Are Rust Belt Multifamily Markets Making a Comeback?
Although the region may often be associated with decay, several key markets are experiencing an economic revival, driving multi-housing sector growth.
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Since deindustrialization, America’s Rust Belt region has become synonymous with decay and stagnation. Cities across the Midwest and the Northeast, such as Detroit, Buffalo, Pittsburgh, and Baltimore, have become relative ghost towns as industrial plants closed down and jobs disappeared. However, thanks to efforts to revive and expand the Rust Belt’s employment base in recent years, the region has begun to experience improved economic fundamentals.
While population growth is far behind the increases recorded across the Sun Belt region, some Millennials looking for more affordable places to live continue to flock to the region. Beyond being more affordable, Rust Belt cities also have solid urban amenities, such as theaters, restaurants, and museums that will likely attract young people to the area, according to an article by Mortgage Professional America.
Pittsburgh’s Growing Tech Sector Fuels Healthy Multifamily Market
However, what has really boosted some of these cities is the inbound tech jobs created by Silicon Valley giants. Thanks to a vibrant academic environment driven by Carnegie Mellon University, Pittsburgh has seen an influx of firms seeking to capitalize on joint-research opportunities and a well-educated talent pool, a Marcus & Millichap report highlighted.
Last month, Google revealed plans to expand in Pittsburgh at its Bakery Square location, bringing the total footprint of its local offices to 320,000 square feet, Technical.ly reported. Google has been present in Pittsburgh for more than a decade, and it has helped accelerate the local tech and entrepreneurship economy.
The well-compensated professionals in the tech industry are also driving demand for Class A multifamily units. According to Marcus & Millichap, average effective rents in this segment grew by 11.2 percent in 2021, three times above the growth recorded in the Class C tier. Owing to the robust tech sector, the vacancy rate in the metro also dropped 280 basis points year-over-year in the first quarter of 2022, reaching 2.4%.
Detroit’s Economic Rebound Continues
Motor City has seen a solid restructuring of its economy and urban life over the past decade. The city declared bankruptcy in 2013 and exited it in December 2014, after Mayor Mike Duggan secured a series of deals and plans for improvements. The city’s economy today is mostly driven by jobs in the professional and business services sector, followed by trade, transportation, and utilities, and education and health services, according to the U.S. Bureau of Labor Statistics.
While population growth still lags behind national averages, the metro’s housing market is experiencing positive growth. Investor interest rebounded in 2021 in Detroit, with around $340 million in rental assets changing hands, up 30.7% from 2020, according to a Yardi Matrix report.
Construction activity also bounced back last year: Developers completed a total of 2,039 units in 2021, which accounted for 0.9%. At the beginning of the year, the metro had nearly 5,000 units underway and another 19,100 units in planning and permitting stages, with development activity clustered in the northern submarkets and near the urban core.
Related Questions
What are the benefits of investing in Rust Belt multifamily markets?
Investing in Rust Belt multifamily markets can provide a number of benefits. Detroit's economy has seen a solid restructuring over the past decade, with jobs in the professional and business services sector, trade, transportation, and utilities, and education and health services driving the city's economy. Investor interest in Detroit has rebounded in 2021, with around $340 million in rental assets changing hands, up 30.7% from 2020, according to a Yardi Matrix report. Construction activity also bounced back last year, with developers completing a total of 2,039 units in 2021.
Pittsburgh has seen an influx of firms seeking to capitalize on joint-research opportunities and a well-educated talent pool, according to a Marcus & Millichap report. Google has been present in Pittsburgh for more than a decade, and it has helped accelerate the local tech and entrepreneurship economy. The well-compensated professionals in the tech industry are also driving demand for Class A multifamily units, with average effective rents in this segment growing by 11.2 percent in 2021. Owing to the robust tech sector, the vacancy rate in the metro also dropped 280 basis points year-over-year in the first quarter of 2022, reaching 2.4%.
Investing in Rust Belt multifamily markets can provide investors with access to a well-educated talent pool, a growing tech sector, and a strong rental market. Additionally, investors can take advantage of mezzanine construction loans to finance their investments in these markets.
What are the risks associated with investing in Rust Belt multifamily markets?
Investing in Rust Belt multifamily markets comes with some risks, such as higher interest rates and decelerating rent rates. According to Freddie Mac®’s Multifamily Apartment Investment Market Index, finding attractive investment opportunities this year may be more difficult than it was in 2021, with the index decreasing 17.9% on an annual basis. Additionally, rent rates continued to decelerate in September, falling 150 basis points to a gain of 9.4% year-over-year, according to Yardi Matrix research. This comes after the average U.S. asking rent dropped $1 to $1,718 in August, and growth slowed by 170 basis points on an annual basis, falling to 10.9%.
What are the current trends in Rust Belt multifamily markets?
Rust Belt multifamily markets are experiencing positive growth, with investor interest rebounding in 2021. Construction activity also bounced back last year, with developers completing a total of 2,039 units in 2021. Pittsburgh has seen an influx of firms seeking to capitalize on joint-research opportunities and a well-educated talent pool, and Google has been present in Pittsburgh for more than a decade, helping to accelerate the local tech and entrepreneurship economy. The well-compensated professionals in the tech industry are driving demand for Class A multifamily units, with average effective rents in this segment growing by 11.2 percent in 2021. The vacancy rate in the metro also dropped 280 basis points year-over-year in the first quarter of 2022, reaching 2.4%.
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What are the best strategies for investing in Rust Belt multifamily markets?
Investing in Rust Belt multifamily markets can be a great way to capitalize on the potential of these markets. The key is to do your research and find the right properties and financing options. Here are some strategies to consider:
- Look for distressed properties. The Rust Belt has seen a lot of economic decline in recent years, leaving many properties in disrepair. Look for properties that are in need of repair and renovation, as these can be great investments. Be sure to factor in the cost of repairs when calculating your return on investment.
- Research local market trends. It's important to understand the local market trends in the Rust Belt. Look at population growth, job growth, and rental rates to get an idea of the potential of the market. You can also look at the local economy to see if there are any industries that are growing or declining.
- Find the right financing. Financing can be a challenge in the Rust Belt, as many lenders are hesitant to lend in these markets. Look for lenders that specialize in multifamily financing and have experience in the Rust Belt. You may also want to consider alternative financing options, such as private lenders or hard money lenders. Multifamily.loans can help you find the right financing for your investment.
What are the most important factors to consider when investing in Rust Belt multifamily markets?
When investing in Rust Belt multifamily markets, it is important to consider the market fundamentals, such as the vacancy rate, rental rates, and the overall economic outlook. It is also important to consider the potential risks associated with the investment, such as oversupply issues, and to research the local property management companies to ensure that the property is well-managed. Additionally, it is important to research the local market to identify any potential opportunities that may exist.
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What are the best financing options for investing in Rust Belt multifamily markets?
The best financing options for investing in Rust Belt multifamily markets depend on the investor's unique needs. Popular options include Fannie Mae, Freddie Mac, bank, CMBS, and life company loans. These loans can be tailored to the investor's short- or long-term financial strategy. For more information, investors should contact a commercial real estate financing advisor.