The easing of virus restrictions and return to offices for many white-collar workers will mean that apartment markets in cities such as NYC and Washington D.C. will outperform this year. But we think the longer-term outlook is most favourable in Sunbelt markets, which generally offer lower rents, lower taxes and warmer climates than most coastal cities.
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- The easing of virus restrictions and return to offices for many white-collar workers will mean that apartment markets in cities such as NYC and Washington D.C. will outperform this year. But we think the longer-term outlook is most favourable in Sunbelt markets, which generally offer lower rents, lower taxes and warmer climates than most coastal cities.
- Much has been made about internal migration patterns in the last year, with Americans moving to states with lower costs of living and more temperate climates. And the increase in demand this drove for apartments in Sunbelt markets was evidenced in MSCI Net Operating Income (NOI), with cities in Sunbelt states seeing solid NOI performance in Q3 and Q4 when compared to other major US cities. (See Chart 1.)
- However, there was already an established pattern of migration towards Sunbelt cities prior to COVID-19. Census Bureau surveys from 2018 revealed that in general, the Northeast and Midwest states were seeing a net negative internal migration rate over a number of years, while Sunbelt states in the southern US were seeing a net influx from internal migration. Reasons for this include warmer climates, a cheaper cost of living and lower state income taxes. So, the direction of travel over the last year is nothing new, even if the pace of that movement has increased. What does this mean for the outlook for Sunbelt apartment markets? Can they continue to outperform?
- In the short-term, we expect some expensive Northeastern cities to outperform, driven by the return to city centres. As more workplaces reopen and many workers again need to live within commutable distance, we expect a resurgence in demand for apartments. But not all cities will benefit equally. We think the bounce back in San Francisco for example will be relatively limited, whereas we are particularly positive on the prospects for both NYC and Washington D.C. (See here.)
- But the bigger picture is that we expect internal migration to Sunbelt cities to continue, which will support the outperformance of their apartment markets. Indeed, we think workers will be more likely to move to these cities over the next decade than in the past. One reason for this is the expansion of remote working, which will mean that by 2025 around 20% of office workers will be working remotely full-time. (See Chart 2 and here.) That compares to our estimate of 15% in 2019 and could represent an increase of 1.5-2m workers with more flexibility over where they live. We also expect some firms to continue to relocate to Sunbelt cities wholly or partially, due to lower office rents and business taxes. Those firms will also benefit from the migration patterns identified, which will mean there is a growing labour pool to recruit from.
- Therefore, although we expect the return to cities to favour some expensive coastal cities in the short-term, the bigger picture is that we expect the Sunbelt to continue to attract firms and workers, at least until gaps between rent levels and costs of living and doing business close. To understand this better, we will be doing a larger piece of work on metro outlook rankings in the coming months.
Chart 1: Apartment NOI Growth in H2 2020 (%)
Chart 2: Share of Office Workers Working At Home (%)
Sources: MSCI, Capital Economics
Sources: US Census, Capital Economics
Kiran Raichura, Senior Property Economist, email@example.com