The Sun Belt, sometimes condensed into “SunBelt”, is a region in the southern United States which stretches from Virginia to California and all across the border with Mexico. Named for the traditionally sunny weather, the Sun Belt is essentially the name for the bottom third of the US. When it comes to commercial real estate, this area has traditionally been thought of as less desirable with the exception of major metropolitan areas such as Los Angeles, Atlanta, Dallas-Fort Worth, etc. In more recent years, relatively underdeveloped areas in the Sun Belt have attracted massive interest from real estate investors looking to build, purchase, and/or lease office space.
There are numerous reasons why Sun Belt commercial real estate has been outperforming traditional powerhouses such as New York City and Boston. We will explore some of these reasons as well as why we expect this trend to continue moving forward.
Sun Belt Population’s Impact on Commercial Real Estate
To understand why office space in the Sun Belt is such a hot commodity, one must first look at population trends in the US. Here are some statistics on population in and out of the Sun Belt and how this has impacted commercial real estate investments:
- The Sun Belt now accounts for approximately 50 percent of the US population. This number is likely to rise to approximately 55 percent by the year 2030.
- The Sun Belt has experienced huge population growth, accounting for 75 percent of the total population expansion in the US.
- When it comes to the 10-year cumulative domestic migration by destination state (a measure of the states which are being moved to in the highest numbers), 8 of the top 9 are Sun Belt States. Texas, Florida, North Carolina, Arizona, South Carolina, Colorado, Georgia, and Tennessee account for these 8 states, with Washington state being the lone non-Sun Belt state.
- States with traditionally strong commercial real estate markets in the American Northeast such as New York, Massachusetts, Washington, D.C. and Pennsylvania are all experiencing a net loss when it comes to domestic migration.
Commercial Real Estate in the Sun Belt is Booming
Of course, greater populations are not the only reasons why Sun Belt states are experiencing such high demand for office space. Additional reasons for the Sun Belt commercial real estate boom include:
Lower costs: real estate investors know all too well that housing prices, real estate prices, labor costs, and other regional cost factors can make or break an investment. Many areas of the Sun Belt offer extremely friendly costs for investors in markets with lower costs of living.
Less governmental restrictions: many sun belt states, particularly those in the Southeast, have made it a policy to have more lax policies when it comes to businesses and real estate investments. Lower taxes and less strict regulations allow for cost savings and greater flexibility for office space investors.
Friendly climates: as a whole, the Sun Belt enjoys a milder, more building-friendly climate. This leads commercial real estate to come with lower insurance costs, upkeep costs, and general maintenance which comes from dealing with cold weather and dramatic temperature shifts. There are obvious exceptions to this rule such as regions who experience flooding, hurricanes, etc.
Local Economy and Office Space in the Sun Belt
Another key factor in the Sun Belt’s success story within the CRE realm is the recovery from recent economic difficulties. While many regions are still struggling to bounce back from the 2008 financial crisis, a huge chunk of the Sun Belt has found its footing in the energy industry, tech industry, and more.
This is reflected in the fact that over 200,000 new jobs have been created in the state of Texas in the last 10 years alone. Many of these jobs are centralized in cities cush as Houston, Dallas-Fort Worth, and San Antonio. Where these regions were traditionally reliant on industries which paid relatively low wages, those jobs have been replaced in large numbers by energy and tech jobs. The strength of this rising Sun Belt economy comes from skilled jobs which pay between $60-$100k per year.
The Sun Belt is also leading the pack in the high tech industry has grown more rapidly than in any other areas in the US. In fact, Sun Belt cities Austin, TX, Raleigh, NC, Houston, TX, and Nashville, TN are numbers 1-4 respectively when it comes to STEM and tech industry growth between 2001-2013. New York clocks in at 36th and Boston ranks 26th.
The Sun Belt looks to be the healthiest market for office space investment in the foreseeable future. Trends of job growth, population migration, and lenient governments appear to be here to stay. Some of the main questions yet to be answered include whether states like Massachusetts, New York, and Pennsylvania will change governmental regulations to stop the bleeding of population and economic losses, or whether the Sun Belt with continue to grow unchallenged. It also remains to be seen whether higher costs of living in newly burgeoning Sun Belt area will bring the pendulum swinging in the opposite direction.
For now, the future of commercial real estate in the Sun Belt looks as bright as ever.