Wednesday

07-02-2025 Vol 2009

Midwest Multifamily Sector Booms Amidst Record Heat and Economic Challenges

Record temperatures across the Midwest have not only raised eyebrows but have also ignited a remarkable surge in the multifamily real estate sector, particularly in Chicago and other major cities.

With rent growth reaching staggering levels, Chicago emerged as a hotbed, boasting a 4.2% year-over-year increase in May, making it the third-highest in the nation, trailing only behind Brookline, Massachusetts, and Hollywood, Florida, based on data from CoStar.

Other Midwest cities have also exhibited impressive growth rates, significantly outpacing the national average of 1%. Notably, Indianapolis reported a 2.6% rise in rents, while Madison, Wisconsin, recorded a 2.3% growth.

Against a backdrop of rising interest and investment, executives in the multifamily sector are making bold moves.

Tim Anderson, CEO of the Chicago-based development firm Focus, remarked on the renewed interest in the region, stating, “We’ve been the poor stepchild for a long time, and it seems now there’s some interest.” He indicated that areas that experienced a population influx during the pandemic have become overdeveloped but expects that economic fundamentals will eventually balance themselves out.

Several key players in the investment arena share this optimism. For instance, Morgan Properties announced a substantial $500 million commitment to multifamily investments in the Midwest in April. Chicago’s Clear Investment Group is also actively pursuing opportunities, aiming to raise $300 million for a fund focusing on workforce housing.

Jonathan Morgan, co-President of Morgan Properties, emphasized the shift in focus to the Midwest, saying, “At the moment, it’s the Midwest. The Sun Belt was obviously hot post-Covid.”

Traditionally, multifamily investors favored major gateway cities like San Francisco, Los Angeles, and New York to secure their capital.

Now, cities like Indianapolis, Minneapolis, and Chicago have become more appealing for core and core-plus investments, driven by organic growth and a robust local job market, according to Tom Taylor, Senior Research Manager at Trepp.

The multifamily sales landscape in Chicago has also seen dynamic activity. According to Northmarq, first-quarter multifamily sales more than doubled compared to the same period in 2024. The surge has been evenly distributed across various property classes, although Class-A prices have surged significantly, with the median price per unit reaching $421,500, reflecting a remarkable 33% increase from the average between 2022 and 2024.

Chicago’s multifamily market encompasses a wide spectrum of properties, from top-tier units to Class-C buildings, all demonstrating strong rent growth.

CIG CEO Amy Rubenstein expressed her enthusiasm for the future, highlighting the relative stability of multifamily investments amidst inflationary pressures. “What is a better investment right now with inflation going on than placing your money in multifamily, existing multifamily assets, where you are sheltered somewhat from some of those construction costs?” she stated.

Despite the growth prospects, challenges remain. Elevated capital costs, rising construction expenses, and the uncertain national political landscape are notable headwinds.

Currently, only about 1,200 Class-A multifamily units are under construction in Chicago, with deliveries expected over the next three years, as noted in a recent report from Luxury Living.

According to Jeff Brown, founder and CEO of T2 Capital Management, acquisitions are often more feasible than new construction due to rising build costs.

The labor pool is shrinking further due to deportations and other factors, exacerbating the already high construction costs that have increased considerably since the pandemic.

Brown articulated, “That’s been a shift that’s been ongoing, I would even say since Covid, where construction costs just spiked so significantly and supply chains were constrained. Now it’s only being exacerbated when you consider shrinking the labor pool.”

Nevertheless, some developers remain undeterred.

Recently, Focus celebrated the opening of the second phase of its Fox Valley Mall redevelopment, featuring a new luxury apartment community known as Lucca.

This addition includes 323 luxury rental apartments and 55,000 square feet of public space.

Anderson, despite the current interest rates, maintains that there remains enough margin in deals, provided they are underwritten correctly, to justify new construction. “We still have got enough margin, then, that we can build and take advantage of this lack of supply,” he explained.

Investors are increasingly picking up multifamily properties recognizing opportunities arising from broken capital stacks on otherwise stable assets.

Anderson noted that many buyers in Chicago are acquiring properties that are operationally sound but have encountered challenges due to rising interest rates.

Those who navigate these acquisitions wisely are likely to reap the benefits of the ongoing rent growth, he observed.

T2 is keenly observing “broken balance sheet” scenarios, focusing on the disparity between the costs of renting versus owning a home.

Brown pointed out, “This bifurcation between what it takes to buy a house versus what it takes to rent still greatly favors renting. There’s a lot of momentum and these tailwinds behind multifamily that lead to. Even though rents are up, they’re not near as severe as it would be to buy a house.”

CIG’s approach is more focused on workforce housing, targeting properties that many investors overlook.

Rubenstein shared her confidence in the multifamily sector’s strength, noting that the Midwest market has undergone much-needed growth following a period of decline.

“It is a market that actually is increasing, which is about time, because Chicago has had its share of a downward trend, which kept us from Chicago for a while. We do really like the Midwest because it is a very stable place,” she concluded.

image source from:bisnow

Benjamin Clarke