Clear split between weak west and strong south

The latest economic and property market data support the view we’ve held since last year that there would be a growing differentiation between southern and western markets. We expect that to persist for the next few years thanks to the relatively high rents and costs of living in many western metros, which will persuade residents to seek out cheaper alternatives, predominantly in the South. That will mean rent growth is strongest in southern metros, with Dallas, Miami and Atlanta faring best over 2023-25. Conversely, Seattle and San Francisco are forecast to see a fall in rents over the same period. Investors are also starting to price in these factors and we think the largest rise in gross yields will be in the West, with Seattle, Portland, San Francisco, San Jose and LA the worst-affected. The upshot of all this is that capital values are set to fall by over 30% in 2023-24 in Seattle, and not far off that in San Francisco. Values will end the five-year period lower across the board, but the southern markets will be the relative winners. As a result, average total returns will be strongest in the southern markets, with Dallas and Austin reaching 5% p.a. and 4% p.a. respectively over 2023-27.