U.S. Emerging Markets: The Rise of America s Sunbelt Cities and the Implications for Real Estate

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Egbert Henderson
5 years ago
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1 PUB LI C SECUR I T I E S G R O UP i 3Q 2018 R E AL E S TAT E U.S. Emerging Markets: The Rise of America s Sunbelt Cities and the Implications for Real Estate EXECUTIVE SUMMARY Recent high-profile corporate expansions into midsized U.S. markets like Austin, TX; Nashville, TN; and Charlotte, NC, spotlight a broader demographic shift occurring between America s largest northern and coastal metropolitan areas and its midsized southern cities. Seeking a better quality of life and a lower cost of living, America s professional workforce is increasingly finding employment opportunities in the population centers of the Southwest and Southeast. This has contributed to slowing population growth in some of the largest U.S. cities and a resurgence in growth across the Sunbelt. As a result, select companies that operate in these markets present attractive real estate opportunities for investors. 1

Sunbelt migration picks up In the immediate aftermath of the Great Financial Crisis, migration to Sunbelt markets (the Southeast and Southwest regions of the U.S.) stalled, while large cities in coastal and northern U.

2 Sunbelt migration picks up In the immediate aftermath of the Great Financial Crisis, migration to Sunbelt markets (the Southeast and Southwest regions of the U.S.) stalled, while large cities in coastal and northern U.S. markets saw greater population and employment gains. 1 As a result, many coastal and northern real estate markets were more resilient and capital flowed accordingly. In recent years, however, Sunbelt markets have experienced net positive migration, while many coastal and northern markets have seen the opposite. NET DOMESTIC MIGRATION NET DOMESTIC MIGRATION PER 1,000 RESIDENTS, JULY 1, 2016 JULY 1, 2017 As of December 20, Source: U.S. Census Bureau, At the heart of these shifts are push and pull demand drivers that make the case for both employees and employers to migrate. On one hand, movement between these areas is driven by people who are attracted to a better quality of life. A number of factors pushing people south include: Lower costs of living Better commutes Warmer climates Current taxes Future tax liabilities U.S. EMERGING MARKETS: THE RISE OF AMERICA S SUNBELT CITIES AND THE IMPLICATIONS FOR REAL ESTATE. 2

3 We believe two demographic groups are likely to accelerate these migration trends. The first is young adults who flocked to urban markets in their 20s, who now find the fiscal challenge of raising a family in these areas to be unappealing. The second is those reaching retirement age, whose quality of life is at risk due to the combination of a fixed income and rising costs (notably, taxes). This group is also less attached to a specific location as they are typically empty nesters and no longer working full time. As highlighted below, average costs of living are significantly lower in many Sunbelt markets relative to traditional coastal and northern urban markets. For illustrative purposes, we paired two coastal/northern markets with a Sunbelt counterpart. Austin and San Francisco were paired given the growing presence of technology jobs in the former; while Nashville and New York City were coupled due to the recent growth in financial services jobs in Nashville. TWO PARENT & TWO CHILD HOUSEHOLDS COST OF LIVING COMPARISON PER MONTH SAN FRANCISCO DIFFERENCE AUSTIN Housing $3,121 -$1,870 Housing $1,251 Food $998 Food $738 Child Care $1,730 Child Care $1,108 Transportation $1,114 Transportation $1,150 Health Care $1,152 Health Care $964 Other Necessities $1,662 Other Necessities $802 Taxes $2,593 -$1,875 Taxes $718 Monthly Total $12,370 -$5,639 Monthly Total $6,731 NEW YORK CITY NASHVILLE Housing $1,789 -$787 Housing $1,002 Food $908 Food $792 Child Care $2,773 Child Care $1,052 Transportation $589 Transportation $1,170 Health Care $1,238 Health Care $1,170 Other Necessities $1,088 Other Necessities $724 Taxes $1,958 -$1,265 Taxes $693 Monthly Total $10,343 -$3,740 Monthly Total $6,603 As of March Source: Economic Policy Institute. Costs are in 2017 Dollars. Midsized Sunbelt cities have therefore experienced higher growth rates in recent years. We believe this will continue as the number of people reaching traditional family-forming years, as well as those nearing retirement are likely to grow significantly in these markets over the next few years. HISTORICAL POPULATION GROWTH Coastal & Northern Sunbelt San Francisco New York City Austin Nashville Percent Percent As of December 20, Source: U.S. Census Bureau, U.S. EMERGING MARKETS: THE RISE OF AMERICA S SUNBELT CITIES AND THE IMPLICATIONS FOR REAL ESTATE. 3

4 With regard to pull demand drivers, there is a strong case for employers to expand or relocate as talent pools expand in these midsized cities. For example, between 2010 and 2016, Texas and Tennessee saw a 21% and 17% growth respectively, in residents with bachelor s degrees. Those growth rates outpaced California (14%), New York (12%) and New Jersey (11%). Historically, the growth in office jobs within these midsized markets has been driven by back-office positions (call centers, transactional accounting, etc.). However, demand has risen for more higher skilled and higher paid front-office positions. We think this trend is in the early stages and there will be an increase in higher quality, better paying mid- and front-office jobs in these markets. The result has been higher growth in Sunbelt office jobs compared to coastal and northern urban markets, as shown below. OFFICE-USING JOBS GROWTH, BY YEAR Coastal & Northern Sunbelt San Francisco New York City Austin Nashville % AUSTIN 43% NASHVILLE 2004 = % SAN FRANCISCO 8% NEW YORK 2004 = As of January 31, Source: Bureau of Labor Statistics (BLS) and Baird Research. According to Forbes, eight of the top 10 cities creating the most business services jobs in recent years were secondary cities, primarily located in the Sunbelt. 2 Austin, for example, has attracted corporate relocations and expansion from large companies like Oracle, Apple, Amazon and Facebook. Another example is Nashville, where AllianceBernstein announced it would move the company s headquarters from NYC, bringing more than 1,000 jobs to the area. The company joins JPMorgan Chase & Co. and UBS, both of which employ a significant number of financial services workers in the region. 3 This trend is expected to continue as office-using employment growth and net migration are forecast to be higher in markets like Austin, Nashville, Raleigh and Charlotte compared to growth rates of major gateway markets like New York, Chicago, San Francisco and Boston. U.S. EMERGING MARKETS: THE RISE OF AMERICA S SUNBELT CITIES AND THE IMPLICATIONS FOR REAL ESTATE. 4

FORECAST OFFICE EMPLOYMENT VS. NET MIGRATION Q2 2018 TO Q2 2020 Annual % As of September 2018. Source: Bureau of Labor Statistics, U.S. Census Bureau, Moody s Analytics, Cushman & Wakefield Research.

5 FORECAST OFFICE EMPLOYMENT VS. NET MIGRATION Q TO Q Annual % As of September Source: Bureau of Labor Statistics, U.S. Census Bureau, Moody s Analytics, Cushman & Wakefield Research. Increased urbanization in many Sunbelt cities over the last five-to-ten years has also made them more compelling for migration. Mixed-use developments focused on retail, entertainment, residential and even office are attracting millennials who seek connectivity and denser neighborhoods over conventional suburban sprawl. Real estate implications Demographics drive demand for real estate. As a result of these demographic shifts, we believe demand for Sunbelt cities is significantly higher compared to coastal and northern urban markets. A number of attractive real estate opportunities in Sunbelt markets exist as a result of this shift. In the office sector, completions have moved higher in recent years to meet growing demand. However, net migration and office job growth has been strong enough to ensure net absorption trends have remained positive. Office rent growth in these cities has accelerated in recent years, and we expect rent growth to continue at current supply levels. In fact, office vacancy rates are trending more positively in Sunbelt markets relative to coastal and northern cities. U.S. EMERGING MARKETS: THE RISE OF AMERICA S SUNBELT CITIES AND THE IMPLICATIONS FOR REAL ESTATE. 5

6 Fundamentals are also positive within the multifamily sector. Since 2007, cumulative rent growth in Austin and Nashville has more than doubled that of New York City. CUMULATIVE APARTMENT RENT GROWTH Q Q San Francisco Austin New York City Nashville Percent % SAN FRANCISCO 51% AUSTIN 45% NASHVILLE 22% NEW YORK CITY Q08 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 As of June 30, Source: Axiometrics, a RealPage Company. Apartment supply is trending down and is expected to decline further (along with vacancy rates). Constrained new supply, combined with demographic trends should support further apartment rent growth moving forward. Of course, we are keeping a close eye on development pipelines as the supply response can be swift and shift the demand balance quickly. Other factors to monitor amid this migration shift include natural growing pains as these midsized cities expand. Adequate levels of infrastructure investments are required to keep up with growth to avoid congestion. Proper city planning of this growth is required to avoid urban sprawl that has become a problem for cities like Atlanta. There are also socioeconomic implications to consider given that living costs are likely to rise in these markets amid the growth of higher-paying jobs. Conclusion Overall, we believe that demographic demand for Sunbelt cities is greater than that of coastal and northern markets. Rent growth has been strong within the office and apartment sectors in these southern markets and we expect this trend to continue. So long as healthy market fundamentals remain in place, listed REITs with exposure to southern office and residential markets are likely to benefit from this long-term trend. Taking this positive view of demand, we re currently finding attractively valued opportunities in the public markets to express that view. U.S. EMERGING MARKETS: THE RISE OF AMERICA S SUNBELT CITIES AND THE IMPLICATIONS FOR REAL ESTATE. 6

7 ENDNOTES: i. The Public Securities Group, or Brookfield Investment Management, is a wholly owned subsidiary of Brookfield Asset Management DISCLOSURES Brookfield Investment Management Inc. ("BIM") is an SEC-registered investment adviser and represents the Public Securities Group ( PSG ) of Brookfield Asset Management Inc. ( BAM ). BIM-PSG is a wholly owned subsidiary of BAM. PSG provides global listed real assets strategies, including: real estate equities, infrastructure equities, multi-strategy real asset solutions, and real asset debt through: open-end funds, closed-end funds and separately managed accounts. PSG manages approximately $20 billion of assets as of June 30, 2018, entrusted to us by financial institutions, pension plans, insurance companies, foundations, endowments, sovereign wealth funds, and high net worth individuals. BAM manages more than $280 billion of assets in a broad range of public and private vehicles, invested across capital structures, liquidity spectrum, and geography. Opinions expressed herein are current opinions of PSG, including its subsidiaries and affiliates, and are subject to change without notice. PSG, including its subsidiaries and affiliates, assumes no responsibility to update such information or to notify client of any changes. Any outlooks, forecasts or portfolio weightings presented herein are as of the date appearing on this material only and are also subject to change without notice. Past performance is not indicative of future performance and the value of investments and the income derived from those investments can fluctuate. Future returns are not guaranteed and a loss of principal may occur. The information in this publication is not, and is not intended as investment advice, an indication of trading intent or holdings or the prediction of investment performance. Views and information expressed herein are subject to change at any time. PSG disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, PSG does not warrant its completeness or accuracy. This publication is not intended to, and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, product, investment advice or service (nor shall any security, product, investment advice or service be offered or sold) in any jurisdiction in which PSG is not licensed to conduct business, and/or an offer, solicitation, purchase or sale would be unavailable or unlawful. FORWARD-LOOKING STATEMENTS Information herein contains, includes or is based upon forwardlooking statements within the meaning of the federal securities laws, specifically Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include all statements, other than statements of historical fact, that address future activities, events, or developments, including without limitation, business or investment strategy or measures to implement strategy, competitive strengths, goals, expansion and growth of our business, plans, prospects and references to future our success. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Words such as anticipate, estimate, expect, project, intend, plan, believe, and other similar words are intended to identify these forward-looking statements. Forwardlooking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining our actual future results or outcomes. Consequently, no forward-looking statement can be guaranteed. Our actual results or outcomes may vary materially. Given these uncertainties, you should not place undue reliance on these forward-looking statements. CONTACT US brookfield.com publicsecurities.enquiries@brookfield.com 2018 Brookfield Investment Management Inc. U.S. EMERGING MARKETS: THE RISE OF AMERICA S SUNBELT CITIES AND THE IMPLICATIONS FOR REAL ESTATE. 7

CBRE CAPITAL MARKETS CBRE 2017 MULTIFAMILY CONFERENCE BEYOND THE CYCLE

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