CHICAGO—The multifamily market has been incredibly robust across much of the US for years, including the Midwest. But there are significant differences between the coastal markets such as San Francisco and New York, where sky-high rents have driven sales prices into historic territory, and the slower, steadier markets of the Midwest.
GlobeSt.com sat down to talk about the current state and future prospects of the region’s multifamily market with Jay Madary, president and chief executive officer of JVM Realty Corp., an Oak Brook, IL-based owner and operator of class A and B garden-style and mid-rise apartment communities in secondary and tertiary markets in the greater Midwest. The company’s portfolio consists of communities in suburban Chicago; Cleveland; Indianapolis; Kansas City; and Tulsa, OK.
How would you describe the overall health of secondary and tertiary multifamily markets in the Midwest?
Madary: We’re continuing to see strong rent growth and high occupancy rates in areas like Cleveland, Kansas City and Indianapolis. These are very healthy, vibrant markets, and sometimes that’s forgotten. Annual rent growth in our portfolio of class A and B communities has consistently been three to five percent, with occupancy rates usually in excess of 95%.
Secondary and tertiary markets in the Midwest certainly don’t have the sky-high rents and jaw-dropping community sales prices you’ll find in core, coastal cities. But the apartment market in the region is still very strong.
It’s steady and reliable. We believe the Midwest is positioned for steady and consistent long-term rent growth, unlike some of the primary markets that could very well be approaching affordability ceilings.
In terms of multifamily investment sales, what are you seeing when it comes to cap rates and the types of investors who are active in these markets?
Madary: The multifamily investment landscape in the Midwest is a good deal different than the one you will find in primary, coastal markets.
Institutional investors, pension funds, international investors and the larger REITs dominate in cities like New York, Boston, Washington, DC, and San Francisco. In cities such as Kansas City and Indianapolis, private investors, including high-net-worth individuals, are the most active.
As for cap rates, we’ve seen them as low as 3.1% and 3.3% for higher-end properties in New York and San Francisco, respectively, according to JLL. Here in the Midwest, we’re seeing rates that are at least 200 bps higher than that for class A and class B communities.
When you consider that owner/operators and investors in the Midwest can obtain the same historically low financing as their larger market counterparts, you see how that paves the way for higher yields and immediate cash flow.
Much has been made about the popularity of intown apartment living in major urban areas. Is that a noticeable trend in cities like Cleveland, Kansas City and Indianapolis? How are suburban, garden-style properties performing in those areas?
Madary: We are certainly seeing demand for central business districts, which is being met in part with new supply.
In the suburbs, we’re seeing new supply come online. There is still a very healthy level of demand for these communities and a real balance between intown and the suburbs. Whether it’s people who work in those areas or renters by choice who simply prefer a suburban environment, renters still want to be in these communities.
Our company has been in this business for more than four decades, and we’ve seen trends come and go. In the end, the popularity of downtown apartments may fade, particularly as millennials get married and start families. That’s when they may decide to move to more suburban surroundings.
The multifamily sector has been on an incredible run the past half-decade or so. What are some challenges that you see on the horizon, both in the Midwest and across the nation?
Madary: Given that the demand for apartments has been so strong for so long, it’s natural to be on the lookout for overbuilding. But while there are a limited number of metro areas where that’s a concern, demand across the country, by and large, seems to be keeping pace with supply. That’s certainly the case here in the Midwest. That’s a testimony to the strength of demand and to the fact that developers learned some lessons during previous down cycles.
Obviously, you always have a close eye on the economy, but we feel good on that front as well, both from a Midwest and national perspective.
Looking forward, the sector in markets like San Francisco, New York and even Denver, where rents are very high, could face some real pressure to address affordability issues.
Crystal-ball time: How do you see the Midwest multifamily market performing over the remainder of this year and what do you expect for 2017?
Madary: I’m optimistic. Operating fundamentals are strong. Supply and demand are in alignment. The overall affordability of rents and the strong income levels in the region create ample runway for rent growth.
Consider this: the average rent in San Francisco, across all asset types, is about $3,900 a month, while in Kansas City the rate is just $1,000 a month, according to the internet listing service Rent Jungle. Now, think about the impact of a 5% increase in rent. In Kansas City, that would translate to just $50 a month, while in San Francisco, the same increase would amount to nearly $200 a month.
Those numbers provide a real sense of how rent growth may be more sustainable in the Midwest going forward, especially given the region’s large segment of “renters by choice” who have the ability and the willingness to pay more for a quality product.
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