The Sun Belt region is one of the hottest real estate locations these days. Businesses and people are migrating to the southern half of the country in droves, driven by its better business climate, lower tax rates, overall affordability, and warmer weather. That's leading real estate investors to increasingly focus on the region since it's driving above-average price appreciation and rent growth.
Several real estate investment trusts (REITs) have made moves to boost their presence in the Sun Belt region this year. The latest one is residential REIT Independence Realty Trust (NYSE: IRT). It's merging with Steadfast Apartment REIT -- a non-traded REIT -- in an all-stock deal to create a large-scale apartment owner focused on the fast-growing Sun Belt region.
Here's a closer look at the sector's pivot toward this red-hot section of the country.
Creating a leading Sun Belt-focused multifamily REIT
Independence Realty Trust, or IRT, is joining forces with Steadfast Apartment REIT, or STAR, bringing together their complementary portfolios of multifamily communities across the Sun Belt region. The combined company will own 131 apartment communities with 38,000 units across 16 states. Overall, the company will have 82 communities with nearly 26,000 units across the Sun Belt, representing 69% of its net operating income (NOI). That will transform IRT into the third-largest publicly traded multifamily REIT focused on the Sun Belt region.
The deal will boost IRT's presence in Atlanta, which will be its top market at 17% of its NOI. It will also bolster its presence in Dallas/Fort Worth, its second-largest market at 8%. In addition, STAR brings the non-Sun Belt but fast-growing Denver market and strong presence in Houston. These markets are all enjoying above-average rental growth rates.
In addition to benefiting from those market conditions, the deal provides additional upside potential because STAR has about 12,000 units that IRT identified as renovation candidates. That will give the combined company nearly 20,000 units to renovate in the coming years. IRT has an excellent track record of creating value through renovation. Its historical projects across 4,000 units have generated a 17.1% return on investment by boosting NOI.
Following the migration trend
Multifamily REITs have been shifting their focuses to the Sun Belt region this year to take advantage of the accelerating migration trend. For example, Preferred Apartment Communities (NYSE: APTS) has spent the past year selling off its student family and office portfolios to increase its focus on owning Class A multifamily properties in suburban Sun Belt markets.
The company is using that cash to make acquisitions and finance multifamily development projects. Over the past couple of months, it has funded a loan to support the development of a 316-unit multifamily community in Savannah, Georgia; acquired a 250-unit multifamily property near Atlanta; and bought a 231-unit community in Fort Worth.
WashREIT (NYSE: WRE) is following a similar simplification strategy. The REIT is selling off its retail and office portfolios to expand its multifamily business across the Southeast. The company currently owns multifamily properties in the Washington, D.C. area. However, it aims to use the proceeds from its asset sales to expand to Atlanta and Raleigh/Durham and Charlotte, North Carolina.
Meanwhile, Equity Residential (NYSE: EQR) is starting to shift its focus from high-cost coastal gateway markets to cities in the Sun Belt region and other fast-growing inland markets. The REIT has sold more than $850 million of properties in California this year. It's using the proceeds to beef up its presence in Denver and expand into Atlanta.
The driving factor behind this geographic shift is faster growth. For example, Equity Residential noted that Atlanta's population has grown at a 1.4% compound annual rate over the past decade, more than double that of the company's existing markets. That's driving above-average rent growth, leading these REITs to pivot their portfolios to capture this upside.
Joining the migration trend
Most large multifamily REITs historically focused on coastal gateway cities because they benefited from limited new supply and steady population growth, which drove above-average rental growth rates. However, an increasing number of businesses and people are moving to the more affordable Sun Belt region. That's leading REITs to follow that trend as they seek to benefit from the rapid expansion in this area of the country. With Sun Belt migration shifting into another gear due to the pandemic, real estate investors will want to consider ways they can profit from this accelerating megatrend.