Commercial Weekly: Sunbelt and Mountain Metro Areas Undergoing the Most Intense Apartment Construction Activity as of 2021 Q4

Metro areas in the Sunbelt and Mountain states are undergoing intense apartment construction activity as builders try to keep pace with the strong demand in these markets. A strong and sustained job recovery, years of net domestic in-migration even during the pandemic, and the relative affordability of rental housing in these markets compared to other markets are drawing workers, businesses, and retirees. Using the ratio of apartment units under construction to the number of existing apartment units as an indicator of intensity, the most intense apartment construction activity is occurring in the metro areas of Florida, South Carolina, North Carolina, Alabama, Tennessee, Texas, Arizona, Maryland, Colorado, and Utah. Specifically, the top five are Myrtle Beach, Port St. Lucie, Huntsville, Spartanburg, and Nashville. Large metro areas, with a population of over 1 million, still attract the most construction activity in terms of the number of units constructed, but the intensity of construction is not as high as in some of the metro areas in the Sunbelt and Mountain states.

Sunbelt States Experiencing Strong Job Growth, More Affordable Housing, and Domestic Net Migration

A strong job recovery and the relatively affordable cost of housing in these markets are drawing employers, workers, and retirees in these markets.

Among metro areas with a population of over 250,000, this set of metro areas is experiencing intense and massive apartment construction activity, so they are prime targets for developers: Nashville, Tennessee¹ (18,796 units; 13.3% of apartment stock); Austin, Texas² (23,282; 9.4%); Colorado Springs, Colorado (4,120; 9.2%); Phoenix, Arizona³ (28,297; 8.3%); and Raleigh, North Carolina (8,534; 7.8%). These metro areas have experienced net domestic migration since 2005 and specifically during July 2019-July 2020 as the pandemic was raging—an indication of their attractiveness to people and businesses. In July 2019-July 2020, the largest net domestic migration was in Phoenix (88,970), followed by Austin (53,266), Raleigh (21,865),⁴ Nashville (18,421) and lastly, Colorado Springs (2,673). Most of these metro areas have also nearly recovered all the jobs lost during the pandemic and as of December 2021, the nonfarm employment is above the pre-pandemic level in February 2020: Phoenix (+107,500); Austin (+38,100); Raleigh (+22.800); and Colorado Springs (+5,100). Only Nashville has yet to reach its pre-pandemic nonfarm employment level, but it is almost close to recovering its lost employment (-1,700). The opportunity to work from home especially among tech workers is likely to further propel demand in these markets. In its 2020 Work from Home Counties Report, NAR identified Wake County, which covers part of the Raleigh metro area, as one of the top work from home counties.  

Florida has eight of the top 20 metro areas with the most intense apartment construction activity among metro areas with a population of over 250,000: Port St. Lucie (22.5% of apartment stock), Naples (9.3%), Miami (9%), Palm Beach (8.6%), Lakeland (7.9%), Orlando (7.8%), Fort Lauderdale (7.4%), and Fort Myers (7.3%). With its warm climate all-year, Florida is a retirement destination. According to the U.S. Census Bureau, Florida had the largest net domestic migration from July 2020-July 2021, with 220,890 moving to the state on a net basis (inflow less outflow). In its 2021 Q4 Commercial Real Estate Metro Area Market Report, NAR named Port St. Lucie as one of the top commercial real estate markets in 2021 as its economic and commercial market conditions surpassed the national trend. In 2020, U.S. News & World Report ranked Port St. Lucie as the third best place to retire in the United States.⁵

Utah has three of the top 20 metro areas with the most intense apartment construction activity: Provo, (10.9%), Ogden (10.3%), and Salt Lake City (7.5%). With its strong job growth, Utah is one of six states where net farm employment is higher as of December 2021 compared to pre-pandemic level in March 2020, with 61,300 more jobs. Utah is experiencing net domestic migration, with 32,200 people moving into the area on a net basis from July 2020 through July 2021.

South Carolina has two of the top 20 metro areas with the most intense apartment construction activity: Myrtle Beach (23%, the highest rate among the top 20) and Spartanburg (13.8%). The Myrtle Beach metro area⁶ has the most intense apartment construction activity among the top 20 metro areas with 3,382 units under construction or 23.3% of the existing apartment units as of January 2020. Myrtle Beach is an area that will tend to attract retirees and workers who are able to work fully remotely. It is located in Horry County which NAR identified as a major vacation spot in its 2021 Vacation Home Counties Report.⁷ NAR also named Spartanburg one of the top hidden gems in its 2022 Housing Market Hidden Gems Report. Spartanburg is located close to Charlotte, but is more affordable, and it has been experiencing net domestic in-migration since 2005 when the U.S. Census Bureau first started reporting data on a metro-level basis. In 2020, 5,290 people moved into Spartanburg from other states on a net basis.

In Huntsville, Alabama, 5,148 units are under construction or 16.3% of the current stock of inventory. NAR identified Huntsville as one of the 10 hidden gems in its 2022 Housing Market Hidden Gems Report. Huntsville has been experiencing strong job growth. Its total nonfarm employment as of December 2021 has surpassed the pre-pandemic level by 25,700 jobs.  

Salisbury, Maryland is the only one of the top 20 metro areas that is not a Sunbelt or Mountain state. The number of apartment units under construction is relatively small at 633 units, but accounts for 8.1% of the rental stock. Salisbury is located on Maryland's Eastern Shore, with proximity to Maryland's beaches and with a small-town vibe that could attract retirees and workers who are able to work from home permanently. According to U.S. Census Bureau data, Salisbury has experienced net domestic migration since 2005 (except in 2009 during the Great Recession). During July 2019-July 2020, there were 7,197 net domestic movers into the area.

Interactive Tool to Compare Market Conditions and Renter Affordability

The data visualization tool below can be used to compare the apartment market conditions in a metro area to the six major commercial markets (New York, Boston, Chicago, Washington D.C., San Francisco, and Los Angeles) or to other metro areas. The tool currently compares Huntsville and Nashville to the six major markets:

For example, in Nashville, about 13 apartments units are under construction for every existing 100 apartment units (13.3%). Construction activity is intense because of the strong apartment absorption in Nashville, with nearly 7 apartment units absorbed over the past 12 months for every 100 existing apartment units (6.7%), outpacing the absorption in the six major commercial markets. Even with Nashville's relatively high apartment vacancy rate of 7.9% (which is higher than the major commercial markets except San Francisco), the average asking rent in the Nashville metro area is up 17.9% year-over-year as of January 2022, which also outpaces the asking rent growth in the six major metro areas. The high rent growth is a clear signal for builders to undertake more construction activity in the Nashville metro area.

Affordability is arguably one reason driving the demand for apartments in the Sunbelt and Mountain states. Affordable rents tend to attract not only families but also businesses in the area, especially startups. With lower housing costs, a company's wage expenditure will likely be lower than if it located in a high-cost area like San Francisco and will increase the likelihood that a startup will operate profitably, incentivizing businesses to locate in the area.  

In Nashville, the average asking rent as of January 2022 is $1,567, about half the asking rent in the San Francisco metro area ($3,032) and the New York metro area ($2,898). In Huntsville, the asking rent drops to the about $1,131, or a third of the apartment rents in San Francisco and New York.

With lower rates, a family needs a lower level of income to afford the rent. Housing (rent or owned) is affordable if a family spends no more than 30% of income on rent.⁸ In San Francisco, a renter needs a family income of $134,748 to afford the rent. In Nashville, a family can afford to pay the rent with an income of $69,644. In Huntsville, a family needs just $50,261 to afford the rent.

Apartment Outlook

With strong apartment construction underway, these secondary markets are more strongly girded to face the effect of higher interest rates on the economy in 2022 and 2023 (the effect is generally slower investment activity as interest rates rise). In fact, higher mortgage rates tend to sustain the demand for rental housing among households at the margin of buying a home as mortgage rates rise. So, 2022-2023 are shaping to be even better years than 2021 for these markets undergoing intense apartment activity.

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¹ The metro area is the Nashville-Davidson-Murfreesboro metro area (CBSA 34980)

² The metro area is Austin-Round Rock (CBSA 12420)

³ The metro area is Phoenix-Mesa-Scottsdale (CBSA 38060)

⁴ Net migration data is for 2019

⁵ For reasons why retirees might consider Port St. Lucie; https://www.tcpalm.com/story/sponsor-story/gho-homes/2021/04/20/4-reason...

⁶ The Myrtle Beach metro area is the Myrtle Beach-Conway-North Myrtle Beach area (CBSA code 34820).

⁷ A vacation home county is a county where at least 20% of the houses are seasonally vacant.

⁸ Because a household may have other expenses for rent such as utilities, I assume that rent accounts for no more than 27% of income.