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Multifamily Finance Blog
Last updated on Apr 7, 2023
5 min read
by Jeff Hamann


THE MOST UNDERRATED MIDWESTERN MULTIFAMILY MARKET OF 2023

In examining nine major metros, one state's capital city stands apart as a place
for great investment opportunities.

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In this article:
 1.  The Midwestern Markets
 2.  The Most Underrated Multifamily Market: Indianapolis
 3.  Strong Rent Growth
 4.  Booming Primary Industries
 5.  Significant Uptick in Units Projected for Delivery
 6.  Attractive Cap Rates
 7.  Demographics and Vacancy Changes
 8.  Market Comparisons
 9.  Conclusion
     
 10. Get Financing

Show full table of contents →

We know that the multifamily sector is facing some pressure this year across the
country. While there’s a record amount of units set to deliver in the face of
cooling demand, some markets are better positioned than others.

Today, we’ll examine dynamics across the Midwest. While often seen as a less
dynamic region for multifamily investments, they have typically been stable
performers. Sure, gains have not been as outsized compared to other high-growth
regions like the Sun Belt, but as demand stagnates, there are several hidden
gems in the area.

This article will explore the region and highlight what is, in our opinion, the
most underrated, overlooked market in the Midwest. To make our determination, we
reviewed data from Marcus & Millichap’s latest metro reports, combined with
insights from the Census on demographic trends and economic data from the Bureau
of Labor Statistics.


THE MIDWESTERN MARKETS

For this report, we examined the following markets: Chicago, Cincinnati,
Cleveland, Detroit, Indianapolis, Kansas City, Milwaukee, Minneapolis-St. Paul,
and St. Louis.

Market

Rent Growth (Projected, 2023)

Cap Rates (H2 2022)

Fastest-Growing Job Sector

Vacancy Change (Projected, 2023)

Deliveries (Projected, 2023)

Chicago

4.8%

4.25% to 5.5%

Leisure & Hospitality

Up 80 bps

8,000

Cincinnati

3.5%

4.75% to 6.25%

Leisure & Hospitality

Up 160 bps

4,000

Cleveland

1.7%

Not available

Mining Logging & Construction

Up 100 bps

1,200

Detroit

2.0%

5% to 6.5%

Leisure & Hospitality

Up 40 bps

1,800

Indianapolis

4.1%

4.5% to 5.25%

Construction

Up 90 bps

3,600

Kansas City

2.8%

4.75% to 5.75%

Leisure & Hospitality

Up 80 bps

4,800

Milwaukee

4.1%

5% to 5.75%

Construction

Up 100 bps

2,500

Minneapolis-St. Paul

5.4%

5% to 5.5%

Leisure & Hospitality

Up 80 bps

8,000

St. Louis

2.4%

4.75% to 6.25%

Leisure & Hospitality

Up 80 bps

2,700


THE MOST UNDERRATED MULTIFAMILY MARKET: INDIANAPOLIS

Amid these nine Midwestern markets, Indianapolis stands out as the most
underrated multifamily market with the most potential for investors in 2023. Its
booming primary industries and strong rent growth, despite significant uptick in
units projected for delivery, position it as a hidden gem.

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STRONG RENT GROWTH

Year-over-year rent growth is a crucial metric when evaluating a multifamily
market's potential. According to projections, Indianapolis is slated to have
growth this year of 4.1%, outpacing Cleveland (1.7%), Detroit (2.0%), Kansas
City (2.8%), and St. Louis (2.4%). This robust growth signifies a strong demand
for rental properties in the area.


BOOMING PRIMARY INDUSTRIES

Economic development is, of course, a key driver for rental markets. In
Indianapolis, the top three primary industries experiencing growth are
construction, other services, and professional and business services. 

While construction and the varied “other services” sectors are relatively high
growth in some, if not most, of the markets on our list, no other market is
benefiting as much from professional and business services employment growth.
These typically office-using jobs can be jet fuel for renter demand,
particularly within upscale Class A properties.


SIGNIFICANT UPTICK IN UNITS PROJECTED FOR DELIVERY

The number of units projected for delivery in a market is often a reliable
indicator of future growth potential. In 2023, Indianapolis is expected to
deliver 3,600 units, more than double the 2022 total and the highest in at least
a decade. This surge in development suggests confidence in the market's future
performance.


ATTRACTIVE CAP RATES

Indianapolis offers attractive cap rates ranging from 4.5% to 5.25%, according
to CBRE’s cap rate survey from the second half of 2022. While not the highest
among the nine Midwestern markets reviewed, these rates are competitive and
provide a solid return on investment for multifamily investors.


DEMOGRAPHICS AND VACANCY CHANGES

Understanding the local demographics and vacancy changes is essential when
evaluating a multifamily market. Indianapolis had a relatively young median age
of 36.6 and a median income of $63,545, according to census data from 2020.
These factors, combined with a moderate projected vacancy increase of 90 basis
points, indicate a stable rental market.


MARKET COMPARISONS

While Minneapolis-St. Paul has the highest expected year-over-year rent growth
(5.4%) and Milwaukee matches Indianapolis with 4.1% rent growth, Indianapolis
outshines both markets in other key aspects.

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The Twin Cities market is projected to have 8,000 units delivered in 2023, which
is lower than any of the past four years. While this reduction in new units may
normally indicate potential underlying market troubles, it comes as something of
a blessing due to the overwhelming amount of deliveries across other markets.

Milwaukee's cap rates (5% to 5.75%) are higher than Indianapolis', but the
city's fastest-growing employment sectors — construction, government, and other
services — may not be as conducive to multifamily market growth. Additionally,
Milwaukee's projected vacancy increase of 100 basis points is higher than
Indianapolis', suggesting a potentially more volatile market.


CONCLUSION

In conclusion, Indianapolis emerges as the most underrated multifamily market
for investors in 2023. The city boasts strong rent growth projections and a
thriving construction industry, which reflects a dynamic local economy.
Moreover, it offers attractive cap rates, providing a desirable balance between
risk and return for investors. As the market continues to grow, financing
opportunities may become increasingly available for investors looking to
capitalize on this underrated Midwestern gem.

It is important to note that there are many strong markets in the Midwest, and
while Indianapolis stands out as the most underrated, other cities also have
great potential for multifamily investment. Markets such as the Twin Cities,
Chicago, and Milwaukee all show promising rent growth and robust employment
sectors, making them viable alternatives for investors seeking opportunities in
the region.

Although the increase in multifamily deliveries raises concerns of potential
overbuilding, astute investors can still identify opportunities by closely
monitoring market trends and assessing the long-term demand for rental
properties. 

With the right financing strategies and a keen eye for hidden potential,
investors can unlock the value in underrated markets like Indianapolis and
others throughout the Midwest.

In this article:
 1.  The Midwestern Markets
 2.  The Most Underrated Multifamily Market: Indianapolis
 3.  Strong Rent Growth
 4.  Booming Primary Industries
 5.  Significant Uptick in Units Projected for Delivery
 6.  Attractive Cap Rates
 7.  Demographics and Vacancy Changes
 8.  Market Comparisons
 9.  Conclusion
     
 10. Get Financing




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