The Most Underrated Midwestern Multifamily Market of 2023
In examining nine major metros, one state's capital city stands apart as a place for great investment opportunities.
We know that the multifamily sector is facing some pressure this year across the country. While there’s a record amount of units set to deliver in the face of cooling demand, some markets are better positioned than others.
Today, we’ll examine dynamics across the Midwest. While often seen as a less dynamic region for multifamily investments, they have typically been stable performers. Sure, gains have not been as outsized compared to other high-growth regions like the Sun Belt, but as demand stagnates, there are several hidden gems in the area.
This article will explore the region and highlight what is, in our opinion, the most underrated, overlooked market in the Midwest. To make our determination, we reviewed data from Marcus & Millichap’s latest metro reports, combined with insights from the Census on demographic trends and economic data from the Bureau of Labor Statistics.
The Midwestern Markets
For this report, we examined the following markets: Chicago, Cincinnati, Cleveland, Detroit, Indianapolis, Kansas City, Milwaukee, Minneapolis-St. Paul, and St. Louis.
Market | Rent Growth (Projected, 2023) | Cap Rates (H2 2022) | Fastest-Growing Job Sector | Vacancy Change (Projected, 2023) | Deliveries (Projected, 2023) |
|---|---|---|---|---|---|
Chicago | 4.8% | 4.25% to 5.5% | Leisure & Hospitality | Up 80 bps | 8,000 |
Cincinnati | 3.5% | 4.75% to 6.25% | Leisure & Hospitality | Up 160 bps | 4,000 |
Cleveland | 1.7% | Not available | Mining Logging & Construction | Up 100 bps | 1,200 |
Detroit | 2.0% | 5% to 6.5% | Leisure & Hospitality | Up 40 bps | 1,800 |
Indianapolis | 4.1% | 4.5% to 5.25% | Construction | Up 90 bps | 3,600 |
Kansas City | 2.8% | 4.75% to 5.75% | Leisure & Hospitality | Up 80 bps | 4,800 |
Milwaukee | 4.1% | 5% to 5.75% | Construction | Up 100 bps | 2,500 |
Minneapolis-St. Paul | 5.4% | 5% to 5.5% | Leisure & Hospitality | Up 80 bps | 8,000 |
St. Louis | 2.4% | 4.75% to 6.25% | Leisure & Hospitality | Up 80 bps | 2,700 |
The Most Underrated Multifamily Market: Indianapolis
Amid these nine Midwestern markets, Indianapolis stands out as the most underrated multifamily market with the most potential for investors in 2023. Its booming primary industries and strong rent growth, despite significant uptick in units projected for delivery, position it as a hidden gem.
Strong Rent Growth
Year-over-year rent growth is a crucial metric when evaluating a multifamily market's potential. According to projections, Indianapolis is slated to have growth this year of 4.1%, outpacing Cleveland (1.7%), Detroit (2.0%), Kansas City (2.8%), and St. Louis (2.4%). This robust growth signifies a strong demand for rental properties in the area.
Booming Primary Industries
Economic development is, of course, a key driver for rental markets. In Indianapolis, the top three primary industries experiencing growth are construction, other services, and professional and business services.
While construction and the varied “other services” sectors are relatively high growth in some, if not most, of the markets on our list, no other market is benefiting as much from professional and business services employment growth. These typically office-using jobs can be jet fuel for renter demand, particularly within upscale Class A properties.
Significant Uptick in Units Projected for Delivery
The number of units projected for delivery in a market is often a reliable indicator of future growth potential. In 2023, Indianapolis is expected to deliver 3,600 units, more than double the 2022 total and the highest in at least a decade. This surge in development suggests confidence in the market's future performance.
Attractive Cap Rates
Indianapolis offers attractive cap rates ranging from 4.5% to 5.25%, according to CBRE’s cap rate survey from the second half of 2022. While not the highest among the nine Midwestern markets reviewed, these rates are competitive and provide a solid return on investment for multifamily investors.
Demographics and Vacancy Changes
Understanding the local demographics and vacancy changes is essential when evaluating a multifamily market. Indianapolis had a relatively young median age of 36.6 and a median income of $63,545, according to census data from 2020. These factors, combined with a moderate projected vacancy increase of 90 basis points, indicate a stable rental market.
Market Comparisons
While Minneapolis-St. Paul has the highest expected year-over-year rent growth (5.4%) and Milwaukee matches Indianapolis with 4.1% rent growth, Indianapolis outshines both markets in other key aspects.
The Twin Cities market is projected to have 8,000 units delivered in 2023, which is lower than any of the past four years. While this reduction in new units may normally indicate potential underlying market troubles, it comes as something of a blessing due to the overwhelming amount of deliveries across other markets.
Milwaukee's cap rates (5% to 5.75%) are higher than Indianapolis', but the city's fastest-growing employment sectors — construction, government, and other services — may not be as conducive to multifamily market growth. Additionally, Milwaukee's projected vacancy increase of 100 basis points is higher than Indianapolis', suggesting a potentially more volatile market.
Conclusion
In conclusion, Indianapolis emerges as the most underrated multifamily market for investors in 2023. The city boasts strong rent growth projections and a thriving construction industry, which reflects a dynamic local economy. Moreover, it offers attractive cap rates, providing a desirable balance between risk and return for investors. As the market continues to grow, financing opportunities may become increasingly available for investors looking to capitalize on this underrated Midwestern gem.
It is important to note that there are many strong markets in the Midwest, and while Indianapolis stands out as the most underrated, other cities also have great potential for multifamily investment. Markets such as the Twin Cities, Chicago, and Milwaukee all show promising rent growth and robust employment sectors, making them viable alternatives for investors seeking opportunities in the region.
Although the increase in multifamily deliveries raises concerns of potential overbuilding, astute investors can still identify opportunities by closely monitoring market trends and assessing the long-term demand for rental properties.
With the right financing strategies and a keen eye for hidden potential, investors can unlock the value in underrated markets like Indianapolis and others throughout the Midwest.