Rental housing faces headwinds this year and into 2024 both from outsized supply growth and weak demand drivers. Rental growth in metros located across the southern United States (Sunbelt1) has been higher than non-Sunbelt markets since 2013. However, we expect a temporary shift, with rents and occupancies softening the most in the Sunbelt.
As shown in Exhibit 1, Sunbelt market occupancies are now farther below pre-pandemic levels than are occupancies elsewhere. Rental growth is converging across Sunbelt and non-Sunbelt markets.
At the same time, developers have responded to the double-digit rent growth in the last couple of years. Construction activity is much higher in many Sunbelt markets and set to outpace new demand to a greater degree than elsewhere. Prime examples of this include Austin, Charlotte, Nashville, Phoenix and Raleigh, which face potential supply growth this year of more than double the average of the past five years, as shown in Exhibit 2.
Supply growth is typically higher in these metros since demand growth, driven by employment, is also stronger. Despite significant volatility in both apartment demand and employment growth over the last few years, the link between the two across markets remains strong, as shown in Exhibit 3. However, near-term employment forecasts suggest that construction at its current scale is excessive because job growth in the Sunbelt markets will decelerate over the next year and match that
Despite this short-term, cyclical mismatch between supply and demand, the sharp pullback in debt availability will curtail multifamily supply deliveries beyond 2024, as developers find it more costly to finance projects. At that point, apartment leasing will benefit from an improved economy at the same time supply recedes. In this environment, Sunbelt apartment market performance will once again benefit from continued strong job growth.
