With few exceptions, Midwest markets have navigated pandemic-induced difficulties better than initially expected. Cushman & Wakefield Vice Chairs Hannah Ott and George Tikijian are confident about the multifamily industry’s strengths in the region. “Most Midwest markets don’t need to recover. Overall, they’ve had growth in occupancy and rental rates,” Ott told Multi-Housing News. Therefore, investors view them as a viable alternative to high-priced gateway markets.
In the interview below, Ott and Tikijian reveal the reasons behind Midwest markets’ appeal and discuss their strong suits and vulnerable spots.
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How do you see the Midwest multifamily market now, almost a year into the pandemic?
Ott: With the exception of Chicago, Midwest multifamily markets have held up remarkably well. Chicago’s issues stem from the property-tax situation there and a host of other issues—it’s not just the pandemic.
How have multifamily investors across the Midwest reacted to the health crisis?
Tikijian: There’s tremendous buyer demand and opportunity. Investors who previously focused on coastal markets, especially New York and New Jersey, shifted focus to more stable locales, and that’s benefited markets such as Indianapolis; Cincinnati; Louisville, Ky.; Kansas City, Mo.; Columbus, Ohio, and Nashville, Tenn.
As interest rates declined, the superior yields that properties in these cities provide further propelled Midwest multifamily. Cap rates declined in 2020 and they’ll continue to go down slightly in 2021. As investors grow uncomfortable with the prices in major gateway markets, the Midwest will be viewed as an attractive alternative. Here’s an example of how the market currently operates: We recently marketed a 1990s-era property in the Indianapolis area. We did 40 tours and had 20 solid offers.
Although the pandemic has undeniably impacted the metro’s economy, Kansas City’s multifamily fundamentals have endured. Please tell us about how this particular market has performed in the past 12 months.
Tikijian: Kansas City fared pretty well over the past year, with 2 percent rent growth and overall strong occupancy, though vacancy did increase 10 basis points. That was largely driven by a high level of deliveries in the River-Crown Plaza and Southern Johnson County submarkets—the region’s two strongest markets that accounted for 73.6 percent of new deliveries and also have the highest effective rents. A correlation between new deliveries and an increase in vacancy rates should be expected in the short term, especially amid conditions that are hardly conducive to people moving and relocating.
While River-Crown-Plaza and Southern Johnson County are the backbone of Kansas City multifamily, the momentum of the Western 435 submarket is notable. The submarket saw rents increase by 3.6 percent in 2020, which correlated with a drop of 90 basis points in vacancy. Strong demand and high rents have laid the foundation for further development, and Western 435 finished the year with the second-highest number of units under construction of any submarket.
Another metro that has so far withstood the economic volatility is Indianapolis. What are the strengths of this market?
Ott: Indianapolis has a number of things going for it. No. 1: The state of Indiana has been very well-run fiscally. Even with a decline in tax revenue, we still have state budget surpluses. That helps drive demand for commercial property in Indiana. Indianapolis also has a diverse employment base with significant life sciences and logistics clusters—two areas of the economy that have performed extremely well.
If you just looked at investment sales volume, rent growth, cap rates and other factors, you wouldn’t know there’s been a pandemic in Indianapolis—with one exception being some softness in the central business district, which had record new development leading into the crisis.
Which Ohio markets do you consider to be most competitive and why?
Tikijian: Columbus and Cincinnati continue to be the two most attractive Ohio markets. Cincinnati offers a steady economy and job growth, driven by the eight Fortune 500 companies based in the city. What’s more, cap rates are approximately 100 basis points higher than peer cities, which attracts out-of-town buyers. Unfortunately for those potential buyers, Cincinnati is a low-volume transaction market, which makes it difficult for investors to find deals.
Columbus is an increasingly desirable market for both private and institutional buyers. The Ohio State University’s growth plays an important role in the multifamily market, of course, but Ohio’s capital also has a strong, growing private sector employment base to complement the public sector base. Columbus, too, was among national leaders in 2020 growth, with rents increasing 3.2 percent on top of record absorption of 5,300 multifamily units.
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Which Midwest markets do you expect to bounce back first?
Ott: Most Midwest markets don’t need to recover. Overall, they’ve had growth in occupancy and rental rates. Chicago is an exception, of course, and there is some softness in CBDs. Downtown markets will start to recover as soon as vaccines are widely distributed, which will benefit multifamily, and, even more so, restaurants and retail.
How do you expect the region’s multifamily market to perform this year?
Ott: Most buyers and participants expect another year of strong performance, though many buyers are underwriting with expectations of slower rent growth. A number of potential transactions were sidelined in 2020, especially in the second quarter. That’s one reason we expect more transactions in 2021, even though 2020 had considerable volume.
Tikijian: Rising interest rates are a possible speed bump, but they could just as well make certain sellers more anxious to get deals done.