Thanks to the low cost of living, appealing tax benefits and its namesake clear, sunny weather, the Sunbelt — which includes states across the lower half of the country — is the new boom region.
You hear the statistics in the news all the time: people and businesses are moving to the nation’s South and Southwestern regions at an unprecedented pace. But while this trend has gained more attention lately, it’s not necessarily new. Thirty years of U.S. Census data paint a clear picture of the South and Southwest as long-standing hotspots for population growth in the U.S. In fact, the regions that compose the Sunbelt have edged out the East and Midwest in terms of net growth over 28 of the past 30 years. Additionally, the U.S.’ population growth of 1.15 million from mid-2019 to mid-2020 was largely the result of just two states –Texas and Florida – which added ~600,000 people, i.e. nearly half of the nation’s population growth over the year.1 This population boom, in turn, has translated into strong business performance across the region, and created a flywheel effect drawing more young professionals to the South.
In order to better understand this virtuous cycle as it relates to commercial real estate, we’ve broken down the four biggest factors supporting property value growth along the Sunbelt below.
COVID-19 has accelerated Sunbelt in-migration
According to the Urban Land Institute and PwC’s 2021 Emerging Trends in Real Estate report, COVID-19 has accelerated intrastate population shifts away from denser, high tax/high cost of living states in the Northeast and Midwest to more spacious suburbs and metro areas in the South. The suburban markets surrounding high-growth core cities such as Austin and Charlotte have benefited most from these relocation trends, and while the Sunbelt’s relatively low cost of living and the high quality of life fueled migration to the region long before the pandemic, this trend is even more pronounced today.
And while COVID-19 has sped up this mass migration to the South, it’s important to remember that this is a robust, long-term trend that precedes the pandemic. For instance, in 2019 an average of 376 residents were moving out of New York City to a different U.S. state each day – an increase of more than 100 per day from the previous year – before it became the epicenter of the country’s COVID-19 outbreak last March.2 Los Angeles and Chicago were also among other cities to see daily departures in triple digits in 2020.
On the flipside, the six U.S. cities that saw more than 100 people a day arriving in 2019 were all in the Sunbelt region, with Phoenix and Dallas leading the way, and a Burns Housing Survey reported a 94% year-over-year increase in net home sales in Florida in August 2020 – a typically slow month for home sales. As a result, it’s not surprising that among all the U.S. markets PwC surveyed in its 2021 report, 9 of the top 12 markets in terms of overall real estate prospects were in the Sunbelt.
The Sunbelt is benefiting from the small city boom
Another major trend occurring within the broad migration to the Sunbelt is the large-scale shift of residents from rural areas to city centers. A deeper dive into recent census findings over the past decade reveals that while this trend is noticeable across the entire country, urban growth rates in the southern and western regions of the U.S. are generally three or four times higher than that of the other regions, particularly within cities with larger population sizes.
Source: SitusAMC Insights
According to a momentum heat map for the top 50 U.S. cities created by SitusAMC Insights, a real estate research firm, there is much stronger current and expected growth in the U.S. Southwest and Southeast relative to most other parts of the country. Additionally, the model suggests that aside from Atlanta the largest metros in each region have a worse score than their smaller counterparts.3 This is in part due to the fact that, while COVID-19 has depressed rents in most of these larger cities, many renters and investors have nonetheless opted for smaller cities with lower rental rates and better price growth potential in the long run. Many smaller cities are doubling down on their development efforts and finding creative ways to offer big-city amenities and entertainment options, and more businesses and residents alike are increasingly seeking out 18-hour cities—moderately large urban centers that typically offer a lower cost of living compared to larger coastal cities like New York, Boston and Los Angeles.
Many of these 18-hour cities lie within the Sunbelt, with cities like Austin, TX, Tampa, FL, and Phoenix, AZ, ranked among the fastest-growing cities in the country.4 According to data compiled by RealPage, most of America’s fastest growing cities are in the Sunbelt. All this is to suggest that the decades-long urbanization trend into major U.S. cities will likely slow over the next several years, as the response to COVID-19 tips the scales in favor of lower-density suburbs and larger and more affordable homes. Furthermore, central cities could face relatively more severe COVID-related fiscal challenges than suburban areas, and businesses and residents alike are increasingly aware that they may be better off in smaller markets with more favorable polities.
Businesses are flocking to the Sunbelt’s tax havens
It’s not simply the warm weather that is fueling the population growth around these cities. Private businesses and individuals alike have flourished in the region, thanks to some of the most beneficial tax treatment in the nation. For example, Nevada and Texas each boast zero corporate income tax rates, while Arizona, Utah, Kentucky, Mississippi and North Carolina all have corporate tax rates of 5%, which is a huge contrast to other states that levy rates of 9% and above. Individual income tax is also uniformly low in the region, with Florida and Tennessee joining Texas and Nevada in waiving the extra tax paycheck dollars completely. And with COVID-19 accelerating remote work and forcing many people to rethink their options, residents from states like New York – where residents earning $100,000 or more make up 80% of the state’s income tax base – may be more open to relocating South.2
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Source: Tax Foundation
While Sunbelt states do take in revenue from other sources—Nevada makes up much of the gap in tourism dollars while Texas has among the highest property taxes in the country—the minimal tax liability for businesses has allowed new and exciting industries to find purchase in the Sunbelt, contributing to the region’s strong GDP growth and tightening real estate market.
Texas stands out as a prime example of this, with Austin and Dallas both playing host to major corporations in the booming technology, media and telecom industries. Tech companies like Facebook, Microsoft, and Google have set up operations in Austin over the past few decades while Dallas has long been a telecom hub, containing the headquarters of major players like Verizon, AT&T and Ericsson.
A UNCC study reviewed the percent growth in real GDP among U.S.’ major metro regions over the past decade and found that the majority of the top 10 list was consistently filled with Sun Belt metros.5 As these cities continue to attract new and cutting-edge business investments, we believe competition for new office and residential space will create a positive vortex as a younger and more vibrant workforce moves to where the jobs are.
The Sunbelt is bolstered by favorable age demographics
This migratory surge of young professionals has already taken effect, and over the past few decades the Sunbelt has gradually evolved into arguably the most youthful and culturally vibrant region in the nation, although states like Florida are also seeing a significant influx of older residents. This diverse population bodes well for both the region’s population retention and its economic outlook for years to come.
Of the 18 states that fall within the Sunbelt, 12 of them have a median age below the national average of 38. What’s more, the region includes two of the three youngest states in the entire country—Utah and Texas. And while Florida is an outlier in this trend with its median age of 42, the state is still several notches younger than the oldest U.S. states, most of which are concentrated in the Northeast.
Source: World Population Review
Roughly 65% of people under the age of 35 are currently renters, according to data from the Pew Institute, which suggests healthy leasing demand in these youthful states in the foreseeable future.6 Coupled with the allure of the expanding tech industry bringing well-paying jobs to the region, the demographics of the Sunbelt promises to supply a good deal of demand to residential lease rates as these young people settle down and start families of their own.
That being said, young professionals aren’t the only favorable age group bolstering the Sunbelt’s property markets. Suburban apartment growth in many Sunbelt markets is largely a function of America’s aging population, according to real estate advisory firm JBREC. From 2020-2030 the number of households entering the family formation years or retirement age is expected to swell relative to the young professionals subset, and these two growing demographics historically prefer affordable suburban housing markets in temperate climates.5 While Millennials currently constitute the bulk of the work-from-home cohort, we expect more Baby Boomers and Gen X workers to take advantage of the benefits of flexible work arrangements, which will likely accelerate their decisions to move to planned retirement destinations earlier than expected. As a result, we believe demand in most Sunbelt suburban housing markets will remain healthy over the next decade and beyond.
The Sunbelt is more than a destination — it’s an investment opportunity
While the pandemic has certainly challenged everyone in a variety of ways, it has also opened the doors to several encouraging opportunities, specifically for multifamily investments in the Sun Belt region. The ongoing and rapid growth in the U.S. Sunbelt has been an extraordinary boon to commercial real estate investors, and the question now is – how do you capitalize on this promising trend?
iintoo is an innovative online investment platform that gives investors direct access to a curated roster of pre-vetted, premium commercial real estate deals while simultaneously expanding their network with like-minded investors.
For investors looking to answer this question, iintoo currently has two new offerings located in the Sunbelt. One is a currently income-generating multifamily value-add deal in Tampa, FL, which has performed well in recent years even in the face of COVID-19. The other is a ground-up development deal in Salado, TX, which is a cashflow-generating preferred equity deal run by one of our longstanding strategic partners. As we continue to vet promising projects spanning the entirety of the U.S., there’s no doubt that we will continue to unlock access to more opportunities across the Sunbelt and beyond.
If you’d like to learn more about our Sunbelt investment opportunities or any of our other offerings, we encourage you to log in to your investor dashboard today!
(1) Bankrate, “5 Most and Least Popular States for Americans During COVID”
(2) Bloomberg, “Even Before COVID 2,600 People a Week Were Leaving New York City”
(3) SitusAMC, “Pandemic Recovery Marked by Dramatic Regional Disparities”
(4) RealPage, “Sun Belt Claims Most of the Nation’s Fastest-Growing Metros”
(5) UNC Charlotte Urban Institute, “Sunbelt Cities are Driving Much of Our Urban Growth”
(6) PolicyAdvice, “25 Must-Know Rental Statistics in the US (2020)”
