March 19, 2020
By Paul Bubny
Few regions of the U.S. have seen quite the uptick of investor interest that the Midwest has experienced. The Sunbelt markets can be counted on as a draw for investment; the Midwest, on the other hand, is news. Connect Media spoke with Tyler Hague, VP with Colliers International’s Chicago Multifamily Advisory Group, on the drivers behind this activity.
Q: We’re seeing coastal multifamily investors buying in the Midwest. Is this a recent phenomenon?
A: Yes, we have seen a meaningful uptick in investor interest in the greater Midwest since early 2019 after other Midwestern markets — like Nashville and Minneapolis — got too competitive and yields compressed. The main focus has been on the core secondary markets like Kansas City, St. Louis, Indianapolis and Columbus, but other secondary and tertiary markets, like Grand Rapids, Madison, Des Moines and South Bend, have also seen investor appetites grow.
Q: What opportunities are they finding in Chicago and other Midwestern markets that either aren’t available or are harder to come by in coastal markets?
A: Great yields, less competition, and steady rent and income growth. Investors can realize 75-150 basis point premiums in the greater Midwest for similar product on the coasts, and many secondary Midwestern markets are becoming burgeoning tech and life science hubs. This means an uptick in employment growth and high incomes with skilled labor seeking apartment housing. The demographic and market fundamentals are sound in almost every large secondary market in the Midwest.
The story in Chicago is completely different than the other Midwest markets we are operating in. Extreme investor uncertainty has caused a lot of investor heartburn in the Chicago market and the current assessor has made many investors fearful over real estate tax assessments. The institutional investment market has taken an effective pause, and this is a shame as Chicago has so much to offer and is an exceptional place to live and invest, with a growing affluence in the downtown area. Political and fiscal headwinds are the problem, but there is a strong argument for those willing to take the contrarian view that Chicago real estate is undervalued.
Q: How does the profile of investors coming in from the coasts compare with that of more locally-based buyers?
A: They typically have a lower cost of capital, are savvy negotiators and are more institutional in nature. They are also less shy about using hard nonrefundable money as a technique to win a deal. Most of these investors are used to shrewd and crafty competition in hot coastal markets and therefore have brought this type of negotiation style to the table in the Midwest.
Q: Has the influx of coastal investors had an effect on pricing?
A: It has definitely pushed pricing upward and has also pushed cap rates and yields down in many Midwestern markets. More aggressive deal terms are an additional result, but generally speaking you still get much better ‘bang for your buck’ in the Midwest when compared to any coastal market.
Q: What patterns are you seeing in investment strategies among these buyers? Are they looking for particular opportunities (e.g., workforce, value-add) or buying across the spectrum?
A: The appetite has been very strong for true value-add assets, as well as core plus properties with demonstrable growth opportunities. That is, Class A or B+ properties in good locations that can benefit from a slight or modest value-add or management efficiency play.
We sold multiple trophy assets and value-add assets throughout the Midwest in 2019, and by far the greatest competitive marketing success we have had was through selling more traditional 1970s-1990s value-add multifamily properties. In fact, we are about to set a record for the highest price ever achieved for an apartment property in the state of Indiana and that was a 996-unit value-add property built in 1985.
Q: Outside the Chicago region, where are the “hot spots” for investors buying in the Midwest?
A: As previously mentioned, and arguably not even part of the “Midwest,”’ Nashville and Minneapolis remain red hot, with Minneapolis being the top investment choice for most investors we encounter. Otherwise, Columbus, Indianapolis, St. Louis, Kansas City, Grand Rapids, Des Moines, Madison and Milwaukee would be the hot spots on my list.
The St. Louis apartment market, for instance, is just beginning to mature and is bolstered by institutions such as Washington University and BJC Healthcare as well as the Cortex Innovation Community. Columbus boasts THE Ohio State University as well as a cosmopolitan downtown and one of Accenture’s 11 innovation Hubs. Indy has surprisingly been referred to as the Silicon Valley of the Midwest and has Salesforce’s largest presence outside of San Francisco, believe it or not. All of these markets boast access to high quality employees, as well as very high quality of life marks and low cost of living. It is no surprise to me that there is growth and yield to be found in the Midwest as many of these smaller secondary and tertiary markets will continue to thrive for years to come.
For comments, questions or concerns, please contact Paul Bubny