Although there is increased interest in Midwest multifamily investing, the pace of interest rate hikes has slowed activity. Still, optimism remains for 2024.

“Investors, who are seeing rent growth fall, are consequently shifting their money into Midwestern markets where they are still finding slow but steady growth.”

—Aarthi Swaminathan, MarketWatch

In a May 23, 2023 MarketWatch article by Aarthi Swaminathan, he notes several reasons why investors are looking at the Midwest. Among them are:

  • Investors are seeing profitability drop in the Sun Belt.
  • The number of apartments under construction in the Sun Belt is expected to exceed the number of tenants.
  • The oversupply is pushing rent growth down—and even negative—in some places in the South.
  • Real estate markets in Cleveland, Detroit, Milwaukee, and Richmond saw increased interest from investors.
  • The biggest jumps were found in Akron, Ohio, Grand Rapids, Michigan, and Peoria, Illinois.

The Midwest Market at End of Q2 2023

To get a boots-on-the-ground read on the Midwest apartment market from someone working it every day, I spoke with Greg Coulter, the founding/managing member of Income Property Organization (IPO), a privately held multifamily brokerage headquartered in Bloomfield Hills, Michigan.

During the past two-and-a-half decades, IPO has sold more than 1,500 multifamily properties throughout Michigan, Ohio, Indiana, Kentucky, and Illinois, reflecting more than $2.5 billion in transactional volume and earning Midwest Real Estate ’s “Best of the Best” Top Commercial Brokers for the past decade.

Question: What trends did you notice in the Midwest multifamily market for the first half of 2023?

Greg: The market has slowed to a snail’s pace in the first half. Our transaction volume is down 75% year-over-year.

Question: The last time we talked, you projected investment sales declining in the first half of 2023 and, if interest rates settled, sales picking up in the second half of 2023. Did this play out as expected, or has there been a twist to the story so far in 2023?

Greg: So far, yes, but the rebound may take longer than first anticipated.

Question: What are you forecasting for the second half of 2023 now?

Greg: Increased sales due to loan maturities and rates stabilizing. Not as significant of a rebound as we had first anticipated though.

Question: What behaviors are you noticing with sellers right now?

Greg: They are living in the past. While cap rates have risen 200-300 basis points over the past 12 months, sellers have only bumped cap rates 100 basis points in their minds. There is a gap between the bid and asking price.

Question: What behaviors are you noticing with buyers right now?

Greg: Buyers are negotiating harder with less non-refundable monies being put up.

Question: What behaviors are you noticing with lenders right now?

Greg: Many local and regional lenders are out of the market. Loan-to-values have shrunk, and spreads are much higher on the rates.

Question: How are interest rates affecting the market right now?

Greg: Interest rates have increased nearly 300 basis points since this time last year. It has had a significant impact on the commercial real estate slowdown.

Question: What are you seeing with the rent growth rate?

Greg: Rent growth has come to a halt with declines in some tertiary markets.

Despite increased interest in the Midwest multifamily market from investors, the historic pace of interest rate hikes by the Federal Reserve has had an effect on sales activity.

Midwest Q2 Market Summary

Some key takeaways from IPOS’s 2nd Quarter Report ( include:

  1. As the market adjusts to 10 consecutive federal funds rate increases, IPO saw sales volume down 75%.
  2. Transaction numbers have been so low that market participants are mostly in “price discovery mode.”
  3. Many market participants with loans maturing are now being forced to sell versus refinance as rates have had a drastic impact on cashflow and value.
  4. In addition, lenders are tightening credit, especially in the last 60 days.
  5. Further, the failure some banks have had with falling deposits and the resulting impact on bank reserves is affecting their ability to lend.
  6. One upside is the expectation the Fed will be forced to lower rates at the end of 2023 or the beginning of 2024.

So, even with increased interest in Midwest multifamily investing, it seems the pace of the Federal Reserve’s interest rate hikes have slowed activity. Despite this, there is optimism heading into the end of 2023 and the start of 2024, if the Fed cuts rates.

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