United States Part 1: Shifting Apartment Winds - What's the Outlook for Relative Market Performance?

New York, City / USA - JUL 10 2018: Lower Manhattan skyline daylight view from Brooklyn Queens Expressway in Brooklyn Heights

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.

USQI_1Q23_v1 cropped
zoom_in
Sources: RealPage, PGIM Real Estate. As of February 2023.
close
USQI_1Q23_v1 cropped
Sources: RealPage, PGIM Real Estate. As of February 2023.

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.

zoom_in
Sources: RealPage, PGIM Real Estate. As of February 2023.
close
Sources: RealPage, PGIM Real Estate. As of February 2023.

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

USQI_1Q23_v1 cropped
zoom_in
close
USQI_1Q23_v1 cropped

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.

1 For the following analysis, Sunbelt markets considered include Atlanta, Austin, Charlotte, Dallas, Fort Lauderdale, Houston, Miami, Nashville, Orlando, Raleigh, Tampa and West Palm Beach.
Quarterly Insights
Read our latest insights on the real estate markets.
Quarterly Insights
zoom_in
close
USQI_1Q23_v1 cropped
zoom_in
Sources: Oxford Economics, PGIM Real Estate. As of February 2023.
close
USQI_1Q23_v1 cropped
Sources: Oxford Economics, PGIM Real Estate. As of February 2023.