The industrial market continues to nab the headlines. And why not? Demand for warehouses and other industrial spaces continues to boom. But there’s another CRE sector that’s also hot today, multifamily.
And this slice of the CRE industry is doing especially well today in so-called second-tier markets, major, but not huge, cities across the United States.
A good example? Indianapolis. Demand for multifamily space, among renters, owners and investors, continues to rise in this key Midwest city. And the signs point to this market remaining hot in the multifamily space for some time.
We spoke with Danny Meister, operations manager at Chicago-based Pangea Real Estate, about the enduring strength of Indianapolis’ apartment market and the reasons behind it. Meister knows this topic: Pangea manages more than 3,000 apartment units in the Indianapolis market.
Here is some of what Meister had to see about Indianapolis’ sizzling multifamily market.
How strong is the Indianapolis apartment market today?
Danny Meister: Our Indianapolis portfolio has seen a 6% rise in occupancy during the last four years. In addition, rents are on the rise. During the past two years, we’ve seen an average rent increase of 15% when a unit transitions from one tenant to a new renter. There are no signs of this activity slowing.
The economy has started to bounce back. Unemployment is lower. We are seeing more people moving into Indianapolis. Fewer people are actually moving out of their apartment units, something that we saw even more of early on in the pandemic.
This has led to a very strong multifamily market here.
Are people coming from other markets to rent apartments in the Indianapolis area?
Meister: I don’t have a lot of information about where people are coming from specifically. But it’s been known that there has been no lack of demand for our units during the last couple of years. Everything that has been happening in our market since the pandemic has proved that out. People are actively searching for apartment units in Indianapolis.
Are you seeing more interest in the Indianapolis-area multifamily market from investors outside of your local market today?
Meister: Pangea entered this market about 10 years ago. We bought 3,000 units across 11 communities. It’s become clear that we should have bought at least twice that. That would have been a great move for us. We are absolutely seeing an increase in investor interest in our market, from investors both local and outside the Indianapolis area. Real estate in general has seen more institutional investing in the last several years. That has driven up prices. This is absolutely what we have been seeing in the Indianapolis market.
What makes Indianapolis such an attractive market for investors and multifamily owners and developers?
Meister: For the people who are moving here, Indianapolis is a less-expensive market in which to live. We also operate in Chicago and Baltimore. Indianapolis is the most affordable for renters. This is also a market that is landlord-friendly when it comes to regulations. It’s easier to operate here than it is on other market. It’s significantly easier to operate here. We are supported when it comes to enforcing our leases to make sure everyone is following the rules so that everyone has a good place to live. That landlord-friendly nature has been good for us in the Indianapolis market.
When tenants are looking for new industrial space, what kind of amenities do they want?
Meister: Our properties usually have fitness centers and pools, which people like. But all our properties have performed similarly regardless of the amenities that we have at those properties. When it comes to one must-have amenity, nothing has stood out. Amenities do matter, obviously. If people are looking for a pool, they’ll look at those properties that have one. But the amenities have not made a huge difference in the performance of our properties. We don’t see any major performance differences between properties with certain amenities versus those without those same amenities. Most of our properties are performing equally well today when it comes to rents and occupancies, regardless of the amenities.
At the beginning of the COVID-19 pandemic, we all wondered if people would continue making their rent payments. They largely have. Have you been surprised by this?
Meister: A lot of that goes to how local governments have handled the pandemic and what relief programs they made available to people. Chicago, and Illinois in general, had really good rental-assistance programs, some of the best in the country. Indianapolis has not had that. There have been some programs, but not at the scale of what we’ve seen in Illinois. However, with lower rents in Indianapolis, it is less burdensome for people to make their payments. Renters continued to voluntarily pay their rents each month here. There was a slight dip in collections performance in all three of our markets, Chicago, Indianapolis and Baltimore, at the beginning of the pandemic. But Indianapolis has already bounced back entirely to where it had been before the pandemic.
Have rising house costs pushed more people to rent in Indianapolis?
Meister: I am looking to move right now, so I know how expensive single-family homes have become. The market has been bananas the last couple of years. We don’t raise our rents on tenants who are renewing their leases all the way to the top of the market. We are not raising people’s rents 15% when their leases renew. This means that people who are in an apartment unit now are getting one of the better deals when they are ready to renew their leases. That plays a factor in getting more people to remain as renters. People are choosing to stay put. They know they have a good deal now. The other options out there are more expensive. Apartment rents have increased dramatically the last year, and the prices of single-family homes continue to rise.
Has this recent jump in apartment rents been the highest you’ve seen?
Meister: I’ve been at Pangea for six-and-a-half years. This is the largest jump in rental rates across the board that I’ve seen. There’s been nothing close to it. And it doesn’t look like any end is in sight yet. We track our rental stats regularly. It comes up in monthly meetings. Rent growth is still on a steep upward trajectory. We have not reached the top yet.
Do you think demand for multifamily units in Indianapolis will remain strong in the coming months and into 2023?
Meister: It should. Indianapolis is still a cheaper option than other bigger metropolitan areas. People are coming to Indianapolis from these higher-price areas. At the same time, work-from-home will stick around. Some companies have brought people back to the office full time. In other industries, an office setting is not as necessary for all workers. People can work remotely, and that opens people up to other cities, Indianapolis being one of them. If that is the case, and construction prices remain high, there shouldn’t be as much development as their normally would be. Supply is stagnant today. Because of all this, demand should stay high and potentially grow.