People are what drives real estate’s housing market. Learn how you can align your multifamily investment strategy with tenant demand and start investing in areas with the highest population growth rates and favorable migration trends.
Population density and trends are the main drivers of real estate demand. Specifically, demographic-driven demand has an undeniable impact on this industry. Current demographic trends such as the growing millennial population, aging baby boomers and shifts in desired lifestyle can impact the demand for real estate by influencing individuals to either migrate into or out of a certain area. The pandemic and its lingering effects have both accelerated demographic trends that were already in motion and created unexpected areas of geographical shift. Successful real estate investors follow these geographical trends and position their assets in high-growth markets with potential for increased returns and steady capital appreciation.
To maximize a real estate investment’s profitability, successful investors closely monitor the demographic and geographical trends for the asset’s location. Occupancy levels and tenant demand are driven by the economic health and attractiveness of the surrounding area. MSAs with qualities such as low unemployment, accessible transportation and a high quality of life draw potential tenants to an area, increasing the demand for real estate. More tenants mean higher occupancy, increased cash flow and benefit your bottom line. A real estate investment strategy that leverages geographic and demographic tailwinds when acquiring assets can produce steady returns for investors.
Does your real estate investment strategy incorporate high-growth markets? Which MSAs are subject to population growth? How do you align your target markets to accommodate demographic migration trends?
In the following paragraphs, we are breaking down U.S. regional growth and demographic shifts to help you build a geographically focused real estate investment approach.
The results of the 2020 Census revealed that the last decade had the lowest rate of U.S. population growth since the 1930s. The COVID-19 pandemic alone is not responsible for this level of stagnation. Both the Great Recession and increased immigration restrictions have contributed to this period of lagging population growth. But amidst this stall, high-growth markets across the U.S. are experiencing short-term and sustained population growth that outstrips the national rate.
For the last decade, Southern and Western MSAs have maintained their status as the fastest growing geographical areas in terms of population percentage growth. Cities like Dallas, Phoenix and Atlanta are well-known areas experiencing considerable population growth. For several years, Charlotte, NC has become known for its significant and steady population increase. The southern city boasts a diverse, thriving economy and attracts professionals from across the country who are seeking employment with large corporations, like Centene, Honeywell and Truist who have recently established headquarters in and around the Charlotte MSA.
But lesser-known Southern cities like Greenville, SC also have well-documented growth. The city’s population growth outpaces that of South Carolina as a whole with new residents relocating from Florida and Texas, as well as areas outside the U.S., with 7.2% growth over a 3-year period. Real estate assets in South and West U.S. metros are considered to be relatively safe and lucrative bets with the rent for 2-bedroom units increasing 4.27% on average in the South and 3.79% in the West.
Southern MSAs are experiencing considerable population growth due to various demographic and environmental factors. Spurred by the relocation of corporations to areas with more advantageous tax rates and greater availability of cost-effective labor, individuals have flocked to Sunbelt states seeking a better quality of life.
Domestic migration is the largest driver of population growth in the South. For example, in Charlotte, NC, 33,300 people moved to the MSA between 2018 and 2019 and averaged over 91 individuals relocating per day. Over the last decade, cities belonging to the Sunbelt have made up the majority of the nation’s fastest growing metros, Due to the longevity of this trend and its consistency through crisis market conditions, the shift of individuals to southern cities and states is projected to continue into 2021 and for years to come.
The Pandemic’s Impact on Migration
The pandemic influenced people to relocate to less densely populated MSAs out of concern for their health, to be closer to family and to obtain more space. According to a study by United Van Lines, in South Carolina, 64% of moves to the state were inbound, and 17.61% of those individuals cited change in lifestyle as their primary reason for moving.
As positive tests and COVID-19 deaths multiplied in heavily populated cities like New York City, less-crowded cities saw an increase in domestic migration. Wilmington, NC saw levels of inbound migration reach 75% with housing prices increasing 12.9% over the prior year. The lower rents of suburban markets also attract renters as unemployment rates slowly begin to recover.
But there are always exceptions to the rule, and Philadelphia, PA is one of those exceptions. The northeastern MSA is ranked the 6th most populated city in the U.S. and still managed to obtain a 16.1% year-over-year rent increase for 2-bedroom units as many people moving from New York City opted to remain in the northeast.
Generational Migration Trends
The millennial cohort is getting older and is progressing into life stages where suburban housing options are more appealing than the urban locations they inhabit now. We’re seeing Gen Zers assume millennials’ place in urban living communities as the older generation flocks to the Sunbelt and suburban areas. But this younger generation’s entrance into urban areas remains outpaced by the rate at which millennials are exiting cities.
Incorporate Geographical & Demographic Trends into Your Investment Criteria
It’s not enough to simply acquire properties in these high-growth markets. Incorporating multi-faceted geographical considerations into an investment strategy involves analyzing historical data, weighing economic and political factors and determining an area’s attractiveness. MSAs with favorable conditions in all three of these categories are well-positioned to provide strong assets and have a high probability of generating favorable returns for investors.
Lucern Capital Partners’ integrated, value-add investment approach features geographical targeting as one of its main focuses. As we acquire assets along the U.S. East Coast, we evaluate the region’s geographical and demographic trends to ensure tenant demand aligns with our investment approach and goals for capital appreciation.
In addition to targeting high-growth MSAs, Lucern seeks regional geographies with the following characteristics:
- In close proximity to members of Lucern’s network of deep industry relationships
- Strong or steadily increasing employment rates and income
- An influx of large corporations that inject the population with more potential tenants
- Renters belonging to demographics that align with our multifamily and mixed-use assets’ typical tenant mix
- Stable, historic rent increases that predict the potential for cash yields after making property management improvements, strategic unit renovations and offering new services
Though the U.S. population is experiencing stagnant overall population growth, many smaller MSAs are benefitting from short- and long-term periods of high growth. The South and West are the clear winners when it comes to having ideal conditions for successful real estate investing based on demographic factors and their ability to offer the lifestyle desired by specific generational cohorts. But it’s important that investors also note high-growth and high-migration geographies beyond these regions and position their investment strategy accordingly. The pandemic’s impact on real estate demand is undeniable, but its long-term effect remains unknown and should be carefully considered when determining which geographies to invest.
At Lucern Capital Partners, we focus on delivering stable returns for our investors with high cash-yields and generous capital appreciation. This focus is backed by our unique, time-tested and geographically minded investment strategy. Lucern strategically invests in multifamily and mixed-use real estate assets throughout East Coast MSAs with a concentration on the North Carolina and South Carolina MSAs as well as the Philadelphia metro. In alignment with geographical and demographic trends, the firm’s assets are located in areas with high rates of population growth and inbound migration. But it’s leveraging Lucern’s large network of deep relationships in these geographies that positions the firm to source and execute on off-market deals that can generate strong, risk-adjusted returns for investors.
Reach out to a member of our Investor Relations team to learn more about Lucern Capital Partners’ investment approach.