Growing economic opportunity, a lower cost of living, and retirement in a warm and sunny climate are driving population growth and investment opportunities in the West and South.
Figure 1: The Sun Belt Region & Major Cities
Figure 2: Sun Belt Population Growth Outperformance
Regional Growth in High and Low Tax States
Over the past decade, national relocations to the Sun Belt, measured by domestic migration, totaled nearly 5 million, largely driven by outflows from the non-Sun Belt region, in particular, states in the Northeast and Midwest (Figure 3). Both regions recently reported comparable international migration and natural population growth (births minus deaths), but it is likely non-Sun Belt states' population growth will be driven more by international in-migration in the future.4
Figure 3: 10-Year Cumulative Domestic Migration by Select State
Figure 4a: Sun Belt Region: Total Population & Growth History/Forecast
Figure 4b: Sun Belt Region: Total Population & Growth History/Forecast
Significantly Better Business Setting Leads to Private Sector Growth
Strong Job, GDP, & Wage Growth. The tremendous business expansion has led to faster job, GDP, and wage growth in most metro areas, well above the U.S. and non-Sun Belt averages. Recent and forecasted office-using job growth is highest in Austin, Orlando, Dallas, Houston, Raleigh, Fort Worth, Phoenix, Las Vegas, Tampa, West Palm Beach, Jacksonville, and Charlotte.8 Muted economic growth, high housing costs, congestion, and dated infrastructure also may worsen outside the Sun Belt.9
Increasingly Younger Work Force. About half of the total nonfarm and office-using jobs (a respective 150 million and 32 million) are already located in the Sun Belt. Also, 50% of Millennials currently live in the region.10 Millennials as a percentage of the population are now highest in San Francisco, Austin, San Diego, Los Angeles, and Charleston. With Millennials expected to be about 75% of the workforce by 2030, we expect Sun Belt markets will continue to capture more jobs as their younger populations continue to grow.11
Tourism A Large & Growing Force. Over half of leisure and hospitality jobs are located in the Sun Belt, with California leading by a large margin, followed by Texas and Florida, three of the five “Sand States,” along with Nevada and Arizona. A variety of tourist hubs are expected to continue to thrive, especially with the U.S. rentership rate being high nationwide and many living in small and confined urban conditions. Hotel accommodations also offer geographic variety and flexibility in an increasingly mobile world.
Millennials: In Pursuit of a Better Quality of Life
More Affordable Housing Overall. Major Sun Belt cities have typically reported much lower median home and apartment rent prices, although both have risen in recent years. Most areas in the region are still cheaper by comparison to the gateway cities, and such relative affordability may become more important as young adults age, marry, and have families. These life milestones may be more likely to occur in these regions. Prices in the other major Sun Belt cities generally range between $150,000 and $450,000. Select areas, mainly in California, Texas, and coastal Florida, have become increasingly expensive. Top cities in California report a median home price between $500,000 and $1.4 million − the U.S. is now about $270,000. Available and developable land varies greatly by city and region.13
Homeownership Rate A Mixed Story. Surprisingly, many cities in the Sun Belt, such as Los Angeles, San Jose, Austin, San Diego, Miami, and Houston have a lower homeownership rate than the national level (64.8%), ranging between 50% and 60%. This suggests there is still a scalable investment opportunity in rental housing in these cities, as well as those reporting a high percentage of Millennials. Cities in the region leading in homeownership are now Nashville, Raleigh, Jacksonville, Charlotte, and Phoenix.14
Seniors and Retirees: Safe Haven for Rapidly Increasing Aging Population
Accelerating Growth of Senior Cohort. Today seniors account for about 16% of the U.S. population, a share that is expected to rise to about 20% by 2030. The Sun Belt now holds about 50% of the age 65-plus cohort nationwide.14 Over the next decade, Orlando, Austin, Phoenix, Raleigh, Las Vegas, West Palm Beach, and Jacksonville are forecasted to be the fastest-growing retirement areas.
More Than Half of All Purpose-Built Senior Housing Is in Warmer Climate. Over 50% of all senior housing inventory (1.9million purpose-built beds) is located in the Sun Belt.15 Demand for professionally-managed, specialty rental housing catering to the elderly should only continue to grow. While homeownership levels are much higher for the 65-plus cohort, these have recently declined, and we expect many elder Americans will sell long-time homes to generate additional income and reduce housing-related expenses and rent more frequently, whether it be in non- or purpose-built housing. This trend is already well underway.
Sun Belt Commercial Real Estate Opportunities
Figure 5: Sun Belt vs. Non-Sun Belt Rent Growth History (5-Year)
Multifamily. Since Sun Belt markets report mixed homeownership rates, some with very high rates of owner-occupied units, we favor high-growth downtown areas for multifamily housing near younger employment hubs. Local barriers to entry (e.g. zoning and land-use restrictions) should be critically reviewed, as select metros may be at risk of oversupply.19 Single-and multifamily rentals in master-planned communities are likely be more common for larger households. Many millennials may opt for gated community living as they start or grow families. Much professionally managed and full-service rental housing will cater to the elderly constituency who prefer non-car-dependent, village-style living.
Retail. Urban and suburban shopping formats should target high-street, grocery-anchored, and lifestyle centers with considerable population density and/or in wealthier neighborhoods. Proximity to top job and housing submarkets is crucial. Also, Seniors tend to have higher net worth’s and shop more in stores.
Industrial. Four out of six of the largest and most active distribution markets are in the region – Los Angeles, the Inland Empire, Dallas/Fort Worth, and Atlanta. The rapidly growing populations in the Southeast and Southwest, Panama Canal expansion, burgeoning recovery of manufacturing, and U.S. energy boom should all bode well for ongoing demand in the region.
Hotel. Tourism is an important all year-round business attracting millions of both domestic and international leisure and business travelers. Nationwide, foreign spending has also reached record levels. We see value in high-quality, full-service hotels with top beaches, access to the great outdoors, food & beverage (F&B), corporate events, and meeting spaces.
Top 10 Sun Belt Markets: 5Y Effective Rent Growth History
Sun Belt Markets Have Consistently Outperformed the NCREIF Property Index
Figure 6: NCREIF Returns Significantly Outperform the Overall Index
Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
1 Clarion Partners Investment Research, Q4 2018. Note: A mid-size city is defined as one with a population between 1 to 3 million.
2 Moody’s Analytics. Q1 2019. Note: The 18 states in the Sun Belt include: Alabama, Arkansas, Arizona, California, Colorado, Florida, Georgia, Kansas, Louisiana, Mississippi, North Carolina, New Mexico, Nevada, Oklahoma, South Carolina, Tennessee, Texas, & Utah.
5 Note: Tax burden only factors in taxes paid by residents/businesses of the respective state.
6 Moody’s Analytics. Q1 2019.
7 Wikipedia. 2019.
8 Moody’s Analytics. Q1 2019.
9 U.S. Bureau of Labor Statistics. Q1 2019.
11 Forbes. The Millennial Arrival and The Evolution of the Modern Workplace. 2018.
13 Moody’s Analytics. Q1 2019.
15 CBRE. 2018.
17 This includes downtown and suburban markets.
18 Fortune. Americans Really, Really Love Sunbelt Suburbs. June 2017.
19 Clarion Partners Investment Research, Q1 2019.
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