As pandemic-era migration trends stabilize, a wave of new construction in the Sun Belt is causing anxiety among multifamily owners. Americans moved out of high-cost cities like New York and Chicago during the pandemic, seeking warmer and more affordable alternatives. Developers responded by launching numerous construction projects from Florida to Arizona. However, with these projects now nearing completion, leasing has slowed and concessions have increased, leading to concerns about an oversupply.
Publicly traded apartment owners reported positive second-quarter earnings, surpassing expectations and seeing their stocks rise despite broader recession fears. Yet, markets that experienced significant development are now grappling with oversupply. Eric Bolton, CEO of Mid-America Apartment Communities (MAA), noted during an investor call, “We feel like we're in the worst of the storm right now.” In the second quarter alone, 119,400 units were completed, contributing to a record 460,200 units year-to-date, a 26% increase from the previous year according to CBRE. RealPage projects that up to 670,000 apartments could be delivered by year-end, surpassing previous records by about 50%. Cities like Dallas, Phoenix, and Austin are seeing the highest numbers of new units.
Between 2021 and 2022, more than 16 million people moved across state lines, with many heading to the South and West. However, by the end of 2023, population trends had returned to pre-pandemic norms, according to census data. MAA's new construction peaked in mid-2022, with most units now being delivered. Despite these developments, MAA's funds from operations (FFO) dropped to $2.06 per share from $2.39 during the same period last year.
Equity Residential, based in Chicago, reported a surprising $177 million profit in the second quarter. However, the company acknowledged that rent levels in its expansion markets are weak, with recovery not expected until at least 2027. During the pandemic, Equity Residential reversed its previous exit from markets like Austin and Atlanta, expanding through a partnership with Toll Brothers and making significant acquisitions. However, it now faces competitive pressures in these markets, which constitute just 6% of the REIT’s net operating income.
Colorado-based UDR, with a significant Sun Belt portfolio, saw its FFO fall by 5% year-over-year, from 63 cents to 60 cents per share, just meeting its guidance. Its revenue grew primarily in the West, mid-Atlantic, and Northeast regions. UDR Senior Vice President Michael Lacy noted that their Sun Belt markets lag behind coastal markets, with pricing deterioration and increased concessions due to elevated supply.
AvalonBay Communities, facing similar issues, has offered substantial concessions in expansion markets like Austin and Charlotte. Despite selling more units than acquiring in Q3 2023, the company invested $277.2 million in over a thousand units in Texas and North Carolina.
Despite these challenges, multifamily executives remain optimistic about expansion, driven by recent positive trends. UDR CEO Tom Toomey emphasized the importance of identifying the next wave of prosperous cities in the new economy, highlighting the ongoing search for emerging markets despite the current oversupply issues in the Sun Belt.
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