The New CRE: A Love Letter to the Midwest

Posted by David Luebke on Nov 19, 2021
David Luebke
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Heartland USA. The nation’s breadbasket. Flyover country. The in-between states.

 

There are many names for the Midwest, some less flattering than others. But what sometimes gets lost between the praise and the mockery is that this entire region is experiencing an undeniable and fundamental transformation. Moreover, those change are reflected in ways that have huge ramifications for the multifamily sector.

 

First, since the term “Midwest” is so overused as to be generic, let’s set some parameters here. According to the Bureau of Labor Statistics, the Midwest includes: Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin. Obviously, besides the geographic proximity, these states have little in common. Internally, there are even greater differences—for example, the big cities within them have greater ethnic diversity and wealth than their rural neighbors, and so on.

 

However, as we track the population migration to less populated areas—particularly in the evolving patterns of a post-pandemic environment—this group of states will play a leading role.

 

They have the space that residents in densely populated regions desire. The cost of living is far lower. There are thriving economic drivers: universities creating an educated workforce, technology hubs transforming traditional environments, and more. Aspirational and real affluence, a globally focused culture, growing diversity, higher education as the norm—these are all defining characteristics of the emerging Midwest.

 

That leaves open one key question: Where will they stay? And what should the CRE community know about it?

 

To be fair, we’ve seen quite a bit of attention paid to this. It’s not a secret that many investors are seeking to move or at least broaden their focus from the most visible markets: East and West coasts, the New South, the Smile Belt, primary and gateway markets and rising star cities. Much of the capital investment in these markets has been devoted to, for example, Class A properties in the CBD and other top submarkets. That made sense then, and perhaps still makes sense now—the glut of stories last year about ‘urban flight’ may yet prove to have been premature. But even at their peak, these areas are pricier and offer a lower return on investment.

 

By contrast, areas in the Midwest may be perceived as more risky but offer a higher ROI: perhaps a lower single-digit yield over a standard hold period from an investment in Raleigh, NC, is closer to a double-digit return in Indianapolis. But here, too, the market is not going from stagnant one minute to lucrative the next. Indianapolis is a perfect example—it’s already more expensive than it was three years ago, but still ‘cheaper’ than most other high-flying metro markets.

 

We count 13 Midwest markets in the Urban Land Institute’s top 75 markets for 2022. These include Chicago, Indianapolis, Kansas City, Minneapolis/St. Paul, Cincinnati, Columbus, St. Louis, Detroit, Cleveland, Milwaukee, Madison, Omaha & Des Moines. Again, these markets are not that much alike, but they do have some standout characteristics: evolving tech hubs, universities driving higher education, major employers, job growth and diversity.

 

Of course, a topline view of the entire Midwest only yields so much. Our own studies, along with plenty of third-party research, indicates that many of these cities and their surrounding neighborhoods lack adequate multifamily options. We see developers stepping up, but there’s room for a lot more. And to talk about value add—with so much focus on the top coastal and Sun Belt markets, there’s a lot of “meat on the bone” on existing properties in less competitive markets.

 

This is where the right combination of research, technology, experience and contacts developed over years makes a huge difference. Offerd tracks these trends and properties through access to 10,000-plus data points at the national, market, sub-market, and property-levels. We use the knowledge acquired to shape and execute targeted sourcing campaigns specific to each investor’s acquisition strategy. Whether you’re looking for stable yield and appreciation, or value-add, we find it.

 

Right now, we’re seeing interesting data and opportunities in the Historic Third and First Wards in Milwaukee, the North Loop in Minneapolis, downtown and West Des Moines in Iowa, Madison, Wisconsin, Fletcher Place and Fountain Square in Indianapolis, and elsewhere throughout the Midwest. There are hidden gems out there, in the Midwest and beyond, many unlisted and unnoticed. It’s our mission to find them.

 

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Topics: Market Insights

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