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December 11, 2023

Exploring Real Estate Trends and Opportunities Across Sun Belt Markets

The Sun Belt presents CRE leaders with unique challenges and growth opportunities. Find out more about trends emerging in some of the biggest markets in the American South.

Sun Belt Real Estate Trends 3

The American Sun Belt, or the Smile States, as they’re affectionately known, has been a warm weather destination for temporary stays and family vacations since the 1950s. However, in recent years, the population of the Sun Belt has become more permanent as Midwesterners move south to pursue careers in the region's budding tech industry and Baby Boomers seek warmer climates for their retired years. And this migration pattern doesn’t appear to show any signs of slowing down.

In the next decade, population projections indicate that the southern third of the United States will accelerate by another 19 million while Non-Sun Belt states are expected to only grow by 3 million. This creates a bevy of promise for those seeking work, warmer on-average temperatures, and lower costs of living than are available in cities along the East and West Coast.

Amid all of these opportunities and individuals seeking a fresh start, the Sun Belt also presents possibilities for business sectors like Commercial Real Estate. Here are some of the latest and the most promising trends making their way across major markets nestled in the Sun Belt such as Nashville, Phoenix, Houston, and Atlanta. 

Jump To A Section in This Article
4 Emerging Trends in Real Estate
Opportunities Flourish in Nashville
Phoenix’s Expanding Metro
Turnkey Demand in Atlanta Soars
Houston Retail Continues to Prosper
Supporting Deal Momentum With AI

Four Emerging Real Estate Trends in the Sun Belt

Whenever a year draws to a close, it’s normal to make predictions for the year ahead. For many major industries, this is often easier said than done, and for CRE in particular, the unpredictability of the past 18 months has caused many industry experts to be hesitant when coming down hard on any one prediction for the year ahead. One thing is for sure, however, and that is the areas of progress we're seeing in cities like Atlanta and Nashville that almost run counter to the national CRE market.  

The office renaissance.

It is no secret that the occupancy woes in CRE largely stem from the office sector. But, experts are starting to understand the “winning combo” for filling office spaces and it has everything to do with location and luxury amenities. According to a report by PwC, office sectors located in “smaller, growing cities” are thriving beyond pre-pandemic levels. Considering that eight out of the top ten real estate markets are located in the Sun Belt, it’s not out of the realm of possibility that the office sectors with rebounding occupancy are located in cities dispersed across the south.

Additionally, the newest buildings with luxury amenities have disproportionately captured the attention of investors and lenders. But this interest runs counter to the employment strategies of most business owners which include supporting and hiring remote talent and breaking their office leases. It is hard to know exactly where this push and pull will lead the office sector in the coming years, but as it stands, office remains a complex sector.

Mixed-use demand.

Even in booming markets like Phoenix and Dallas/Fort Worth, net absorption has remained negative, indicating that tenant demand remains low. This, in addition to credit availability, has caused development projects to slow around the Sun Belt. This includes both retail and office development even though the demand for retail product has remained higher than the demand for office. This trend could give way to a higher number of mixed-use projects getting the green light over the coming quarters which is a trend we are already starting to see in metros like Chicago.

Sustainability.

Property owners are facing greater pressure to adhere to environmental mandates and may even be subject to regulations themselves, in some cases. This increased focus on sustainability ultimately could lead to higher insurance premiums. While insurance costs are typically covered by the tenant, property owners are increasingly weary of rent steps that might threaten building occupancy.

Additionally, the increase in extreme weather events occurring in the south and California threatens to saddle property owners with additional and sudden costs for repairs or preventative work. To secure the best rates for their tenants, avoid financial penalties, and safeguard against the elements, CRE property owners will need to watch regulations happening around ESG. 

AI.

PwC recently interviewed CRE leaders to gauge their understanding of emerging tech trends like AI. To their surprise, many CRE leaders were aware of AI but demonstrated a fundamental lack of understanding and hesitancy due to AI misinformation.

While many CRE teams already employ AI for some aspects of their day-to-day responsibilities, tech leaders have privacy concerns about AI models that handle large data sets. However, these larger AI systems hold the most potential for achieving holistic portfolio data accuracy and governance, like the data capabilities offered in Prophia’s advanced AI. This innovation could also be key to generating new demand around office as investors look to work with CRE owners and operators who demonstrate being on the cutting edge when the market underperforms.

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Submarkets Flourish in Nashville

Each major market in the Smile States offers CRE leaders unique opportunities. In Nashville, despite strong economic headwinds at the national level, the Music City is booming. Last quarter, several successful deal executions helped diversify the city’s opportunities and create thousands of jobs.

Southwest announced a new crew base at Nashville’s International Airport and the creation of four additional gates by the end of Q4. This deal with Southwest is estimated to create thousands of jobs and assist in the continuous growth of middle Tennessee, which is quickly becoming a corporate hub.

In addition to this expansion opportunity happening at BNA, Nashville closed Q3 with 450,000 sq ft of new leasing activity which was a 23% increase QoQ. As the ink dried on successful deals with Deloitte, Sirius XM, and the co-working firm E-Space, Nashville’s CBD and Midtown continue to garner interest from CRE leaders eager to go where deal momentum is going against the national grain.

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The Phoenix Metro Continues to Grow

Phoenix is one of the fastest-growing metros in the country and despite negative net absorption this past quarter, many submarkets steadily grew in prosperity and size. This past quarter, the number of households in the Phoenix Metro grew by 2%. This is one of the highest rates in the country and it puts into perspective the economic progress occurring in submarkets around the city.

Scottsdale Airpark and Central Scottsdale recorded the highest levels of leasing activity in Q3 and tenant demand in the suburban markets surged. Amidst this leasing activity in the submarkets, many owners are choosing to ground lease their properties as opposed to Build-to-Suit. This is helping to keep Phoenix’s construction pipeline healthy with over 496k sf of retail projects scheduled over the coming year.    

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Demand for Turnkey Office Space Persists in Atlanta

Despite cooling national interest in office product, industry-leading corporations continue to flock to Atlanta’s trendiest neighborhoods, like Midtown, in search of flexible lease agreements and modern, turnkey suites. Many office owners in Atlanta are responding to the interest by building out office spaces with luxury amenities and ready-to-use spaces that are conducive to hybrid work styles. But Midtown isn’t the only Atlanta neighborhood with expansion opportunities.

As of Q3, Buckhead has secured a large leasing opportunity with the development of a 120,000 sf premiere office space leasing at $55 per square foot (psf). Developments like the Garden Hills Office Building in Buckhead and Interlock Office Phase II in Midtown are continuing to transform the city into a pseudo-Silicon Valley nestled along the Sun Belt.

Whether signing new leases or managing in-place tenants, data accuracy is key to maximizing every opportunity. Without data accuracy or an up-to-date account of your portfolio’s business activity and cash flow, key stakeholders can not effectively take action on a new deal or manage deals in motion. Prophia is an industry-leading AI platform that transforms data quality and governance so essential teams have the support they need to negotiate renewals or pursue new opportunities.  

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Houston Carries Midsize Markets

In a market with growth opportunities like Atlanta or Phoenix, accurate and up-to-date portfolio data at every stakeholder’s fingertips is a baseline necessity. This goes double in smaller markets like Houston which are experiencing vacancy challenges that are more in stride with the rest of the country.

While interest continues to go down for office product in Houston’s metro, retail has largely picked up the slack in terms of driving leasing activity over the past couple of quarters. In Q1 2023, 10 out of 13 submarkets experienced positive net absorption thanks to opportunities in retail. Additionally, new leasing activity totaled 1.8M square feet which is a booming rate when compared to other major markets in the middle of the country.

Property owners and CRE leaders in markets of any size can benefit from a transparent view of their leasing activities and portfolio performance. Prophia offers retail owners particular governance and insight into leasing terms such as encumbrances, critical dates, and tenant rights to give leasing teams, asset managers, and property managers the munition they need to negotiate better terms with in-place tenants or effectively market to prospective buyers. Additionally, teams that effectively manage their baseline data are better prepared to support expansion projects in every property category from office to retail.

Support Deal Momentum in Any Market With Prophia's Advanced AI

Whether your team is located in the Sun Belt or another part of the country, deal execution requires access to accurate portfolio data at any given moment. However, the ability to do this impactfully requires centralized and standardized baseline portfolio data; a luxury many teams do not have today.

For decades, CRE teams have carried out data quality mitigation manually, leading to all-hands-on-deck reporting activities, and an inordinate amount of time spent on data aggregation, not ROI strategies. However, in 2018 Prophia set out to change this standard and the way CRE teams relate to and utilize their data.

After five years of collecting proprietary documentation from leading firms, Prophia has built a comprehensive AI model that recognizes and standardizes the complex terms found in CRE lease documents. With data visualization options, like the dynamic stacking plan, and advanced reporting, Prophia offers every portfolio stakeholder a comprehensive view of the performance metrics they need to have an impact on ROI. Whether Prophia is used to uncover data gaps throughout a due diligence process or manage a renewal with a longstanding tenant, Prophia gives shape to the key components of an effective strategy so your team can maneuver challenges in any market.

If you would like to harness the power of next-generation AI and overcome some of today's most daunting market challenges, contact the Prophia team to learn about platform adoption for CRE.

Hannah Overhiser

Hannah is Prophia's Content Marketing Manager and a seasoned B2B and B2C marketer. Her career began in eCommerce consulting with a focus on code testing. This technical expertise transferred seamlessly to SEO and she started working agency-side as an SEO and Content Strategist. Today, her home is Prophia, and she puts...

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