Multifamily markets across the Midwest rarely see the soaring monthly rents and surge in new construction activity that Sunbelt and coastal markets often do. And to the commercial real estate professionals working in this part of the country? That’s good news.
As they say, being the tortoise is better than being the hare: Slow and steady is a recipe for success, with Midwest multifamily assets still attracting a steady stream of renters and investor dollars, even with the uncertainties surrounding the U.S. economy.
We spoke with multifamily professionals across the Midwest about the state of the region’s apartment market. Their consensus? This year should see measured, but steady, rent growth, no big uptick in occupancy rates and an increase in investment sales activity.
In other words? A typical Midwest performance. And that’s just fine.
Here is some of what these multifamily specialists had to say.
Charles Krisfalusi
Senior Director | Real Estate Finance
Walker & Dunlop
Birmingham, Michigan
The multifamily sector has long been a top performer in the CRE industry. Can you go through some of the reasonswhy demand from renters remains so high for multifamily units?
Charles Krisfalusi: This sector has been resilient. If you think back to after 2008, that post-recession time, we were underwriting multifamily properties with 10% vacancies. That is a little tight for underwriting, but it is not dangerous. And ever since then, vacancies have been very low, very stable in multifamily.
The multifamily sector in Michigan has been a nice resilient market. Demand has remained high in Michigan for apartment units. That has kept the vacancies here low. We haven’t seen an oversupply of new units coming online in Michigan. That has helped to keep that demand high.
At the same time, people today are remining renters for longer. We are seeing more people who are renters by choice. Part of that is that multifamily properties have gotten higher-quality amenities as time has gone on. The properties are flashier. These properties provide the kind of lifestyle that a young professional might want, one that might not be achievable when these young professionals are looking at first-time single-family homes for the same price.
Yes, apartments are getting expensive. But they are still a less expensive alternative when compared to the all-in costs of homeownership. As mortgage interest rates have gone up, that has exacerbated that. Many people are holding onto their apartment units for a little bit longer because of the challenging economics of buying a single-family home.
What about affordable multifamily? Is it a struggle for renters to find that in the Detroit market and other Michigan communities?
Krisfalusi: I know that there has been a push for more workforce housing, properties that offer rents at 80% of the area median income. But a lot of our local building owners have naturally occurring workforce housing properties. These properties were built in the ‘60s, ‘70s and ‘80s. The rents for these older properties are affordable. But the occupancies are lower than in other, newer multifamily properties. So many people don’t want to live in older-style units with brown cabinets and Formica countertops. There is often a slower lease-up on those properties with rents at 80% AMI.
Are there any multifamily product types that are doing an especially good job of attracting tenants?
Krisfalusi: One of the products that is doing really well is the townhome with a garage. They don’t come with a ton of density. but they do offer another housing type that is attractive for people who want to remain renters for longer. These properties are very home-like. Townhomes with attached garages do exceptionally well. They get good rents and are built at a modest cost. That is a product that has gotten stronger the last two or three years.
Does the Detroit market, and the entire state of Michigan, need more multifamily housing to keep up with the demand, much like we’ve seen across the rest of the country?
Krisfalusi: There does need to be more housing. Michigan is still seeing a little bit of a yearly increase in apartment rents, about 2% to 3% a year. We have moved back to a more normal pace of rent growth. We are no longer seeing those crazy rental increases of 6% or 7% a year. But we can certainly use more multifamily units throughout the state.
It’s interesting when you look at what happened during COVID. The work-from-home movement created a bit of migration. Michigan held onto a lot of people, but we definitely did see some folks move to the Sunbelt. Those areas did get overbuilt with apartments. They are now seeing rent decreases. We are lucky that we have this slow-and-steady tortoise of a market. We have new development but it is only trickling in.
When economic times do get tough, we might see more people splitting rent and living together. Two-bedroom units might do a little better. People are looking to live with roommates to save on rent.
Our occupancy levels, though, are still solid. We can absorb new development without seeing that occupancy rate fall.
Do you expect to see an increase in new multifamily development in Detroit and its surrounding locations this year?
Krisfalusi : Detroit has had a good number of new developments come online. A lot of them were delivered at around the same time. Because of that, it’s a bit harder to fill those developments. Detroit’s multifamily occupancy percentage is somewhere in the high 80s. It takes a little longer to bet those stabilized.
We saw that in Grand Rapids about two or three years ago. They were developing a lot. Because of that, owners might have to build in a two-year lease up instead of a12-month or 14-month lease-up. The only reason our occupancy rates in multifamily get below those post-recession rates is oversupply. We don’t have an oversupply of multifamily units right now.
But we do need more supply. We see strong occupancy rates and rents everywhere else. As a lender, we look for 30-, 60- and 90-day delinquencies. We are not seeing any spikes in those. I don’t know how much new supply we will get, but I do think we will see some new building in particularly strong markets.
How is the multifamily sector performing in the suburban areas of your market?
Krisfalusi: The suburban areas are interesting. Many have created these vibrant downtowns with mixed-use developments. The City of Auburn Hills has done this. They are trying to bring in new restaurants and retailers and build a downtown. Those type of developments are very successful, and multifamily buildings in them are usually popular.
Are you seeing more financing requests for multifamily properties today?
Krisfalusi: Yes. We pulled so many maturities forward when rates were low. There was a lull in financing requests. Now there is a big wave of naturally occurring maturing debt coming up. That is giving us a lot of loans to work on.
Everyone did these short-term five-year loans. So we are seeing a compressed maturity schedule. We have also seen more investment sales offerings in the last six months. The momentum is there. The offering memorandums are flying. We are picking up more loan requests for multifamily.
I think we will continue to see stability in the multifamily market. There is not a huge push for messing with 1031s and the tax code. That eliminates some investors’ concerns. Owners know that they can run their properties without the giant overreach of the federal government.
Because of all this, I do expect that we will see an increase in multifamily financing requests.
Michael Spero
Senior Director
Berkadia
Kansas City, Missouri
What are some of the reasons for the enduring strength of the multifamily sector in the Kansas City market and across the country?
Michael Spero: If you look at markets in the Midwest, and in Kansas City specifically, this is still an affordable place to live and rent. The markets that I cover are not overbuilt, either. That leads to a steady amount of demand from renters. The multifamily product in our markets is being absorbed. We have an apartment occupancy rate of 95% in the Kansas City metro area. To me, that is full.
For investors, the Midwest markets have become darlings for attracting equity and getting deals put together. There is no shortage of capital from within the United States or even abroad. There are just better opportunities for investors in the Midwest markets.
Why are we seeing so many people choosing renting instead of buying a single-family home?
Spero: There is a lot of uncertainty out there. Mortgage interest rates aren’t where they once were. Those sub-3% rates have gone away. The buying power for first-time home purchases has shrunk with that. There is also a shortage of single-family homes. This is all forcing folks to continue with renting instead of buying owner-occupied housing units.
Considering how strong the demand is for apartment units in your market, does the Kansas City market need more multifamily housing?
Spero: We keep good track of what is happening in the market. We are absorbing the multifamily product that is being delivered. In 2025, we will see an uptick in deliveries over what we’ve seen during the past few years. We are tracking about 5,000 units being added to the market this year. We can certainly benefit from new deliveries. The rent growth is solid here, too. We have been one of the better performers nationally for rent growth. Considering all that, the addition of new units will be a help here.
What about investment sales? Will we see more of those in the multifamily sector this year?
Spero: There were some twists and turns navigating the economic climate last year. We have some new things to worry about now with where the stock market is. But starting with the second quarter of 2024 and carrying over into this year, we have seen an increase in investment sales of multifamily properties. We had a pretty busy back half of 2024 and a busy start to 2025.
There are some groups with the current uncertainty that are on pause for the moment. They might be giving it 30 days to see where things are at. But we are staying busy with valuations. We anticipate more listings coming our way over the next three months.
We are doing more off-market transactions now. We are dong the most I’ve ever done in my career. We are seeing more owners quietly and directly doing deals off-market. For the right deal and the right seller, these deals are a way to more efficiently navigate market uncertainty. They are looking for certainty of close and surety of execution. They want a no-stress transaction.
What about affordable multifamily housing? Is more of that coming in the Kansas City market?
Spero: The consensus across the United States is that we have a shortage of housing of all types, including affordable. Developers of new housing are looking for more resources such as the low-income housing tax credit, tax abatements and public-private partnerships to make it more feasible to deliver affordable housing. I anticipate ongoing conversations from the federal level down to the local level on ways to help developers deliver additional housing.
It can be challenging to deliver affordable housing. Developers are facing rising labor costs and higher interest rates. A lot of developers in the urban areas looking at concrete-and-steel construction are facing different challenges with the cost to build. They are looking at partnerships and incentives to make deals pencil out.
Governments are starting to want to see a set-aside of some affordable units even in market-rate or higher-end products. That has been more common in coastal markets versus Kansas City. But this is something new for Kansas City developers to face. Developers will explore various options to engineer deals from federal to local resources.
How strong is the multifamily sector in Kansas City’s suburban areas?
Spero: In general, the suburbs are doing very well in Kansas City. Many of the suburbs are creating walkable mixed-use districts, building that live/work/play environment. And these are spread out. They’re not always in just one part of town. We are seeing continued growth in new multifamily development in these pockets.
The Lenexa City Center development in Lenexa, Kansas, is a good example of this. It’s a mixed-use development that includes Class-A office space, single-family and townhome properties, retail and a healthy amount of new apartment deliveries. They’ve added a community center and an aquatics park. A good amount of public investment has gone on there.
When it comes to new apartment properties, what amenities are renters looking for today?
Spero: The Class-A new-build space is still in an amenities arms race. You see golf simulators, pickleball courts, secure package delivery areas, dog wash stations, higher-end self-serve coffee stations and tech-heavy clubhouses. If they have the ability, they’ll add walking trails on the property. They might have ponds that they stock for fishing. The pool areas will have TVs and lounges, fire pits and bocce courts.
In the urban core, you’ll have rooftop pools staffed with waitstaff and bartenders. At the top-end rent level, you’ll see a decent push for event offerings on weekends. They might have wine tastings or some sort of entertainment with music and DJs.
Grant Fitzgerald
Vice president/regional manager
Cleveland and Columbus, Ohio
Marcus & Millichap
The multifamily sector has long been a top performer in the CRE industry. Can you go through some of the reasons why demand from renters remains so high for multifamily units?
Grant Fitzgerald: The main reasons are the costs of single-family homes and the lack of single-family housing inventory. Those are interrelated, and together they are creating a lot of renter demand.
There are not enough single-family homes on the market. And the ones that are on the market are unaffordable to many buyers. Add to that the higher interest rates, and that pushes people to rent for a longer period. That is probably the number one driver of the sustained demand for multifamily housing.
Taking a longer-term view, during the last three years inflation has outpaced wage growth significantly. Stagnant wages put a strain on someone saving for a down payment. The cost of saving enough money for a down payment and the cost of monthly mortgage payments for a house keep a lot of people renting. This is more challenging in bigger and more expensive cities. But in and around any city, it can be expensive to buy a home.
Are you seeing any increase in the number of renters by choice?
Fitzgerald: The quality of rental options across many markets has gone up significantly. The quality of the buildings and their amenities have improved. And it’s not just in Class-A buildings. We’re seeing that in Class-B properties, too. During the last 10 or 15 years, we’ve seen an increase in the number of people who are renters by choice. That has helped sustain demand in the multifamily market, too.
Is the number of multifamily units in the Cleveland and Columbus markets too low for demand?
Fitzgerald: There is always going to be a need for more units. Just looking at the country, there are more people looking for housing than we have units for. But Cleveland and Columbus are well balanced. I don’t think there is a huge shortage of multifamily units in those markets. The more housing we build, though, the more affordable it makes housing across the area. That’s just a matter of supply and demand.
Do you think we’ll see any increase in multifamily development this year?
Fitzgerald: Yes. In Columbus, we are projecting about 7,500 new multifamily units this year. That would be a high for Columbus. In Cleveland, we are projecting about 1,800 new units during the year. That’s the most in Cleveland since 2018. It’s good that we are building new units. There’s not a huge shortage of multifamily units in these markets, but anytime you can add new units, it’s a good thing.
Do you expect more investment sales, too, in the multifamily sector this year?
Fitzgerald: I would anticipate seeing some more. We have seen investment sales down year-over-year the last three years in terms of the number of sales. But I think we’ll be up a little bit this year and next year just because of the natural life cycle of deals. Some buyers have held onto their properties longer than they originally anticipated. Now it is time for them to transact.
What about affordable multifamily housing? Will we see more of that added to your markets?
Fitzgerald: I don’t think we will see a special push for that compared to prior years. But we have been seeing more affordable units in our markets. You can build affordable in two ways, You can build dedicated, purpose-built affordable housing. Or you can build enough housing so that some of the quality stock of apartments becomes affordable on its own.
One of the advantages of markets like Cleveland and Columbus is that they are relatively affordable markets by default. If we build more quality housing, a chunk of the existing housing stock will become more affordable. That might not happen in a more expensive market like Manhattan. You also have the ability in Ohio through renovating existing units, that value-add strategy, to create quality affordable housing.
What amenities are renters looking for from today’s newer apartment properties?
Fitzgerald: The classics are what remain important. Saying that, there is a bit of an arms race to have the coolest amenities and buildings. Still, the classics like in-unit washers and dryers, walk-in closets, quality outdoor space and on-site fitness centers remain the most important amenities. Those classics never go out of style. But there is a push to make buildings as cool as possible. That way, owners can get maximum rents.
