Sunbelt Fund II Updates > Sunbelt Cities Market Analysis Update
Sunbelt CitiesBallast Rock funds invest in quality workforce housing in Sunbelt states because these states feature strong demographic growth while still offering attractive cap rate yields, relative to the rest of the nation. Within the Southeast we focus our investing in small- to medium-sized cities with specific consistent economic features, markets where the demand and supply imbalance is most pronounced.
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Market Analysis
As is clear in the table below, our cities have relatively high wage and rent growth (even if often from a lower base) and little to no new apartment development. In the major primary markets in the Southeast we believe that despite the population growth, the relatively stagnant wage growth and substantial new supply met with low yields offers a less attractive risk/reward. Learn more about demand growth, apartment construction supply, and yield indicators in Southeastern markets.
- Looking first at the growth indicators, we can see that annual rent growth and median household income growth in primary Sunbelt markets sit below 2%. While in most cases these numbers are in line with or above the national average, they are dwarfed by the growth rates of Sunbelt Fund I (“SB1”) existing markets and Sunbelt Multifamily Fund II (“SB2”) target markets. The growth numbers in these secondary and tertiary markets indicate increasing renter demand, that in most cases is still outpaced by wage growth.
- In addition to the strong growth indicators in SB1 existing and SB2 target markets, these markets feature low under construction as a % of inventory rates. This statistic measures how supply will increase in the near future. SB1 existing markets have less than 1% of the existing supply under construction while SB2 target markets feature increasing supply that is below the national average. These low increases in supply are especially enticing when compared to primary Sunbelt markets (i.e. the larger cities in the region), where there is a chance that there will be an oversupply in the near-term leading to increased vacancy and/or the potential for reduced rent.
- Finally, looking at market cap rates, we can see that SB1 existing and SB2 target markets feature cap rates that are roughly 50-150 basis points (0.50-1.50%) wider than primary Sunbelt markets and the national average. The combination of strong growth indicators, a shortage of new supply in the near-term, and attractive cap rates illustrate part of our investment rationale for secondary and tertiary markets across the Sunbelt.
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