Sun Belt Multifamily Investment Momentum Slows Amid Oversupply Worries

The multifamily market in America’s Sun Belt once seemed like one of the surest bets in commercial real estate investment. It’s not anymore, but that doesn’t mean the clouds are going to spoil the party. 

Multifamily demand throughout the sunny Southeast and Southwest was propelled by large migration trends over a decade-long period that went into overdrive during the height of the COVID-19 pandemic as remote working trends took hold, arming workers with increased flexibility to relocate from gateway cities. The expectations for how many rental units would be needed to keep up with population growth soon crashed into a reality check, though, with loads of new supply suddenly hitting the market without enough demand.

Data from analytics firm Yardi Matrix showed the Sun Belt gained 673,000 new multifamily units between 2021 and 2023 with migration-fueled demand hiking rents by 30 percent from the beginning of the pandemic to the first quarter of 2024. The large-scale growth in supply was the biggest driver in multifamily rents declining year-over-year through March 2024, according to Yardi Matrix. Yardi statistics show rents fell by 1.2 percent in the Southwest and 0.2 percent in the Southeast compared to a 3.8 percent growth in the Northeast during that same period.

While the supply-demand headwinds are impacting some acquisition and lending decisions on Sun Belt multifamily properties over the near term, Harbor Group International (HGI) remains focused on investing in these properties over the long term. The Norfolk, Va.-based global real estate investment firm was aggressive in acquiring apartment assets throughout the Southern U.S. in 2021 and 2022 before scaling back its purchases last year. 

“It’s going to impact how we look at a specific opportunity and how we look at what our underwriting might be for 12, 24 or even 36 months,” said Yisroel Berg, chief investment officer for multifamily at HGI. “But, generally speaking, when you look at all of the fundamentals as a whole as it relates to multifamily and economic drivers, it still has us focused on the Sun Belt and looking for individual opportunities that make sense for us.”

Indeed, it should be noted that the Sun Belt is a big chunk of the U.S., and not all parts of it have been performing exactly the same, particularly when talking about South Florida. HGI has selectively targeted long-term multifamily acquisitions in certain Sun Belt markets over the past year despite immediate oversupply risks. These included purchasing a newly built 280-unit, garden-style complex in West Palm Beach, Fla., in June 2023 called Locklyn West Palm. It also acquired a newly constructed 270-unit community in Myrtle Beach, S.C., for $64.4 million last August. 

A historically low interest rate environment that existed until the Federal Reserve began aggressively hiking interest rates in early 2022 contributed to overdevelopment of multifamily projects throughout the Sun Belt, even in markets experiencing major population growth, according to Brent Jenkins, managing director at real estate investment company Clarion Partners. 

Jenkins stressed, though, that the higher borrowing costs have limited new construction projects from taking shape over the last two years, which should help ease much of the oversupply dynamics. 

“We expect any excess supply to really kind of burn off throughout the 2024 and early 2025 time frame with the combination of supply being muted and demand still being there,” Jenkins said. “It’s really important as an investor to understand the specific supply-demand dynamics of each submarket, and then really price properties appropriately and don’t overpay for growth in the absence of supply constraints when you’re looking at the long term.”

Paul Fiorilla, director of U.S. research at Yardi Matrix, noted that the Sun Belt encompassed roughly two-thirds of all U.S. multifamily transactions from 2020 to 2023, but some investors now are either avoiding or being extra cautious in markets with high supply growth. Yardi Matrix is projecting Austin, Nashville, Phoenix and Miami will have 10 percent more units coming online over the next two years with “weak” rent growth in some of these metro areas through the end of 2025.

Fiorilla said, though, that multifamily demand in many Sun Belt markets remains “robust” and will be strong over the long haul as supply growth likely slows due to the elevated cost of debt. 

The softening multifamily sector in the Sun Belt has come into focus in 2024 with rent growth down more than 4 percent annually in April in five of the largest markets, according to Brad Dillman, chief economist at RPM Living, a multifamily developer and investor. The rent declines were led by Fort Myers, Fla., (9.7 percent), Austin (7.4 percent), Jacksonville (5.1 percent), San Antonio (4.8 percent), Atlanta (4.5 percent) and Orlando (4.3 percent). 

Despite the headwinds, early 2024 has seen a “meaningful” increase in institutional buyers of Class A multifamily assets in the Sun Belt, including private equity firms, compared to 2023, according to Berg. 

That private equity interest was spotlighted in mid-May when Apollo’s non-traded real estate investment trust, Apollo Realty Income Solutions (ARIS), acquired Madison at Harper Place, a garden-style apartment building in Charleston, S.C., for $49 million. The newly constructed 186-unit property in Charleston’s West Ashley neighborhood was 95 percent occupied and purchased at cap rates roughly 200 basis points wider than comparable transactions in this submarket, according to a source familiar with the acquisition. 

“Before the most recent CRE cycle, large institutions rarely ventured outside the top 10 largest markets, but that changed due to the explosive growth in the Sun Belt,” Fiorilla said. “I think as we move from the high-supply cycle we are in now to fewer deliveries in 2026-27, multifamily performance will be strong in the Sun Belt and elsewhere.” 

Jenkins noted that the Clarion Partners Real Estate Income Fund he oversees pivoted more into lending to, rather than acquiring, Sun Belt multifamily properties over the last two years, but private equity funds have been more cautious to join the capital stack on deals. He stressed that there remains heavy interest from long-term private equity investors who see positive indicators playing out over the next few years with many large corporations expanding in Southern cities, coupled with greater numbers of retirees opting to relocate to warmer climates. 

There remains a lending appetite for multifamily properties in the Sun Belt, according to Michael Hoffenberg, founder and managing principal at Trevian Capital, which has recently closed deals for rental properties in Nashville, Fort Lauderdale, Dallas, Jacksonville, Miss., and Birmingham, Ala. The bridge lender founded in 2013 has around 90 percent of its portfolio secured by multifamily assets, many in the South. 

Hoffenberg said while there was construction oversupply of Class A multifamily units in many Southern metropolitan areas in recent years — with many landlords stepping up concessions such as a free month’s rent — rents overall are not dropping as much as had been expected. He noted, too, that older Class B rental properties are still performing strongly.

“Now you’re seeing people who maybe can’t afford Class A sliding into Class B, and the people who have outgrown Class C are sliding up to Class B. So Class B is doing very well in terms of collections and on-time payments,” Hoffenberg said. “Where you are really seeing issues is the lower-end Class C and C-minus workforce housing where borrowers, instead of putting money back into their assets and doing deferred maintenance and keeping up with the physical plant, are using that money to pay for interest payments or plugging holes in their portfolios.”

RPM Living’s Dillman, who was previously chief economist at Atlanta-based multifamily investor Cortland, said he expects some bumps on the horizon for Sun Belt apartment properties along with the entire rental housing sector. He projects that the U.S. multifamily market will have a “systematic oversupply” for the first time since 2001 starting around mid-2025 — and that will last around five years.

“The data historically is very clear that when we go into systemic overbuilding that tends to be done on the periphery and these kinds of markets will start to underperform,” Dillman said. “While investors are still attracted to it, they tend to be flying off of narratives that at this point are five, seven, even 10 years out of date.”

Andrew Coen can be reached at acoen@commercialobserver.com.