Multifamily Real Estate In The Midwest: Considerations For Investors
This is turning out to be the year of Midwest multifamily real estate. Rent growth in parts of the Midwestern U.S. is outperforming the multifamily market on a national basis and in select Sunbelt cities.
More specifically, rent growth in markets such as Cincinnati, Milwaukee, Cleveland, Detroit and Kansas City are on track to outperform rent in markets including Atlanta, Austin, Dallas and Phoenix, according to a report my company ran via CoStar, a commercial and multifamily real estate information service. (This is generally speaking; there are, of course, specific properties in all of these markets that are over or underperforming the markets as a whole.
The data shows that asking rents in many Midwest markets are predicted to rise by a higher rate, year over year, than the national average and relative to a number of markets in other parts of the country that have been super-hot through the current real estate cycle.
The Midwest’s Appeal
This data might surprise some, but it doesn’t surprise us at my firm. We’re located in the Midwest. Nearly 70% of our holdings based on invested equity are in Midwest real estate, and about half are invested in multifamily.
Something that I’ve found makes the Midwest appealing is that many Midwestern markets are consistent. I’ve seen through my personal life growing up in Wisconsin and in my professional life investing in Milwaukee, Minneapolis and other Midwestern markets that this region tends to have stable demographics and balanced supply and demand. Some nice growth is happening in certain Midwestern cities as well.
But that doesn’t fully explain why 2024 is turning out to be a good year for Midwest multifamily real estate. So, what else is going on?
The main culprit, based on my firm’s analysis, is that some of the Sunbelt cities are seeing oversupply. Stated simply, many rental units have been built in the Sunbelt in the past few years, and it’s taking time for apartment inventory in these markets to be absorbed. Conversely, the Midwest did not see the same level of building, so supply and demand have been more balanced.
Another factor that may drive some migration to the Midwest, including demand for housing, over time is climate change. “As the planet gets hotter, the Midwestern multifamily market may continue heating up as well,” according to Bisnow (registration required). People in coastal markets and in the South might relocate to places less likely to experience hurricanes, earthquakes and extreme temperatures, including the Midwest.
What This Means For Investors
So, what does this mean for investors? For firms like mine, it reinforces the notion that the Midwest can offer valuable investment opportunities. But that doesn’t mean all of our eggs (investments) or yours should necessarily be in one basket. We see attractive opportunities that meet our investment criteria all over the U.S., so we make investments in other parts of the country, too, and not just in multifamily but also in other asset classes. Diversification across geographic areas and property types are two ways to minimize risk, and that approach is generally advisable to all investors.
You’ll also need to consider whether you want to handle the investment process yourself or work with professional real estate investors. If you opt for the latter, evaluate their track record of acquiring properties, managing them, generating cash flow and nurturing their appreciation.
Moreover, when exploring a potential investment, consider whether there are multiple opportunities to add value. In my firm’s case as a value investor, we focus on assets that offer at least two or three (or more) ways to add value. For example, we often buy properties that have the potential for unit upgrades and common area enhancements to maximize occupancy and achieve a renovation premium when we sell. Even a property experiencing distress may still have potential if you can identify ways to alleviate the pain. You’ll also want to consider if the property is in an area with high barriers to entry or where the supply-demand balance is tight or likely to tighten in the short or medium term.
Is the Midwest the only area where you could achieve success as a real estate investor? Of course not, but the geography and market may offer unique advantages. To me, it’s nice to see certain Midwest multifamily markets experiencing an especially good year in 2024.