Sun Sets On Sun Belt: Multifamily Execs Say The Coasts Are New Apartment Industry Golden Child

The consensus around which regions offer the most promising returns for multifamily developers is beginning to shift as supply inflates in the Sun Belt and coastal-based companies demand their employees return to the office.

Executives at four of the nation’s largest publicly held apartment companies said revenue grew in the second quarter, pointing to strong performance on the East Coast and the West Coast paired with minimal exposure to the elevated levels of supply being delivered in the Sun Belt.

“As we look forward, we continue to expect our portfolio, which is two-thirds located in suburban coastal markets, to benefit from significantly less competitive new supply coming online than in the Sun Belt and other parts of the country,” AvalonBay Communities CEO, President and Director Ben Schall said during the company’s second-quarter earnings call Tuesday.

There are several drivers of coastal market success, including the growing number of companies cutting back on remote work, executives for several of the nation's largest multifamily real estate investment trusts said.

The rise of artificial intelligence is also boosting job growth in these areas, driving demand for apartments. 

“The Northern region economies are steadily growing. A key driver is the investment in AI companies that are largely concentrated in Northern California,” Essex Property Trust President and CEO Angela Kleiman said during her company’s Q2 call July 28. “We've seen open positions of the top 10 tech companies improve gradually each month since the trough earlier this year.”

Amazon CEO Andy Jassy told the company’s more than 1.5 million employees in a February memo they would be required to report to their offices at least three days a week starting in May. 

The change led to more than 50% of all daytime workers in Downtown Seattle being back at their work sites from Tuesday to Thursday compared to pre-pandemic levels, according to CoStar. The largest increase was in the office district that includes most of Amazon’s headquarters.

Zoom, a company synonymous with the rise of remote work, is now requiring workers who live within 50 miles of their office to show up at least two days a week. The firm joins fellow California tech companies Google, Meta and Salesforce in instituting office attendance requirements.

On the East Coast, companies like JPMorgan Chase and Citi implemented similar mandates earlier this year, buoying demand.

That bodes well for the apartment market in those cities, Equity Residential President and CEO Mark Parrell said.

“In places like Seattle, we are hopeful that the return-to-office mandates by employers like Amazon will drive incremental demand back into the urban areas of the city as commute times become intolerable for workers who dispersed far outside the city in response to Covid and are now required to be in the office frequently,” he said on the company’s July 28 earnings call.

The Sun Belt saw its apartment market explode at the apex of the pandemic as historic job growth and in-migration pushed demand to new heights. As a result, there’s a glut of new supply coming online, impacting occupancy and prompting some companies to lower rents on new leases. 

The number of tenants in the Sun Belt who vacated their units prior to the end of their lease nearly doubled across UDR’s portfolio year-over-year, which Senior Vice President of Operations Mike Lacy attributed to rent growth outpacing income growth and affecting affordability for certain residents.

“Because of these factors, we expect pricing power across our various Sun Belt markets to remain constrained in the near term, though we continue to believe in the long-term growth prospects,” he said.

A significant amount of Camden Property Trust’s portfolio is in the Sun Belt, but CEO Ric Campo said it has been minimally affected by the wave of new apartments coming online.  

The company has a large number of middle-market properties that offer rents 30% to 40% cheaper than the cost of new development. Demand is high for those units, Campo said, since the majority of new deliveries are targeting more well-heeled tenants.

“The wall of supply that everybody is worried about, it has not really negatively impacted our portfolio,” he said. “There are a lot of reasons for that, but one of which is that a substantial portion of our properties are … at lower price points, and they’re not in the competitive high-end market.”

Camden posted 6.1% revenue growth in Q2 and 95.4% occupancy, down slightly from the 96.8% seen at the same time last year. The company expects those numbers to improve as the cost of capital continues to thwart new apartment projects.

“We’ve definitely started seeing starts decline in all the markets,” Campo said. “Clearly, the tight financial markets and the difficulty of getting bank financing and equity financing, along with increased cost of capital, is having the Fed’s desired result, which is [to slow] everything down.”

The waning number of residents moving out of apartments because they bought homes is also bolstering the apartment industry.

Only 6% of move-outs across UDR’s portfolio during the second quarter were due to home purchases, which is 50% lower than the company’s historical average.  

At Equity Residential, 8% of residents listed buying a home as the reason for giving up their apartment, down from the 12% historical norm for Q2. Camden’s rate was 9.8% in July, much lower than the 15.1% seen last year.

“Relative affordability remains in our favor, with mortgage rates hovering around 7% and low single-family home inventories bolstering prices,” Lacy said on UDR’s call. “Renting an apartment is approximately 55% less expensive than owning a home versus 35% less expensive pre-Covid.”

Companies across the nation have seen occupancy impacted by move-outs caused by the end of pandemic-era eviction moratoriums. Most are still working through delinquencies but expect their revenue to improve once units are backfilled with paying tenants.

“All of the courts have opened up, but all the courts are delayed,” Camden Executive Vice President and Chief Financial Officer Alex Jessett said. “You’re starting to see some acceleration on the court side, which is really getting folks that have not been abiding by the rental contracts for quite some time out much quicker, which is obviously a good thing.”

Morningstar in a paper released last month said multifamily is the largest real estate category, comprising 18.5% of market value. By comparison, office makes up 15.5% of market value.

The paper warned that real estate loans in the sector are looking “especially wobbly,” but the nation’s top multifamily firms said they aren’t yet worried about the impact of looming maturities. Transactions are down across the board, and several have paused acquisitions, but executives said they expect sales activity to ramp up as the bid-ask spread narrows through the end of the year.

“We really aren't seeing distress within the multifamily space,” UDR President and Chief Financial Officer Joe Fisher said.

“There are sectors that have become much more capital-starved and/or have different fundamental profiles, but in multifamily, with the [government-sponsored equities] backstop, there's always liquidity available, and it is a preferred asset class, as we've seen good performance going through Covid and coming back out the other side.”