The Sun Belt: A High-Growth region - Socio-economic drivers of real estate market development in the southern United States

Rising interest rates, higher rates of inflation, and more volatile stock markets are driving demand for inflation-proof, relatively stable, and lower-risk asset classes. Real estate investments are generally well suited to fulfilling the investment goal of hedging against inflation in particular: As nominal incomes rise with inflation, the respective users of residential or commercial spaces are also able to accept nominally higher rents over the long term. From a real, inflation-adjusted perspective, the amount of rental income and therefore also the value of the real estate itself is preserved, in mathematical terms at least. However, investors have always expected more than “mere” value preservation after adjusting for inflation; even from a real perspective, the goal is to generate positive returns if possible. So, in an environment of high inflation rates, investors now seek nominal returns that are already at a considerably higher level. Some real estate markets are currently still generating positive returns after adjusting for inflation, while also allowing access to promising long-term growth markets and limiting risk exposure. Accordingly, structurally higher property yields are possible in the United States than in most of the major European real estate markets. However, there is hardly any one single U.S. real estate market. At a more granular level, the world’s largest real estate market can be broken down into numerous highly heterogeneous and, in some cases, highly unrelated submarkets. And yet how is it possible to identify – at the earliest stage possible – the most promising of these sub-markets? Interesting and promising real estate markets are identified on the basis of more than just past trends and current indicators of the market itself. Numerous factors upstream from the real estate market, particularly those rooted in the economy, society, and socioeconomics, come into play. Rapidly growing regions offer special opportunities – not only for businesses and the population but specifically also for the accompanying real estate investments and project developments. Beforehand, however, it is necessary to define meaningful regional clusters and subsequently to conduct a more in-depth analysis of the respective sub-markets. The so-called “Sun Belt” presents a regional definition that is intriguing, particularly in this context. Roughly speaking, this refers to the area of the U.S. south of the 37th parallel. According to this definition, the region includes 15 states (from west to east): California, Nevada, Arizona, New Mexico, Texas, Ok lahoma, Louisiana, Arkansas, Mississippi, Tennessee, Alabama, Georgia, Florida, South Carolina, and North Carolina. Despite the many differences between these individual states, this region offers certain climate-related, historical, cultural, and socioeconomic commonalities. Perhaps the most interesting of these is the extraordinary growth seen in the economic and population trends. Because of the distance they cover from north to south, California and Nevada have only a small part of their area within this defined geographic region and each also feature specific structures that differentiate them from the rest of the Sun Belt. This explains why they are commonly – not only for the purposes of this study – removed from this classification, and why they have also been excluded here. This study presents the main socioeconomic and real estate market-related indicators of the 13 states of the Sun Belt. The study also compares the major locations and capitals of the respective states to one another. This is intended to reveal the immense range of interesting investment opportunities in the Sun Belt. On one hand, this shows that the region promises real estate investors greater potential than the supercities of the East and West Coast which are often preferred by Europeans. On the other hand, the individual locations in the Sun Belt – a region home to over 110 million residents – are certainly diverse in terms of their development, which is why their op portunities and risks should be considered individually. 

Steffen Metzner, Head of Research, Empira Group