January 31, 2020
By Paul Bubny
Among Midwestern metro areas, only Minneapolis/St. Paul figures in the top 10 of Marcus & Millichap’s National Multifamily Index (NMI), where the upper reaches of the index are dominated by Sunbelt and tech markets. The Twin Cities managed seventh place this year, after topping the index in 2019.
However, the lower-ranked markets in the index—Columbus at No. 26, followed farther down by Indianapolis, Detroit, Chicago, Milwaukee, Cincinnati, Cleveland, Kansas City and St. Louis—each make arguments in favor of investment in apartment product there.
Here’s a thumbnail sketch of each of these 10 Midwestern cities from the standpoint of investment appeal:
• Minneapolis/St. Paul: “For most of the past decade, Minneapolis-St. Paul has maintained one of the tightest vacancy rates among major U.S. metros. This trend will continue into 2020,” even as a surge in construction and slowing job growth will nudge the vacancy rate higher and slow rent gains.
• Columbus: “Inflow of supply will minimally expand vacancy downtown; however, demand for housing near these amenities will continue to trigger stable rent gains this year.” Columbus slipped three places to No. 26 in this year’s NMI.
• Indianapolis: Indiana’s largest city, which has become an industrial powerhouse, is also moving up in the NMI. “Vacancy has contracted every year since 2013, boosting the metro’s investment appeal. The majority of sales are within the densely populated neighborhoods north of the core, in the corridor between Interstate 65 and I-70.”
• Detroit: Renter demand is expected to continue outpacing supply across the metro area, says Marcus & Millichap. “The metro’s robust rental demand will produce the strongest rent gain since 2012, gathering interest from a wider range of buyers. Throughout the region, steady cash flows provide little incentive for owners to divest, creating competition for the limited supply of assets that are listed.”
• Chicago: “Employment growth is focused in downtown Chicago, particularly among tech firms, providing a boost to apartment demand here as vacancy has pushed down 180 basis points since 2017.” The influx of new jobs is encouraging developers to add new product. However, the main focus for apartment investors at present isn’t downtown but on the city’s North Side, in the area around the forthcoming Lincoln Yards mega-project.
• Milwaukee: Here, the focal point is Class B and C housing, favored by younger renters as they launch their careers. “Tight market conditions for suburban garden-style rentals will deliver sizable rent growth, appealing to a wide range of investors.”
• Cincinnati: Sales velocity west of the city will continue to be strong in 2020, as Class C buildings spanning from Lower Price Hill up to Westwood are trading more frequently than in other areas. In West End, buyers are seeking assets near Cincinnati’s $250-million professional soccer stadium currently underway.” The metro area is ranked No. 39, up one notch from 2019.
• Cleveland: Residents continue to flock around the Great Lakes Shoreway, says Marcus & Millichap, “as the area rehabilitates with venues for experiential arts, entertainment and culinary hot spots. As residential demand strengthens here, several buyers are targeting updated assets predating the mid-1900s.”
• Kansas City: “Following a five-year-long streak of robust rental absorption, Kansas City’s apartment sector enters 2020 on solid footing,” says Marcus & Millichap, adding that “Catalysts for job creation are lined up for this year.” However, slower job growth and expanded inventory took Kansas City down a notch in this year’s NMI.
• St. Louis: “Spanning the past two years, nearly 8,000 apartments were absorbed in the metro, lowering vacancy by more than 200 basis points,” says Marcus & Millichap. Tight vacancy in the metro area’s low- and mid-tier sectors “is fueling buyer competition in suburbs and neighborhoods adjacent to the core, where cap rates above 8% and sub-$50,000 per unit pricing is prevalent.”
For comments, questions or concerns, please contact Paul Bubny