The Midwest is attracting record capital. Here's why it happens

Jeff Lamott of Northmark on the region's strengths and what to expect.
The US multifamily market has seen record rent growth so far this year, backed by correspondingly high demand. The currently fluctuating state of the economy - with rising inflation and escalating interest rates - will likely begin to take its toll on the rapid expansion of the sector soon.
But the Midwest multifamily market presents some clear advantages compared to other regions of the US. The lack of excess supply has kept vacancy rates stable in all major Midwestern cities, according to a recent Northmark report. And despite the slow start in 2022, experts expect an acceleration of construction starts in the second half of the year.
Jeff Lamott, CEO of Northmark, explains what's driving the performance of the Midwest multifamily market and shares his predictions for the rest of the year.
How did the Midwest multifamily market fare in the first half of 2022?
Lamott: New shipments got off to a slow start in the first half of the year in the Midwest due to lingering supply chain challenges and a shortage of skilled trades to complete projects. Year-over-year rent growth reached about 12% in the Midwest, with an average growth of 2.5% in the first quarter.
Selling prices on a per-unit basis have reached all-time highs as interest rates continue to be low, fueled by high capital competing for investments in the Midwest. Strong competition from private equity and national syndicators looking to deploy capital in the Midwest was hot because of pricing from offshore and gate markets.
What are the hottest markets for multifamily development in the region today and why?
Lamott: The Midwest has not been subject to overbuilding in recent years, which has kept vacancy rates stable. While early 2022 got off to a slow start, Kansas City, Missouri; Indianapolis; Saint Louis; Cincinnati, Ohio and Chicago are some of the top markets for new shipments.
Many developers still find acquiring land in the Midwest easier than in gateway markets, where the permitting process for vertical construction is more advanced.

How have the vacancy rates changed until 2022? Which of the region's metropolitan areas had the highest and lowest vacancies in mid-2022?
Lamott: Average vacancy rates are down around 70 basis points year-over-year, hovering around 4.8 percent across the Midwest region in mid-2022.
In recent quarters, the renewal of hiring led to the release of pent-up demand that led to worsening vacancy conditions and rapid increases in rental rates. A return to more normalized asset performance was seen across all mid-markets in 2022.
Vacancies in Chicago and Kansas City averaged around 5 percent, with an increase in some urban development adding more units to absorb. Milwaukee; Omaha, Nebraska; Cincinnati; Indianapolis and St. Louis were within 4 percent of vacancies, with less fresh supply coming online in early 2022.
How is the Midwest performing in terms of rent growth?
Lamott: Rents in the Midwest have been on the rise in recent quarters. Rent growth in the first quarter averaged 2.5%, although a handful of markets posted increases ranging from 3% to nearly 4.5%. Year over year, rent growth averaged 12.9 percent across the Midwest.
Where are the hottest areas for multifamily investment in the Midwest?
Lamott: Multifamily investment activity has been mixed across the Midwest region to this point in 2022. Several markets have posted declines from near-record levels reached late last year. Still, transaction activity at the beginning of 2022 is ahead of the pace recorded in each of the past years across the region.
Most Midwestern markets saw significant unit price increases in 2021, averaging $139,000. Kansas City saw prices jump at the start of the year with median sales rising to $250,000 per unit, up from about $107,000 per unit in 2021. Indianapolis, Chicago and St. Louis all posted price increases of about 10 percent.
Is now the right time for investors to purchase in the area?
Lamott: With the Federal Reserve signaling continued interest rate hikes, it's still a great time to secure long-term funding on a comfortable Midwest basis.
While we may not see the continued accelerated appreciation of the record compared to a year driven by unsustainable double-digit rent growth, Midwest markets offer investors consistent appreciation, a comfortable cost of living for renters and steady job growth.
Where are cap rates in the Midwest compared to previous years and what changes do you foresee in the coming months?
Lamott: Cap rates have been squeezed across the region in early 2022, with nearly every major Midwest market posting averages near 4.5%. Just a few years ago, tariff rates in these markets were closer to 5% and 6%.
While interest rates have risen recently, tariff rates still remain in a tight range. With interest rates expected to rise, many investors are now turning to low-leverage agency loans to lock in long-term financing. Investors are open to receiving lower initial returns in the first year, while expecting to capture their returns later in the holding cycle, or on disposition.
What are your predictions for the market going forward this year?
Lamott: Nationally, we still have a shortage of new inventory, compared to the 12-14 months before the Great Recession. Low vacancies and continued demand are enabling further rent increases in much-needed development in undersupplied Midwest markets.
Tenant demand for apartment properties is expected to remain healthy throughout the rest of the year, but will likely lag 2021 levels. This forecast assumes that the labor market will remain tight and businesses will slow the rate of additions and not significantly reduce the number of employees.
The Midwest multifamily market continues to outperform the economy and a return to more normalized property performance is expected through the remainder of 2022. While there are many moving parts affecting multifamily markets across the country, the broad assumption is that conditions are very strong and should remain healthy through the second half of 2022 .

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