Apartment rents are rising in coastal cities but falling across the Sun Belt, reflecting stark differences in how quickly new housing supply is being absorbed.
Recent financial reports from major landlords show the divergence is being driven largely by differences in construction pipelines. Coastal markets, where new development has slowed sharply, are seeing rents rise as demand remains steady. In contrast, fast-growing Sun Belt metropolitan areas are still absorbing a wave of apartments completed over the past two years, keeping downward pressure on prices even as occupancy improves.
“The fundamental outlook for the apartment industry is encouraging with resilient demand, a shrinking future multifamily supply pipeline and attractive relative affordability apartments versus other forms of housing,” Tom Toomey, president and chief executive officer of apartment landlord UDR, said on UDR's first-quarter earnings call in late April.
That strength is not evenly distributed across markets.
Landlords with coastal-heavy portfolios, including Equity Residential and Essex Property Trust, pointed to San Francisco and New York as their strongest areas, where rent growth has turned positive and, in some cases, is accelerating.
“These two markets share common elements of strong demand from our target higher-earning renter demographic for our well-located apartment homes and low levels of new supply,” Mark Parrell, chief executive at Equity Residential, said in the company’s first-quarter earnings call in late April.
UDR, an operator in both coastal and Sun Belt markets, reported similar trends. The company said San Francisco posted roughly 10% blended lease growth that combines rent changes for both new and renewed leases, with occupancy in the high-97% range. New York saw about 7% growth with occupancy above 98%.
Sun Belt concern
In contrast, Sun Belt-focused NexPoint Residential Trust reported declining rental income as comparable properties dropped 2.2%. Net operating income fell 2.7%, reflecting weaker pricing across its portfolio.
Alexander Goldfarb, a managing director at Piper Sandler, said it is “too soon to rotate into the Sun Belt,” adding that the region is “not likely to see market traction until later this year."
Recent leasing data underscore that trend. UDR said pricing in some Sun Belt markets turned more negative in April.
“Specific to the Sun Belt, those markets … retreat slightly over the past 30 days, going from about negative 1.5% in the first quarter to negative 2.5% in April,” Michael Lacy, chief operating officer at UDR, said on the first-quarter earnings call.
That puts Sun Belt pricing roughly five percentage points below coastal markets, where UDR reported blended lease growth of about 3% in April. Lacy described the weakness as “more of a blip” and one more concentrated in certain markets, including Florida and Nashville.
“Market rents [are] just not moving up as much as we would have expected over the last 30 [to] 45 days,” Lacy said, adding that landlords have had to “negotiate a little bit more on your renewals” and “retreat a little bit” on pricing in that region.
“But my expectation is we're going to continue to work through the supply down there, and we could see market rents start to move back up throughout the summer, and that could help us continue to try to drive those markets as we go forward,” Lacy said.
Concessions begin to fade
However, leasing conditions remain uneven.
In stronger coastal markets, concessions have begun to fade. Equity Residential said portfolio-wide concessions declined about 21% year over year and are “virtually nonexistent” in parts of San Francisco.
In contrast, conditions remain more competitive in supply-heavy Sun Belt markets. Camden Property Trust said it does not offer concessions itself, but management said incentives are “coming down fairly meaningfully in most of our markets” as new supply declines.
Camden also said that in markets with “more concessions in supply,” landlords may not be able to push rents as aggressively.
Executives and analysts said the divide is largely a function of supply, with Sun Belt markets still working through a wave of new apartment completions.
“This is merely a matter of absorbing the existing supply that's out there,” a Camden executive said on the company’s earnings call, adding that once supply is absorbed, the markets should return to “very, very healthy revenue growth.”