New Supply in Multifamily – Fate (and maybe the Fed) Will Decide the Rest

The last couple of decades have seen a significant domestic migration.  Much of this migration has been from north to south.  People are leaving the colder climates of the northern United States and moving to the Sunbelt.  In the aggregate, these movements have been going on for a long time, but there have certainly been fits and starts along the way.  Most recently, the pandemic triggered a particularly massive wave as people learned the benefits of working from home.  As a sweeping generalization, tax regimes in the south are much friendlier to business than those of the northern and coastal regions and workers are generally cheaper. 

These dynamics made the Sunbelt feel like it had its own gravitational pull.  But like anything, growth brings investment and investors went whole hog to try to capture a slice of this demographic shift.  In 2020 and 2021 in particular, investors paid high prices for Multifamily properties assuming significant rent growth and committed to build significant new supply.  As is almost always the case, these investments appear to be an overshot of demand in the short term and news outlets everywhere are taking this opportunity to call for the end of the Sunbelt’s reign as the top destination for US businesses and workers. 

As investors, times like these make careers.  In 2021, Willow Creek was a net seller in the Sunbelt and locked in significant returns by playing the contrarian.  The mindset that led to those investments and sales is the same mindset we’re using as we look at the current environment.  We continue to look to get ahead of the crowd and our investment team is not going to be fooled by short-termism or media members looking to make a splash.  That said, absorbing new supply of multifamily will take time, and rent growth will be very difficult to come by in the region in the next 2 years.  The build should begin to slow by the middle of 2024 and rents will then have a chance to recover.  

The fact that the Federal Reserve is largely believed to be raising rates and keeping them higher for longer exacerbates the situation. Single family housing is not affordable for many people today even if money was still free. But increasing rates have driven mortgage demand to a 28 year low. Mortgage demand was better during the dot-com crash, 9/11, the great financial crisis, and the depths of the Covid-19 pandemic. This probably means that single family will have to correct, but multifamily is still way more attractive to the average worker.

Sources: The Wall Street Journal, Globest, cnbc