For much of the past decade, the apartment market, both in the Midwest and across the United States, has enjoyed an outstanding run. Vacancy rates have dipped to almost microscopic levels at times, and rents have shown impressive growth.
With 2019 now firmly in its second half, the multifamily sector is poised to continue to thrive in the Heartland.
To start with, the job market remains strong, which will help fuel additional demand. Owners and operators also are finding that they have access to capital for well-thought-out renovations and acquisitions. At the same time, there are good reasons to believe new construction levels will remain in check and that supply and demand will remain in balance.
Add it all up and it’s still a good time to own and operate apartments in the Midwest.
It’s all about jobs
We are living in an era of historically low unemployment rates, both in the Midwest and throughout the country. In July, the U.S. unemployment rate was 3.7 percent. Approximately164,000 jobs were added during the month, and wages rose 3.2 percent on an annual basis.
Local job markets in the Midwest are performing similarly. For example, Kansas City’s unemployment rate was 3.3 percent in June, while Indianapolis posted a 3.1 percent rate in the same month, according to the most recent data available from the U.S. Bureau of Labor Statistics (BLS). Among U.S. metropolitan areas, Chicago had the third-largest annual job growth for the 12 months ending in June, with 84,800 new jobs, the BLS reports.
Job growth and rising wages are the foundation of renter demand for apartments. With the employment market set to remain strong, occupancy rates should remain healthy in the Midwest over the rest of 2019 and into next year.
With the apartment market performing so well – the national occupancy rate was 95.8 percent in the second quarter, according to RealPage – it makes sense that owners and operators would find investors and lenders willing to provide capital.
In the National Multifamily Housing Council’s most recent quarterly survey of its members about the state of the U.S. apartment market – which was conducted and released in July – the Equity Financing Index was 56. (A reading above 50 indicates that, on balance, equity is more available when compared to three months earlier, while a number below 50 means that equity is less available. A reading of 50 means conditions are unchanged.) Meanwhile, the Debt Financing Index was 80 (also of note: the Market Tightness Index was 60, indicating that, on balance, apartment markets around the country are getting tighter).
Of course, this survey isn’t focused on the Midwest, but I can attest that equity and debt financing are readily available to strategic owners and operators in the region. This means that investment sales activity in the Midwest should remain brisk. It also means that owners and operators can fund value-add renovations to better position outdated communities to provide the kinds of amenities and living experiences that today’s renters demand.
A possible slowdown in new construction
The apartment industry – both here in the Midwest and across the county – has seen an uptick in the delivery of new communities in recent years. By and large, though, these new properties have been well absorbed.
Looking ahead, though, the growing costs of construction materials and labor may slow the pace of new development in the Midwest and elsewhere. In fact, according to a RealPage analysis of Census Bureau statistics, the annual rate of building permits issued for apartment units in the Midwest declined by 10.9 percent on a year-over-year basis in June.
While I’m confident that resident demand will continue to support sensible levels of new construction, a slowdown would further help occupancy levels and set the stage for stronger rent growth.
A quick note about property taxes
Many local governments in Midwest metros such as Kansas City and Chicago have recently become much more aggressive in the amount of property taxes they are charging to commercial and multifamily properties.
Since real estate taxes can be the largest single expense for an apartment community, an unforeseen increase or a change in an assessor’s valuation methodology can have seriously negative consequences for property values and investor returns. While we have yet to see this take place, it’s quite possible that the interest of equity investors in the Midwest may cool if this unfortunate dynamic continues.
Overall, though, the future appears bright for the Midwest apartment sector. Cities such as Indianapolis and Kansas City will likely never produce the soaring rent growth we sometimes see in markets like San Francisco or New York. But they do experience strong, consistent operating fundamentals that lead to reliable increases in rental rates and attractive, dependable returns for multifamily investors.
Jay Madary serves as president and CEO of JVM Realty Corp., an Oak Brook, Ill.-based apartment owner and operator.