A wave of new construction coming to the market in the Sun Belt has left multifamily owners nervous as pandemic-era migration stabilizes.

As Americans moved out of cities like New York and Chicago during the pandemic and headed for lower-cost, warm-weather alternatives, developers bet big, putting shovels in the ground from Florida to Arizona. But now, as that construction comes to completion, leasing has slowed and concessions have increased.

Publicly traded apartment owners largely reported positive second-quarter earnings, beating expectations and watching their stocks rise despite the broader market cratering over recession fears. However, oversupply in markets that many developers expanded to is now taking hold.

“For me, the key takeaway is that [we are] in the midst of clearly record levels of new supply coming into our market,” Memphis, Tennessee-based Mid-America Apartment Communities CEO Eric Bolton said during a call with investors last week. “And we feel like we're in the worst of the storm right now.”

In the second quarter, 119,400 units completed construction, bringing the year-to-date figure to a record 460,200 units — up 26% year-over-year, according to CBRE. A RealPage report estimates that as many as 670,000 apartments could be delivered by the end of this year, passing previous records by about 50%.

The cities getting the most of those apartments are Dallas, Phoenix and Austin, with more than 30,000 units each, according to RealPage.

Between 2021 and 2022, more than 16 million people moved across state lines, with a large percentage moving to the South and West. But by the end of 2023, population trends returned to prepandemic norms, according to census data.

During its earnings call, MAA executives said that new construction starts in their portfolio peaked in mid-2022, with most units being delivered now. Its funds from operations, a key metric of REIT cash flow, dropped to $2.06 per share from $2.39 during the same period last year.

Chicago-based apartment REIT Equity Residential pleasantly surprised investors, reporting a bigger-than-expected $177M profit in the second quarter.

However, in a conference call, Equity Residential executives acknowledged that in its expansion markets, “current rent levels are weak,” with recovery not expected until at least 2027, when deliveries slow.

In 2008, Equity Residential pulled out of Austin, putting its entire portfolio of about 3,000 units on the sales block. In 2012, the REIT exited Atlanta after it had been the city’s sixth-largest apartment owner, and in 2015 it sold 23,000 units, mainly in South Florida and Denver, to Starwood Capital Group for $5B.

But during the pandemic, it reversed course, once again expanding in those markets. In 2021, it announced a partnership with Toll Brothers to develop nearly $1.9B in new rental communities over the following three years in Atlanta, Denver, Boston, Seattle, Orange County, Austin and Dallas-Fort Worth. The same year, it quickly scooped up two Atlanta buildings for $115M and $122M, respectively. In early 2022, it spent $311M on two complexes in Denver.

Faced with recent competition, Equity Residential Chief Operating Officer Michael Manelis told investors that the firm is experiencing pressure, although it plans to continue growing. Those markets constitute just 6% of the REIT’s net operating income, executives said.

“It's a challenging operating environment for both new leases and retention given the amount of new supply,” Manelis said.

Colorado-based UDR, which has a Sun Belt portfolio representing 25% of its NOI, saw its FFO fall 5% year-over-year from 63 cents to 60 cents per share, just meeting its guidance. Its revenue grew primarily in the West, mid-Atlantic and Northeast regions.

“Our Sun Belt markets … continue to lag our coastal markets,” UDR Senior Vice President Michael Lacy said on a conference call. “Year-to-date performance was in line with our original expectations through the beginning of June, at which time we began to see some pricing deterioration due to elevated new supply and the concessions that came with it.”

Faced with the same issue, AvalonBay Communities executives said they are offering two or three months of concessions in their expansion markets like Austin and Charlotte. In Q3 2023, while operating as a net seller, the developer spent $277.2M to acquire more than a thousand units in Texas and North Carolina.

Still, despite incoming deliveries in the markets, multifamily executives remain bullish on expansion given recent tailwinds, and they are eager to find the next new hot market.

“Trying to find the next wave of cities that will prosper in a new economy, I think it's really what we're thinking about,” UDR CEO Tom Toomey said.