Following the sun: Institutions diving into Sun Belt markets work to stay clear of potential risks

For many institutions, the “why” of investing in the Sun Belt is a pretty straightforward growth story. The bigger question is where to position strategic investments to generate the best risk-adjusted returns in a large geographic region that has become increasingly competitive.

Compelling growth sweeping through the Sun Belt is by no means a new trend. The 18 states that make up this region of the southern United States are now home to more than half the country’s population. Prior to the pandemic, the Sun Belt boasted some of the fastest-growing markets in the country, and COVID-19 propelled even more migration, corporate relocation and job growth in the region. According to JLL, markets such as Atlanta; Austin; Charlotte, N.C.; Dallas; Denver; Miami; Nashville; and Raleigh, N.C., have experienced population growth from 2010 to 2020 ranging between 10.0 percent and 30.0 percent, outpacing the U.S. average growth rate of 7.1 percent.

People are drawn to Sun Belt markets by good jobs, a lower cost of living and a better quality of life, including shorter commute times, great outdoor experiences and plenty of live-work-play amenities. Employers also like the business-friendly environment that exists in many Sun Belt states, with less regulation and lower costs. Population and job growth are strong incentives for institutions to break out of their typical investment focus on gateway markets and expand into secondary, and even tertiary markets, in southern states.

“Our strategy is not necessarily to say, ‘We want to invest in the Sun Belt.’ We’re looking at markets nationally and trying to target the ones we think have the best risk-adjusted returns. It just happens to be working out that many of those are in the Sun Belt,” says Richard Kleinman, co-chief investment officer for the Americas and head of U.S. research and strategy at LaSalle Investment Management.

“The Sun Belt has been at the top of our list for some time,” says Jonathan Needell, president and chief investment officer at Kairos Investment Management Co. That focus results, in part, from an algorithm the firm has developed to identify markets that are experiencing population growth at one to two times the national average, in context with other filters, such as property pricing. “We also like places where there is overlap with population growth and innovation markets, and the Sun Belt gets a lot of that attention,” he says. Some examples of micro markets where Kairos Investment is actively targeting investment opportunities for multifamily and highly amenitized office properties include Austin; Tempe, Ariz.; and in Atlanta near the Georgia Institute of Technology campus. The company also likes lower-tax states, and has good allocations to both Florida and Texas.