Publications

- September 1, 2019: Vol. 6, Number 8

Rise of the Sunbelt: Outsized commercial real estate investment opportunities can be found in the region

by Mike Consol

The ongoing and rapid growth in the U.S. Sunbelt has been an extraordinary boon to commercial real estate investors, says a new report from Clarion Partners. The Sunbelt — the region stretching across 18 states in the Southeast and Southwest, including seven of the 10 largest U.S. cities, as well as many midsize metropolitan statistical areas — now holds about 50 percent of the national population, and is expected to rise to about 55 percent by 2030. Over the past decade, the region accounted for 75 percent of total U.S. population growth.

Over the next decade, Sunbelt population growth is expected to accelerate by another 19 million (13 percent), while non-Sunbelt states are forecasted to rise by only 3 million (2 percent). Statistics show all ages gravitating to the area for its business-friendly environment, lower cost of living, quality of life and mild climate.

Report co-authors Tim Wang and Julia Laumont point out that the Sunbelt boom is primarily driven by an exodus from high-tax to low-tax states. Overall, the region offers either low or no corporate, individual or property taxes, unlike many non-Sunbelt states further north, where the burden is increasingly onerous to many businesses and households. The regional influx by people and corporations is motivated generally by greater economic opportunity and affordability. Within the Sunbelt, California is the main outlier, given that it has both high taxes and domestic out-migration. Over the past decade, national relocations to the Sunbelt, measured by domestic migration, totaled nearly 5 million, largely driven by outflows from the non-Sunbelt region, in particular, states in the Northeast and Midwest. Both regions recently reported comparable international migration and natural population growth (births minus deaths), but it is likely non-Sunbelt states’ population growth will be driven more by international in-migration in the future.

Looking ahead through 2030, the overall surge in population should continue in the three largest U.S. states — Texas, Florida and California, followed by Arizona, North Carolina and Georgia. Given recent expansion trends, future growth is also likely to take place in a handful of midsized cities. For example, Raleigh, Charleston, Orlando, San Antonio, Charlotte, Denver, Fort Worth, Nashville, Jacksonville and West Palm Beach have reported sizable gains over the past 10 years, which should persist in the future.

MILLENNIALS IN PURSUIT OF A BETTER LIFE

Traditionally, Boston, New York, San Francisco and Washington, D.C., have drawn the majority of recent college grads, but the high cost and low quality of life in these large metros are driving more young people to midsized cities in the south and west, the report observes. These areas also have thriving energy, tech, new media, entertainment, hospitality, healthcare and financial services industries.

Major Sunbelt 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 Sunbelt 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.

SAFE HAVEN FOR AGING POPULATIONS

Today, senior citizens account for about 16 percent of the U.S. population, a share that is expected to rise to about 20 percent by 2030. The Sunbelt now holds about 50 percent of the age 65-plus cohort nationwide. 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 50 percent of all senior housing inventory (1.9 million purpose-built beds) is located in the Sunbelt. Demand for professionally-managed, specialty rental housing catering to the elderly should only continue to grow, the report comments. While homeownership levels are much higher for the 65-plus cohort, these have recently declined, and the expectation is that 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 under way.

The report also notes the following about specific property types:

  • Office: The largest class A office submarkets by square feet are San Francisco, Los Angeles, Atlanta, Dallas, Atlanta and Orange County. Due to increasing office space efficiency and the co-working explosion, the report suggests investors focus on irreplaceable assets near transit hubs, campuses and commercial districts, which tend to be in more walkable, mixed-use settings.
  • Multifamily: Since Sunbelt markets report mixed homeownership rates, some with very high rates of owner-occupied units, the report recommends targeting high-growth downtown areas for multifamily housing near younger employment hubs.
  • Retail: Urban and suburban shopping formats should target high-street, grocery-anchored and lifestyle centers with considerable population density and 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 Sunbelt — 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 year-round business attracting millions of both domestic and international leisure and business travelers. Nationwide, foreign spending has also reached record levels. The report recommends acquiring or redeveloping high-quality, full-service hotels with top beaches, access to desirable outdoor areas, food and beverage, corporate events and meeting spaces.

The report says the investment outlook for the West and South is now especially attractive, pointing out that Sunbelt markets within the NCREIF Property Index returns have performed extremely well during the past 20 years.

Through 2030, anticipated growth will be outsized in the three most populous states — California, Texas and Florida. Many Sunbelt areas will become increasingly popular destinations for professionals, families, retirees and world travelers, the report concludes. Most importantly, the expanding new economy in the West and South may become more important than the Northeast and Midwest 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, likely driving outsized commercial real estate appreciation.

 

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings. Read the full Clarion Partners report at this link: https://bit.ly/2HhWCMs

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