Market Spotlight: Chicago ＆ the Midwest

Focus on the Midwest

Amid a global pandemic and its economic repercussions, the American Midwest has remained a place of comparative stability—and opportunity. 

Wide-open spaces and lower costs of living attract businesses and workers alike. Warehouses, distribution centers, and transportation corridors bustle thanks to shifting supply chains and surges in deliveries. Educated workforces and leading universities and research centers nourish hubs in tech and life sciences. In short, there’s a lot in “flyover country” for the multifamily industry to like in 2021.

An overview follows of the region stretching from Minnesota to Ohio and from Michigan to Kentucky. Why is the Midwest a good value for multifamily investors today—and well positioned for the post-COVID-19 recovery? Read on to learn more. 

Beneath-the-radar metropolitan areas blossom

Even before COVID-19, Midwestern cities have been attracting people and businesses. 

Across industries, the Midwest hosts some of America’s largest employers: Kroger (Cincinnati), Salesforce (Indianapolis), Cardinal Health, Nationwide Insurance, Honda of America (Columbus), and Target, U.S. Bancorp, General Mills, 3M, and Medtronic (all in Minneapolis-St. Paul). Thirteen companies in the Fortune 1000 have set up shop in Milwaukee, and 15 have operations in Columbus. 

The region has much to recommend it outside of the office as well. With its famed “10,000 lakes,” acclaimed arts and theater offerings, and increasingly adventurous restaurant scene, Minnesota ranks 3rd overall on Forbes magazine’s Quality Of Life rankings. Indianapolis—home to the Colts, Pacers, and Indy 500—received an A- rating from Niche.com, ranking high in the areas of outdoor activities, diversity, and nightlife.

Each day on average, Columbus, Ohio welcomes more than 50 new residents. With 20,000 new residents each year, it is the fastest-growing city in the region behind Chicago. With The Ohio State University, boasting the largest enrollment in the country, the metropolitan area is home to over 55,000 students. This growth has catalyzed vibrant mixed-use developments like Bridge Park, which brings upscale residential living, dining and shopping, and an events center to the Scioto River.
Columbus is a place for start-ups. Root Insurance and CoverMyMeds are two of the latest $1B+ start-ups to call Columbus home, and hospital AI bot Olive recently achieved unicorn status. More new businesses grow to 50 or more employees in their first 10 years here than any other major metropolitan area in the country. Meanwhile, nearby Pittsburgh holds its own as a tech and life sciences hub. With Carnegie-Mellon University, UPMC, and The University of Pittsburgh, the region is powering world-class research, and the city has become a leader in smart cities innovation.

Favorable collections, rents, and occupancy

During an undeniably tough year for rental income, ancillary fees, deferrals and delinquencies, some markets were hard hit and others, particularly the Midwest, weathered the storm. 

“Collections have remained strong. People tend to pay less of their income on rent here, and properties are more fiscally conservative when qualifying. It’s a Midwestern mentality,” said Walker & Dunlop Managing Director Jason Stevens.
One could argue that it’s a bit easier to live within one’s means where the cost of living is significantly lower. While New York City, Boston, and San Jose average around $2,000 a month for a one-bedroom apartment, Minneapolis and Chicago average $1,200-$1,300—and in Detroit, this figure is around $700. 

Whatever the contributing factors, conditions are favorable in this region for multifamily owners, operators, and investors. Rents have resisted downturns in cities such as Columbus, Kansas City, St. Louis, and Indianapolis, and several other indicators are encouraging for the future.

“We’ve seen asking rents on the rise since the end of November, and rents on two- and three-bedroom units have been holding steady as people continue to work from home and seek more space,” said Walker and Dunlop Managing Director Andrew DiBlasi. “In terms of supply, multifamily starts are down significantly from the boom of 2015-2018, and the market has a large need for housing for older renters as well as affordable housing.”

Is Chicago America’s new “alpha city”?

Throughout the COVID-19 pandemic, city-dwellers have been trading urban downtowns for greener, more spacious suburbs, and Chicago has not been immune to this trend. Rental incomes have gone down, as with any major metropolitan area. 
Despite temporary trends, however, Chicago is the third-largest city in the United States and the leading economic engine of the Midwest:

• Each year, $564 billion in goods move into and out of metro Chicago by truck, rail, water, and air freight, and O’Hare airport alone processes 1.8 million tons of freight
• Google has doubled their workforce
• Amazon has signed leases on or purchased over 3.5 million square feet of warehouse space.
• The Old Post Office has leased 80% of its 2.5 million square feet to tenants including Uber, Walgreens, PepsiCo, and Cisco

As potential returns diminish and risk increases in other major metropolitan areas, Chicago presents ample opportunity for short- and long-term investment. 

Suburbs—particularly those with high incomes, strong school districts, and steady rent growth of 3% or more—are among the areas with potential. Walker & Dunlop recently structured $80,110,000 in financing for the 1,155-unit Ellyn Crossing community in Glendale Heights, a village west of downtown with high ratings for its schools and as a place for families to live. In the northern suburbs, life sciences companies like Abbott, Abbvie, and Hospira, which was recently acquired by Pfizer, are driving employment and growth.  

Chicago has become a life sciences hub. The metropolitan area ranks among the Top 10 U.S. Biopharma Clusters by Genetic Engineering and Biotech News, with labs, research facilities, offices, and incubators finding homes in areas such as Fulton Market, Lincoln Park, and South Loop. 

Chicago also has several major developments in progress, including:

• Lincoln Yards – A former industrial site re-envisioned as nearly 21 acres of open space and 12 million square feet of office space, including an eight-story life sciences research center 
• The 78 – A mixed-use commercial campus along the Chicago River which will expand the presence of Illinois’ public and private universities in the city 
• One Central – A cluster of skyscrapers south of the Loop, built above rail tracks that will be converted into a transit hub
• Bronzeville Lakefront – Redevelopment of the former Michael Reese Hospital site, adjacent to Lakeshore Drive, the Metra Electric Rail, McCormick Convention Center and an artery of high-capacity fiber optic cable 
• Southbridge – Approximately 877 residential units across income levels and approximately 65,000 square feet of retail and recreational areas designed to meet best-in-class urban and sustainable standards
• River District – 18 buildings totaling 9 million square feet of commercial and residential space along the Chicago River, with a quarter of the land devoted to green space
• North Union – 2,680 residential units, 30,000 square feet of commercial space and approximately 1.3 acres of open space by the CTA’s Brown Line

High-yield potential puts the U.S. heartland on the global map

As with any market, the Midwest has its challenges—such as pension and tax issues in Chicago andskyrocketing costs for the lumber used in much of this region’s construction. Yet more positives stand in the region’s favor, particularly the potential for higher yields. 

Chicago, for example, is a large market with a diverse set of multifamily properties. Higher cap rates, particularly in suburban areas, may attract even more investors here in the year ahead. 

Multifamily investors from across the country, and globe, have been discovering the American Midwest. “There’s a true international presence, with investors from South America, Canada—especially in Chicago, which Canadians see as a familiar city,” said Walker & Dunlop Managing Director Todd Stofflet “With the opportunity for lower costs and bigger yields, this traditionally slow and steady market is one to watch through the COVID-19 recovery and beyond.” 

Meet the Contributors:

Dave Hendrickson, Senior Managing Director, Capital Markets
Pat Modig, Senior Director, Capital Markets
Todd Stofflett, Managing Director, Investment Sales
Andrew DiBlasi, Managing Director, Investment Sales