By Dan Rafter
New apartment towers continue to spring up in the urban areas – and suburbs – of the Midwest’s biggest cities. And two commercial finance pros with BMO Harris Bank – John Petrovski, managing director and head of U.S. commercial real estate, and Kim Liautaud, managing director in charge of the Chicago real estate lending team – said that demand is still outpacing supply in most of these cities.
Midwest Real Estate News recently spoke with Petrovski and Liautaud about the hot apartment market and the steps developers need to take to land financing for their multifamily projects.
How hot is the multifamily market today?
John Petrovski: Apartments are still the best-performing asset class. If rents, occupancies and net operating income are all going up, you know you have a strong asset class. And that is happening with apartments.
What’s behind the strength of multifamily?
Petrovski: It’s driven by the country’s growing economy. I think most people would say that we are now fully recovered. It’s been six years since 2009. It’s certainly not a party atmosphere, and plenty of people are still watching the economy closely. But I’d say that we have fully recovered from the downturn. So that has helped.
Then there is this trend toward urbanization. People want to live the urban lifestyle. They want to live in the middle of urban areas and use public transportation. That helps apartments, too.
There is also a tepid interest in the for-sale housing market. People aren’t as willing to commit to buying a house today. That market is picking up. But it is a slow-grow market in most cities for new homes or resale housing. Between the tepid interest in for-sale housing and the move toward urban living, you are seeing more people moving into apartments.
So apartments are still popular with investors today?
Petrovski: When you look at it from an investor standpoint, the equity wants to get a safer return. Equity is driven toward apartments where investors can make a solid return. Multifamily is a good return compared to treasuries, stocks, bonds or international investments today. What you are seeing today in the international markets means that the United States is a safe haven. More money is coming here. Banks want to provide debt on apartments. Life insurance companies do. Fannie and Freddie both want to. This is just a good time to invest in apartments.
In the last year, though, I have noticed a bit more reticence. Just a notch. It doesn’t mean that deals aren’t getting done. They are getting done. People are just taking it at a bit of a slower pace. Cap rates are low. New supply is more robust than it was three years ago. I still think the light is green for buying and developing apartments. But that doesn’t mean you shouldn’t look both ways before going through the intersection.
What do developers need to show you before they can gain financing from BMO Harris for their apartment projects?
Kim Liautaud: Most of what we are doing today on the multifamily side is new development, new construction loans. We are looking for developers who have the experience to build the projects that they are proposing. We are looking for unique projects that suit the market. Of course, we take a close look at the amenities that they are proposing and the unit mix of proposed projects. Most of what we are financing today is infill. That is our focus.
In the Midwest markets, we are seeing plenty of new city projects. We are seeing a lot of infill developments in Chicago, in neighborhoods like Lincoln Park. We are seeing a few projects in Minneapolis. There is a tower we just provided financing for in Nashville. These are all downtown, very urban projects with lots of amenities. That is where the demand is today for apartments.
When you look at amenities, what kind are developers bringing today?
Petrovski: These are newer, nicer projects with more amenities than I ever experienced when I was a younger guy. A suburban apartment back then might have a small clubhouse, no workout room and a small postage-stamp pool. These urban projects are different. They offer mini-health clubs that are remarkable. They are not just a cross-trainer and a tread mill in a closet. They are big facilities. They might have a yoga room. They have movie theaters. They have a bar and a party room that you can rent. They often come with a balcony with a view that connects to an indoor party room. They have bicycle storage and a tech room with computers and a business center. They do often have smaller units. But there is more to do outside the unit. They are not built for people who want to sit inside their units all day.
Liautaud: There is a more social atmosphere for renters today than there has been historically. Renters tend to be more active users of the amenities and public areas. Pets are more important. Renters today are waiting longer to have kids. So they put more of their focus on their pets. These new apartments have dog runs. They have rooms that renters can use to wash their pets.
Other apartment projects feature amenities unique to their particular markets. There are some markets where bocce ball is a big hit. They might have a bocce ball court. Tenants like that. It pays to be sensitive to what is young and hip in your market and incorporate it in your apartment project.
What age range of renters are you seeing in these new urban multifamily projects?
Liautaud: Developers are certainly seeing more renters today who are empty nesters than they have historically. The majority of renters, though, continue to be young, either single or dual-income families with no kids. That is still the bulk of it. But there is a trend now where we are seeing more empty nesters renting. We are seeing a lot of international renters, too.
Are you worried that we are seeing too much apartment construction in some Midwest markets?
Petrovski: We ask on any transaction, what does the supply look like? What is the increased demand like? Is the market in balance? Three years ago if you asked if a new apartment project was going to work, it was a no-brainer question. You’d build it. Today, there are some markets where you have to do some supply-demand analysis. What is the population growth? What is the growth in the student population? What is the pipeline of new supply? Downtown Chicago is an example. Right now, it seems that we have the right amount of new supply for the demand. No one thinks that we are under-supplied. In the next three years there will be a split debate. Is too much apartment stock coming? Is enough coming? But it won’t be consensus that we are over-supplying the market. The pendulum is sort of in the middle.
What other Midwest markets are hot today when it comes to new apartment construction?
Petrovski: Milwaukee is still a strong market. It doesn’t have the population growth, but it does have pent-up demand for new urban rental. Nashville is a hot city. Indianapolis has a lot going on, too. More people want to live in downtown Indianapolis. Madison is surprisingly very active. Kansas City has been active, too. St. Louis has been a little less active. The demand for new apartments there is a bit slack.