Real estate investing is all about location. People have flocked to large coastal gateway cities for years because they have traditionally offered the best job opportunities. And that steady influx of people drove steady rent growth for apartments. These stable market conditions led many of the largest real estate investment trusts (REITs) to focus on these major coastal metro areas.
However, that dynamic has changed in recent years. Companies are increasingly relocating and expanding in large cities across the Sun Belt region because of their better business climates, which are drawing job seekers needing places to live. As a result, residential REITs are increasingly moving to the South to capture this growing demand for apartments.
This year, one clear theme has emerged among multifamily REITs: They're taking the Sun Belt migration trend seriously. Nearly every one of them unveiled plans to expand into the region if they didn't already have a presence.
For example, industry behemoth Equity Residential (NYSE: EQR) -- which currently owns 303 properties with more than 78,000 apartment units across coastal gateway cities like Boston, New York, Washington, D.C., Seattle, San Francisco, and Los Angeles -- is moving back into the Sun Belt region after exiting years ago. The company is selling off properties primarily in California, using the proceeds to expand beyond the coasts into Atlanta and Austin, Texas.
Fellow apartment giant AvalonBay Communities (NYSE: AVB) -- which owns 288 apartment communities with more than 85,000 units primarily in New England, the New York metro area, the Pacific Northwest, and California -- is also looking to expand into new markets.
In its second-quarter earnings report, the company noted that it's pursuing opportunities in Dallas and Austin, Texas, and Charlotte and Raleigh-Durham, North Carolina. That will add even more expansion regions to the company's growing presence in Southeast Florida.
Meanwhile, WashREIT (NYSE: WRE), a diversified REIT focused on the Washington, D.C., metro area, is transitioning to a multifamily REIT focused on the Southeast. It's selling off its office properties and retail portfolio and plans to use that cash to expand its multifamily operations into the high-growth Southeastern markets of Charlotte and Raleigh-Durham, North Carolina, and Atlanta.
What's driving this move?
These REITs are expanding into large cities across the Southeast because they benefit from significant population growth. That's driving demand for apartments and steadily pushing up rental rates. For example, Atlanta is on track to add nearly a quarter-million people by 2023 -- the largest projected increase in the nation.
Likewise, Dallas-Fort Worth and Austin, Texas, and Charlotte and Raleigh-Durham, North Carolina, are on track to benefit from significant population growth over the next couple of years as more people move South for jobs, better weather, and the region's overall affordability.
That fast-paced population growth is driving above-average rental growth rates in these cities. For example, rental rates in Atlanta have expanded at a 4.7% annual rate over the last decade, while Austin's have grown at a 4% yearly pace during that same time.
Those above-average rental growth rates should continue for the foreseeable future because continued population growth will keep market fundamentals tight even as developers build more multifamily communities.
With rents rising at above-average rates across the Sun Belt region, REITs can grow their net operating income (NOI) at a faster pace than if they remained focused on the coasts. In addition, they'll benefit from price appreciation, as growing NOI will boost the value of their communities. That will enable these REITs to create more value for their shareholders than if they were to maintain their current geographic focus.
Making the right moves
Renters once flocked to major cities along the coasts because of their abundant job opportunities. However, those jobs are starting to shift to the Southeast as companies expand into those more business-friendly areas. That's driving renters and large apartment owners to follow them south. This strategy makes a lot of sense for REITs because they can benefit from faster rent growth, creating more value for their shareholders in the coming years.