Hope. It’s sweeping across the country as vaccines send the number of COVID-19 cases across the United States crashing. At the same time, governors across the country are lifting mask mandates for fully vaccinated people, meaning that those who’ve received their shots can shop inside Target, Walmart, Trader Joe’s and other retailers without first strapping on their masks.
It seems that at long last the United States is moving toward the end of the COVID-19 pandemic.
This hope is evident, too, in the latest multifamily report released by Walker & Dunlop. The commercial finance company recently released its Spring 2021 Multifamily Outlook Report. And the report is filled with more good news, this time for the commercial real estate industry.
Of course, the multifamily sector was one of the most resilient throughout the pandemic, so it’s not overly surprising that Walker & Dunlop experts expect this market to remain strong throughout the rest of this year and into 2022.
That doesn’t mean, though, that the strength of the apartment market isn’t still one more reason for optimism. Midwest Real Estate News recently spoke with Todd Stofflet and Jason Stevens, both managing directors based in Walker & Dunlop’s Chicago office, about the multifamily market and its enduring strength.
Here is some of what they had to say:
The multifamily sector has remained strong throughout the pandemic. Are you surprised at how resilient the sector has been?
Todd Stofflet: We are pleasantly surprised at the resiliency we’ve seen in the apartment market throughout the Midwest. The Midwest is typically a more conservative area when it comes to apartment rents and new construction. To be able to see market occupancies maintained and collections stay as high as they’ve been, that’s good to see. The Midwest markets have shown stability throughout the pandemic.
Jason Stevens: The strength of the Midwest lies in its fiscal conservatism. It has lower income-to-rent ratios compared to other parts of the country. In a market like Miami, you might see renters spend north of 40 percent of their income on rent. In the Midwest, people err on the side of caution when it comes to spending too much on their rent. That is part of why the multifamily market in the Midwest has seen strong collections and is already showing signs of becoming even stronger in the coming months.
Why do you think apartment rent collections have remained so high throughout the pandemic in the Midwest?
Stofflet: A lot of the people in the Midwest have remained working throughout the pandemic. Most likely they are working from home, but they are still employed. We also have that conservative mindset in the Midwest, so renters here are paying their rent before they pay anything else. We have a strong, diverse employment base in the secondary markets of the Midwest.
Stevens: Our workforce is also highly educated. Our workers have largely been able to avoid being furloughed.
Have you seen many renters leave city apartment buildings and move to the suburbs during the pandemic?
Stofflet: We absolutely have seen it in Chicago. But renters haven’t necessarily moved to the suburbs. They’ve moved from downtown areas to city neighborhoods that are little farther out. When people realized that they were going to be home for a longer period of time, they wanted to get a little more space. The Loop was pretty well shut down for a long time, with restaurants and entertainment, the shopping, all shut down. That takes away much of the allure of living downtown. We did see people move to the neighborhoods where rents might not be as high and they might get a bit more space. That trend, though, is starting to reverse in the last couple of months. We’ve seen an uptick in leases downtown, especially in the Loop.
How is the Chicago multifamily market faring today?
Stevens: One of the advantages that Chicago has right now is that there is not an extensive development pipeline. There are some large projects on the horizon. But there is not a deluge of units coming on the market like in the southeast. We are poised for good absorption and real rent growth, as we were before 2020. We were predicting a 3 percent rent increase in the Chicago market before the pandemic hit. I think we will get there in a shorter period of time than some might think.
Stofflet: There is a lack of deliveries of units in the Chicago market right now. The units that are being delivered are seeing a quick lease-up. Just look at the River North area in Chicago. During the height of the pandemic, owners here were offering significant concessions to get people to rent. Now, the apartment buildings in River North are 95 percent occupied. Owners are down to offering minimal concessions.
One of the hotter multifamily markets in Walker & Dunlop’s outlook report, is the single-family home rental market. Is that market strong in the Midwest?
Stofflet: From the onset of the pandemic, large institutional groups began to focus on a different investment trend, single-family home rentals. There has been a big move from an institutional perspective to get into that space. We also have a demographic that likes the idea of renting and also having that larger space with separate entrances and yards. That desire is driving that part of the market.
That’s one change that came about during the pandemic. Do you think we’ll see other changes that rose during the pandemic continue on even after COVID-19 cases fall?
Stevens: We have seen a desire from renters for fewer touchpoints to get into and out of their homes. We’ve also seen a huge growth in pet ownership throughout COVID. Both of those seem like they will stick around. And, of course, it looks like people will continue renting single-family homes, too. They don’t want the financial responsibility of owning a home but do want the benefits of private yards and private spaces.
Stofflet: The younger demographic that is looking into this end of the market doesn’t have the savings built up to go out and acquire a house. Renting a single-family home is one way for them to do this without needing the down payment that is required for actual ownership.
Stevens: Throughout the Midwest, we are also seeing a lot of interest in the two-bedroom rental. There had been a pivot away from that prior to COVID. People were more interested in one-bedroom and studio apartments. They were willing to spend more to live alone. Now we are seeing the two-bedroom units renting faster. People want that interaction with a friend or roommate. Or they want more space while they continue to work from home.
What about the possibility that more people will work from home even after the pandemic subsides? Is that changing the way new apartments are being designed?
Stofflet: We are seeing some retrofitting of existing amenity space to accommodate that trend. Some owners are taking large club lounge areas and dividing them into personal workspaces. For new buildings, we are seeing more flex space being included in the apartments themselves. There might be a built-in piece of furniture that can act as a desk.
We’ve talked a lot about Chicago. But what about the rest of the Midwest? Is multifamily performing well throughout the region?
Stofflet: All the major markets in the Midwest are doing well when it comes to multifamily. The sector is extremely strong. It’s not just Chicago that is strong. We are seeing very strong multifamily activity in markets like Indianapolis and Columbus. We expect that as markets in the Southeast remain white-hot, that we’ll see more investors looking to the Midwest, to Indianapolis, Columbus, Minneapolis and Chicago. They are looking for yield. They might not be getting 6 percent or 7 percent rent growth, but they will be getting solid, stable investments.
Stevens: I am thrilled with how well Milwaukee is doing. Rents are increasing in Milwaukee. There is a drive for luxury rentals in the Milwaukee market. I’m impressed with how well that market is doing from a growth standpoint.
It seems like the future of the multifamily market, then, remains bright, right?
Stofflet: It was great to see the strength of the Midwest versus other markets. It’s exciting to see how in Chicago how quickly the rebound is occurring. That is not happening in New York or California. Chicago is the first alpha city in the country that is bouncing back from concessions and any occupancy loss. We are excited about how the Midwest is shining strong right now.