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February 16, 2022

Real-Estate Investors Head South, Bid Up Sunbelt Apartment Buildings

Real-estate investors across the U.S. are betting heavily on apartment buildings in the South and Southwest, chasing population growth and soaring rents they expect will keep outpacing inflation this year.

Landlords say they are following the migration patterns of workers and their employers, who relocated to Florida, Texas and other southern states during the pandemic. These states’ warm weather, business-friendly governments and laws, lower taxes and fewer regulations have been attracting companies and workers from California, the Northeast and other corners of the country.

Foreign funds have come along for the ride, backing investments in thousands of apartments in major Sunbelt markets such as Atlanta, but also in places like Lafayette, Louisiana’s fourth-largest city.

Investors poured a record $335.3 billion into apartments across the country in 2021. Nearly a quarter of it went to just four metro areas in the Sunbelt: Dallas, Atlanta, Phoenix and Houston. In some other Sunbelt cities, total multifamily investment more than doubled over the year prior, according to a report by real-estate firm CBRE Group Inc.

Buyers are clinching an unusually large number of deals for properties that weren’t listed for sale, investors said. Appetite to capitalize on fast-rising rents far exceeds the number of assets available to buy.

“We get unsolicited offers nonstop,” said Kip Sowden, chief executive of Dallas landlord and developer RREAF Holdings. Mr. Sowden said his company sold roughly $400 million in apartments in 2021, about 60% of which it didn’t plan to sell. Many of those buyers are from the Northeast and the West Coast, Mr. Sowden said.

Big buyers include Northeast real-estate owners like Pennsylvania-based Morgan Properties, which teamed with the American arm of Saudi Arabia’s Olayan Group to purchase a $1.75 billion portfolio of mostly Sunbelt apartment properties last year. Purchases included nearly 2,000 middle-income units in Tampa, where rent increases on new leases are now pushing 30%, according to Jonathan Morgan, president at the firm.

Mr. Morgan said rising wages, including the demand from higher-paid workers moving into Florida and looking for apartments, have fueled those gains. Before the pandemic, less than 2% of the company’s holdings were in the Sunbelt. Now it is 20%, he said.

New York’s RXR Realty said it has also been scooping up off-market properties, investing in two apartment buildings under construction in downtown Phoenix, the company’s first deals in the Sunbelt in many years. The city’s expansion of university campuses and medical facilities that attract knowledge workers, as well as new investments in transportation infrastructure, have made Phoenix an attractive bet, said Scott Rechler, RXR’s chairman and CEO.

The frenzy in the multifamily market is intensifying concerns about affordability, which were already present before the pandemic investment boom. Lawmakers in Tampa have begun to discuss the possibility of rent control. Earlier this month, the U.S. Senate Banking Committee held a hearing to discuss the effects institutional investors are having on housing affordability, including in Sunbelt states.

But for now, there appear to be few threats to these billions in new investments.

“The rent growth has been so explosive,” said Tal Peri, head of the East Coast and Latin America division of German fund manager Union Investment Real Estate GmbH. The company entered the American multifamily market late

last year, buying high-end rentals in Fort Lauderdale. The firm is already pumping rents on lease renewals by 13%.