Downtown Minneapolis. St. Louis. Indianapolis. Downtown Chicago. Ann Arbor, and not just for student housing. The list of Midwest markets in which apartment rents are soaring, vacancies are plummeting and new multi-family buildings are rising is a long one.
And Sue Blumberg, senior vice president and managing director with the Chicago office of NorthMarq Capital, says that multi-family’s hot streak isn’t about to end soon.
“When will investor demand for multi-family cool off? When will the construction of new apartment buildings slow? When — not if, but when — interest rates start to hopefully gradually increase,” Blumberg said. “Only then will it taper off. And it looks like that won’t happen for three to five years.”
Blumberg is far from alone in her assessment of the still red-hot multi-family market in the Midwest. Commercial-lending pros across the Midwest agree that investors still consider multi-family the most desirable and commercial sectors.
And developers? They’re rushing to build new apartment towers from downtown Chicago to the suburbs of St. Louis and the riverfront of Cleveland.
“For investors looking for financing it is an absolute feeding frenzy,” Blumberg said. “It is so competitive right now. Multi-family just couldn’t be more attractive to investors.”
Marcus & Millichap’s 2014 National Apartment Overview provides plenty of evidence of the apartment market’s strength.
According to the report, vacancy rates nationwide in the multi-family sector should hit 5.1 percent in 2014. But that’s mostly because developers are adding so many new units to the mix. Marcus & Millichap reported that developers will build 215,000 new multi-family units in 2014.
Despite the new construction, rents should continue to rise, Marcus & Millichap reported. In 2013, effective apartment rents across the nation rose 4.2 percent. Marcus & Millichap predicts that effective rents will jump by 2.6 percent by the time 2014 comes to an end.
The addition of so many new units in so many markets is causing lenders some pause. Blumberg says that NorthMarq takes a close look at the market when developers come to the company in search of multi-family development dollars.
“At what point is there the potential for softness in the market?” Blumberg asked. “We look at the feasibility of new units. There have been so many added to the major metropolitan areas.”
That said, Blumberg thinks that most markets — and most in the Midwest — are still underserved when it comes to multi-family units. Demand continues for new apartment buildings, and once these buildings open, tenants continue to flock to them, she said.
Blumberg hasn’t even seen an increase in concessions as new units hit the market. That’s more evidence that the supply of new multi-family buildings isn’t outpacing consumer demand.
“We were once seeing two months of free rent,” Blumberg said. “Now it is down to a move-in special that is just a few days of free rent. That, to me, is a sign that demand isn’t lessening for these new units.”
And what types of units are renting in the shortest amount of time? Blumberg says that she’s seeing studio apartments nabbing the most interest from renters.
Part of the reason? Apartment rents in many major metropolitan areas are at all-time highs. Smaller studio apartments are more affordable to a greater number of renters.
Demand for these units isn’t limited to city centers, either, Blumberg says. She points to the Chicago market. While apartment units in the middle of the city draw the highest rents, newer buildings in the suburbs are attracting plenty of activity, too. Many of the suburban apartment complexes tout their work-life amenities, everything from pools to jogging paths to bike trails.
Amenities have become more important to multi-family owners, whether in the suburbs or in the hearts of downtown CBDs. And when it comes to amenities, technology has become important.
Blumberg points to apartment buildings that have high-tech fitness centers. A resident can, for example, select an online Zumba lesson on a large-screen TV. The next time this resident comes to the same screen, the screen will remember the most recent Zumba lesson the resident took. The screen will then give the resident the option to repeat the lesson or move up to a more intense workout.
Saunas, hot tubs, outdoor pools, indoor pools and rooftop decks are common amenities, too. Blumberg has seen apartments with indoor dog runs and herb gardens.