financing costs, rising debt service payments, and a potential slowdown in rent growth in markets where new supply is expected to exceed demand. 

Still, despite these challenges many investors continue to view multifamily investing as a compelling long-term play, especially considering how the sector has shown resilience over many market cycles historically.

This article looks at the current factors influencing the outlook for multifamily investments and highlights several characteristics that support a positive, long-term view of Sunbelt multifamily investing. 

Today’s Dynamics

The multifamily real estate market in the Sunbelt states continues to present a unique blend of opportunities and challenges for accredited investors in 2024 and beyond, influenced by an unusual combination of market dynamics. 

Supply and Demand

• A considerable influx of new multifamily units is expected in 2024. RealPage Analytics projects the completion of over 600,000 market-rate multifamily units during the year, potentially the largest number in four decades.¹         

• The CBRE U.S. Real Estate Market Outlook for 2024 indicates a slight oversupply in the apartment sector. With about 440,000 new units expected and more than 900,000 currently under construction, rent growth is likely to decelerate, and vacancy rates may rise²

Economic Drivers 

• A key factor behind the attractiveness of the Sunbelt multifamily market is the significant disparity between renting and owning costs. With home prices and interest rates increasing, renting has become significantly more economical. This scenario is likely to continue attracting renters, especially in high-demand markets like Houston, Dallas/Fort Worth, and Austin​​.
  • The Sunbelt's favorable business climate, characterized by lower taxes and fewer regulatory restrictions, continues to drive job growth and attract businesses. This economic vibrancy supports the multifamily real estate market by maintaining a consistent demand from a growing workforce​​.
    
    

    Potential Risks and Challenges

• There are concerns about potential oversupply in non-gateway metro markets like Austin, Phoenix, and Raleigh-Durham. If the population growth in these markets does not continue at a rate to match the construction boom, it could negatively​​ impact valuations 

• Traffic congestion and the lack of public transportation in rapidly growing Sunbelt cities could also pose challenges to economic growth and affect the attractiveness of these areas for new residents and businesses​​.
  
  

• • Why Experience Matters

    In light of what may appear to be conflicting dynamics that could influence the performance of Sunbelt multifamily housing investments in 2024 and going forward, the need for accredited investors to conduct proper due diligence becomes even more evident.

    Markets moving from retraction to recovery may be challenging for many sponsors. But for those asset management firms with decades of on-the-ground experience acquiring, managing, and liquidating properties in specific Sunbelt markets, today’s market conditions present significant opportunities.

    Firms steeped in experience with core-plus and value-add investment strategies are likely to be those capable of creating investor value across the entire cycle of ownership. 

    Conclusion

    While the multifamily real estate market in the Sunbelt states remains attractive for investors due to its robust job market, lower living costs, and favorable business environment, it is crucial to be aware of market dynamics that could negatively impact investment performance. Not all Sunbelt markets are the same, and finding a sponsor with years of experience and understanding in specific Sunbelt markets becomes imperative as you consider your next multifamily investment.   

  • We encourage you to download our eBook, The resilience of multifamily property investments, for additional insights.
  
  

• ¹https://www.realpage.com/analytics/apartment-forecast-3rd-quarter-2023/#:~:text=RealPage%20data%20shows%20that%20north,of%20the%20past%20four%20decades.   

  ²https://www.cbre.com/insights/books/us-real-estate-market-outlook-2024/multifamily