The Sun Belt Is Rising: Real Estate Outlook Strong

By Tim Wang, Managing Director and Head of Investment Research, and Julia Laumont, an Associate in the Investment Research group at Clarion Partners.


April, 2019


Rapid population growth in the U.S. Sun Belt has been an extraordinary boon to commercial real estate investors, and the investment outlook for Sun Belt real estate is now especially attractive.

Stretching across 18 states in the Southeast and Southwest, the region includes seven of the 10 largest U.S. cities, as well as many mid-size metropolitan statistical areas. Population growth has surged for decades from an influx of people seeking growing economic opportunity, lower cost of living and retirement in a warm, sunny climate. Many areas are become increasingly popular destinations for professionals, families, retirees and world travelers.

The expanding new economy in the South and West may become more important than the Northeast’s and Midwest’s, and will continue to attract top talent. These dynamics should greatly improve and catalyze cultural, institutional, leisure and intellectual property growth in urban areas, as well as household wealth. This likely will drive outsized commercial real estate appreciation.

Through 2030, population growth is anticipated to be outsized in the three most populous states – California, Texas and Florida – followed by Arizona, North Carolina and Georgia. Given recent expansion trends, high growth is also likely to take place in many mid- and large-sized Sun Belt cities.

Returns for Sun Belt markets in the NCREIF Property Index returns performed extremely well over the past 20 years:
 


Sun Belt Commercial Real Estate Opportunities

In recent years, Sun Belt markets have greatly outperformed in effective rent growth. Largely composed of lower-density suburbs and exurbs, much of the region’s real estate is newer and low-rise construction. Given the higher level of sprawl, trends toward densification and live-work-play are going strong. Meanwhile, the fastest-growing markets were largely suburban.

Office. The largest Class A office submarkets by square feet are San Francisco, Los Angeles, Atlanta, Dallas, Atlanta and Orange County, CA. Many top high-paying, office-using jobs are in corporate headquarters in the premier suburbs of these metropolitan statistical areas (MSAs). Due to increasing office space efficiency and the coworking explosion, consideration should be given to irreplaceable assets near transit hubs, campuses, and commercial districts, which tend to be in more walkable, mixed-use settings.

Multifamily. Since Sun Belt markets report mixed homeownership rates, some with very high rates of owner-occupied units, we like high-growth downtown areas for multifamily housing near younger employment hubs. Local barriers to entry such as zoning and land-use restrictions should be critically reviewed because select MSAs may be at risk of oversupply. 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. Professionally-managed, full-service rental housing will cater to elderly constituencies 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 and shop more in bricks-and-mortar stores.

Industrial. Four out of six of the largest and most active distribution markets are in the Sun Belt – Los Angeles, the Inland Empire of Southern California, Dallas/Fort Worth and Atlanta. Factors that should bode well for ongoing demand in the region including rapidly growing populations in the Southeast and Southwest as well as the Panama Canal expansion, the burgeoning recovery of manufacturing and the U.S. energy boom.

Hotel. Tourism is an important year-round business attracting millions of domestic and international leisure and business travelers. Nationwide, foreign spending has 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.

Ultimately, the Sun Belt’s pro-business culture – largely enabled by less onerous taxes and regulations – have spurred significant private sector growth. More companies are domiciling in the Sun Belt. Texas, Florida and California boast the most Fortune 500 companies outside New York, Illinois and Ohio. Over the past decade, Sun Belt employment grew by 12 million (+20%) versus nine million (+12%) elsewhere in the U.S. This tremendous business expansion has led to faster job, GDP and wage growth in most Sun Belt metro areas.

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