A deepdive into the Midwest multifamily investment environment

November 22, 2024

One thing is clear for any investors looking at the current multifamily investment landscape—capital markets are exerting significant influence on the sector.

Recently, we have seen a notable cooling off, driven largely by the widening bid-ask gap. Sellers often hold onto past pricing expectations, resulting in listings that sit stagnant for months. Many properties have remained on the market for a year or longer, despite professional marketing efforts generating interest. The most aggressive buyers have left the market as raising equity for partnerships is more challenging today. With risk-free interest rates available around five percent, many question why they should take risk.

Like in the single-family home market, many owners of multifamily properties previously refinanced into long-term, low-cost debt. Low-cost debt, combined with Michigan’s property tax structure that limits tax increases on existing owners, results in significantly higher cash flow for existing owners compared to what new buyers can underwrite. Even if a buyer can assume the existing debt, the tax basis reset can often lead to significantly lower cash flow for the new owner, creating further reluctance among sellers to engage in transactions based on their own cash flow expectations.

Growth Markets to Watch and Where to Have Caution

In the Midwest, certain markets continue to draw robust interest for multifamily investment. These markets offer growth potential with limited product availability, making them ideal for long-term investment. Areas including Ann Arbor, Grand Rapids and the Traverse City region are highly sought after by investors. The west side of Michigan is generally viewed as a growth market compared to Southeast Michigan, which is still heavily tied to the auto industry. While Chicago office investments struggle, Chicagoland multifamily remains a hot commodity. Investors are historically drawn to regions with diverse economies, making them less susceptible to economic downturns.

Hotel Conversions Lead as Emerging Trend

As we look ahead to 2025, it is helpful to contemplate both opportunities and challenges within the multifamily sector. There’s a noteworthy trend of converting outdated hotels into workforce housing and senior living spaces. This is in-part due to the lighter lift in redevelopment compared to new construction, making it an attractive option for multifamily owners looking to pivot their strategies. Conversions of antiquated hotels are generally easier than office conversions due to smaller floorplates and in-place plumbing. These conversions are also a faster alternative deal than any ground-up development at this time.

While more challenging, we are seeing some office conversions. For example, there is a conversion project at 79 West Monroe St. in the Loop, where R2 Companies and the Campari Group are converting the 14-story office building into apartments—the first of four planned developments. The conversion will transform floors seven to thirteen into 117 residential units, 41 of which will be designated as affordable housing. The project’s unit mix will include 56 studios, 54 one-beds, 7 two-beds. Note that this building is an ideal conversion project due to the older vintage with smaller floor plates, its brick façade, and punch-out style windows.

The Rise of Mid-Atlantic States

We expect to see a rise in “bounce back states,” where people consider relocating to areas such as Tennessee, Georgia or the Carolinas, as Florida faces increasing natural disaster risks (and insurance costs). Many individuals who once pursued the dream of retirement in Florida are now weighing the benefits of moving to states with milder climates and fewer natural disaster concerns. Additionally, the Midwest may see less outmigration as the region’s winters become less severe.

Adapting to Demographic Shifts

Investors should also keep an eye on demographic shifts, particularly as younger populations increasingly seek affordable housing options. The trend toward smaller units has gained traction, aligning well with the conversions of hotels into affordable housing or senior living.

As the multifamily investment landscape continues to change, understanding the impact of capital markets, identifying promising regions, and recognizing emerging opportunities will be crucial for investors. The key lies in being proactive and adaptable, particularly as we approach a new year filled with potential challenges and opportunities.

Todd Szymczak and Eli Wasserman are investment sales experts at Farmington Hills, Michigan-based Farbman Group, a Midwest full-service commercial real estate firm. To reach Todd and Eli directly, email szymczak@farbman.com and Wasserman@farbman.com.

Categories: Blog Post

A deepdive into the Midwest multifamily investment environment

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