The multifamily market across the Midwest is still soaring. Last year, developers added more apartment units to Midwest markets than ever.
It’s no surprise, then, that commercial lending pros are seeing a growing number of requests for financing for apartment acquisitions and new developments.
Midwest Real Estate News recently spoke with veteran commercial lending expert Christy Lockridge, principal in the Chicago office of PGIM Real Estate Finance, who said that lending requests for apartment properties, and especially refinancing requests, continue to keep her office busy.
Lockridge said that roughly $139.3 billion in apartment deals traded in 2017. That was down about 8.3 percent from 2016. But the slowdown – if that’s the right term for it – was largely driven by a slower first quarter this year. Lockridge said that apartment-financing activity levels in the second through fourth quarters of last year were consistent with prior years.
Because of this, Lockridge said she is expecting a strong 2018 when it comes to multifamily financing. And a good portion of this activity so far has come in the form of refinance requests, she said.
“There is a tremendous amount of refinance activity right now on the part of owners,” Lockridge said. “That is why we have so far been busier in the first quarter of this year than we were in the first quarter last year.”
Big numbers
Last year was certainly an historic one for multifamily development in the Midwest, which is why commercial financing requests are so high in this sector today.
Evidence came in the CBRE Midwest U.S. Multifamily 2017 Year-End Report. According to CBRE, apartment vacancy rates plummeted throughout the Midwest last year, with rates especially low in Detroit and Minneapolis. And Midwest markets added more than 30,000 new apartment units to their stock in 2017.
The company reported that Detroit’s apartment vacancy rate stood at 3.6 percent as of early March. That’s higher only than Minneapolis, which had a multifamily vacancy rate of 3 percent.
Overall, Detroit’s apartment market has seen vacancies fall 483 basis points since 2009, the most in the Midwest. Rents have been rising here, too. From 2015 through 2017, Detroit recorded a 6 percent increase in asking rent per unit. Detroit saw the third-highest rent growth in the Midwest during this time, behind only Indianapolis, where apartment rents grew 6.5 percent, and Columbus, where they rose 7.1 percent.
“We have seen a strong interest in the rental market in recent years, especially in downtown Detroit, where we have seen a revival in the office sector,” said Jack Johns, first vice president with CBRE, in a written statement.
Johns said that workers want to be closer to their offices as more jobs move into the downtown areas of the city. This is inspiring more employees to relocate downtown for housing options. Johns said that increased demand for rentals means that developers should bring more units coming online in the market in 2018 and 2019.
Overall, markets in the Midwest combined to deliver 32,845 apartment units last year. That broke the previous record of 29,739 units delivered in 1999. Detroit added 1,832 new apartment units in 2017.
Vetting the deals
With new apartments still coming online across the Midwest, financing requests for multifamily projects are showing little signs of a slowdown.
But what do commercial lenders look for when deciding whether to approve financing for an apartment development, acquisition or refinance?
Lockridge said that the borrower’s history and past successes are certainly an important factor. Secondly, PGIM looks at the dynamics of the property. If it’s a new development, how will it fit into its submarket? If it’s an existing property, how strong have occupancy patterns been historically? How quickly are units absorbed into the market?
PGIM also looks at the concessions and rents that the borrowers are considering for apartment properties.
“It’s a deep dive,” Lockridge said.
Commercial lenders can expect to be taking this deep dive often in the coming months. Lockridge said that multifamily properties remain an attractive asset type to investors.
“Apartment properties are a great place to put debt capital,” Lockridge said. “The demographics, population growth, investor interest and liquidity make multifamily properties a highly desirable asset class to be lending on.”
National trends
Larger national trends are also providing a boost to the multifamily market. As Lockridge says, then national homeownership rate has fallen from its previous highs. People need to live somewhere. If they aren’t buying homes, then they’re renting.
And with fewer people buying, more are turning to renting. Many are renting not because they can’t qualify for mortgage lending or can’t afford homes, either. They’re renting because they like the rental lifestyle and don’t want the financial commitment and work involved in owning a home.
At the same time, housing prices continue to rise. The National Association of Realtors reported that the median existing-home price in January was $240,500, up 5.8 percent from the same month one year earlier. It also marked the 71st straight month of year-over-year gains.
Housing inventory levels are low, too, with the Realtors association saying that 1.52 million existing homes were for sale at the end of January. That’s 9.5 percent lower than a year earlier.
Consumers, then, are struggling to find homes in their markets. When they do, they are often priced too high. This combination is helping to fuel the boom in apartment living.
Then there’s one more factor: People today increasingly want to live in the center of major cities. When they do this, they often choose apartments because they are more affordable than are single-family homes in these urban centers.
Lockridge points to Chicago. She said that population within a 1- to 2-mile radius of Chicago’s CBD is booming today.
“The prices in this part of the city prohibit homeownership from a cost standpoint for a lot of people,” Lockridge said. “Then there are the high real estate taxes in this part of the city. If you’re a renter, you don’t have to deal with real estate taxes.”
Amenities matter
The numbers show that new apartments are popping up across the Midwest. But what amenities are the people renting in these units looking for?
Deep amenity packages are a key draw for those renting in modern apartment buildings. Lockridge said that pet-featured amenities, such as dog runs, are still popular among renters.
But a growing trend is the focus on community amenities. Lockridge said that average apartment unit sizes were once larger. Today, developers are offering smaller units. But they are putting more dollars into offering expansive common areas filled with high-end amenities.
Lockridge points to rooftop decks, culinary common-area kitchens, libraries, computer labs and tricked-out fitness centers.
“It’s more about fostering interactivity with the other tenants,” Lockridge said. “And it’s less about the units themselves.”
