Multifamily Opportunity Beyond the Sun Belt

6 min read

Apartment market investors of all sizes are expanding their portfolios into the Midwest and Mountain markets.

Kennedy Wilson’s purchase in 2022 of San Miguel del Bosque in Albuquerque, N.M., expands its portfolio of garden style apartments in rapidly growing markets in the Mountain Region. Image courtesy of Kennedy Wilson

The apartment sector loves the Sun Belt, but there are also new multifamily opportunities to be found beyond today’s “it” market. The average U.S. asking rent rose just $10 in July, to $1,717, the lowest increase since January, according to Yardi Matrix data. Multifamily investors are looking for new places to park their money and discovering smaller markets in the Midwest and Mountain regions that are not as sexy—but they offer good returns.


READ ALSO: Inside Multifamily’s Migration Patterns


The Midwest multifamily outlook is bright according to Jeff Lamott, managing director investment sales, Northmarq. The Midwest does not have the peaks and valleys that many gateway markets have, and therefore it has always been a relatively safe place to deploy capital and achieve consistent returns. Even in troubled cities such as Chicago, multifamily developers will continue to bring new projects online with nearly 5,500 apartment units slated to be delivered in 2022.

“The Kansas City, Des Moines and Omaha triangle is a very strong hub for a lot of our clients,” said Lamott. “About 90 percent of the sales that we oversee—in the last 20 years I’ve been doing this—are from out of state. We’re also seeing equity and capital flow down from Canada.” Local developers who have owned land for several years still dominate the Class A new construction scene.

Lamott added there’s been a lot of good organic annual, double-digit rent growth on trade-outs over the last 20 or 24 months. Rent growths are starting to level off now with the cost of living spike and inflation. The region saw a decline in multifamily pricing this summer due to the shift in interest rates, and this impacted Class A deals first. Class B and C value-add garden style assets in well-located suburban submarkets have traditionally been the bread and butter in the Midwest for investing. “Year in and year out these are some of the top performers,” said Lamott.

Investors who are priced out of Kansas City can acquire value add opportunities in tertiary markets like Lawrence, KS—just 30 minutes outside Kansas City—for the long term or a five-to-seven year hold for consistent cash flow and slightly higher yields.

“We’re still in a kind of auction environment where we market properties for 30 to 45 days and have a call for offers when they give us real time feedback on what the pricing would be for them to make it work,” explained Lamott. “Then they can offer a bid. That’s the best way to get their foot in the door.”

Michigan’s Tertiary Markets

According to Northmarq, Midwest market fundamentals are positive. The region has not been subject to overbuilding during the past several years, which has kept vacancy rates stable. Image courtesy of Northmarq

McKinley is based in Ann Arbor, Mich., and has specialized in tertiary markets for decades and currently has 7,000 units in the metropolitan Ann Arbor region including about 60 percent of the area’s workforce housing. According to Albert M. Berriz, CEO, McKinley, “The old joke was, you’d fly from New York to LA, but you would never stop in Grand Rapids. Today, we see major funds that I never would have imagined would be in the same locations where we’re trying to buy.”

Berriz added, “It used to be you moved to Chicago for your first job, because that’s the big city. Now, post-COVID the choice is Ann Arbor or Grand Rapids for the young 30- to 35-year-old consumer who is our target market or the workforce housing resident who doesn’t have to show up to work downtown.”

According to Berriz, there are five interesting apartment markets where the supply demand imbalance is in favor of the investor/owner. Metropolitan Ann Arbor is home to the University of Michigan. Grand Rapids boasts a roster of Fortune 500 companies, while Holland and Traverse City both offer relaxed lifestyles with easy access to Lake Michigan. “No investor in their right mind 20 years ago would even mention Traverse city is an investment choice,” Berriz noted, who opines that Detroit is also acting like a tertiary market because only about 10 percent of the ground area is being actively redeveloped. 

Mountain Region Migration

Mountain Region cities Phoenix, Las Vegas, Salt Lake City and Denver are attracting new multifamily investment, according to John Sebree, national director, multi-housing division, Marcus & Millichap/IPA. Boise, Idaho, and Albuquerque, N.M., have been seeing increased interest as well. 

“What these cities have in common is that they did not lose nearly as many jobs going into the pandemic as the west coast cities,” said Sebree. They also rebounded more quickly. “Salt Lake City was the anomaly in the Mountain States. When you look at the numbers it’s as if they lost almost no jobs. And then they started immediately adding more new jobs which was very positive.”

One of the largest infrastructure projects underway is the $4.1 billion airport expansion. The first phase is operational, while the second is expected to open in 2024.

The Mountain Region’s lower cost of living continues to drive renter migration. According to Sebree, people realized they can live in a city that offers a live/work/play balance. Many have ended up staying even longer than they thought they were going to. 

“The fundamentals remain extremely solid in those mountain states,” added Sebree. “But interest rates are going up and some of the yields are admittedly compressed. Investors are having to sharpen their pencil and be willing to accept a lower initial return on their investment and be willing to hold.”

The triumph is that anybody who bought a property in 2018 or 2019 experienced substantial rent growth. They’re still well ahead of what their purchase price was, if they purchased in 2019 or 2020.

Acquiring Mountain Assets

888 Lofts is located in Lawrence, Kan. The 114-unit Class A offering was built in 2014. Northmarq is representing the seller First Management; the 1031 buyer is from out of state. Image courtesy of Northmarq

“We continue to be bullish on our outlook for the Mountain West,” said Senior Managing Director Shem Streeter, who leads acquisitions for Kennedy Wilson’s U.S. multifamily division.

Kennedy Wilson’s Mountain region multifamily portfolio is focused on institutional-quality, garden style apartments in rapidly growing markets. In 2022 they acquired three multifamily assets totaling 1,110 units in three separate off-market transactions for $418 million. The properties are located in Las Vegas, Scottsdale, Ariz., and Albuquerque, N.M. Kennedy Wilson’s growing multifamily presence in the Mountain West now totals approximately 13,800 multifamily units, including those under development.

Kennedy Wilson invested $255 million of total equity in the three communities, which are expected to generate approximately $15 million of initial annual net operating income. They will implement a $19 million value-add asset management plan, including renovating over 65 percent of the existing units, refreshing common areas and enhancing amenities to further grow NOI.

Identifying high-quality apartment assets with a long runway for growth is an attractive investment approach in this post-COVID climate. The Midwest and Mountain regions offer private and institutional investors many markets worth exploring.

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