Greater Indy Multifamily Sector Draws Interest from Larger Pool of Investors
Demographic shifts and the subsequent demand for affordable housing are currently impacting the greater Indianapolis multifamily sector, but the most marked influence is increased and expanded investor interest.
Demographic shifts in population are influencing developers and owners in their long-term decision making when it comes to the multifamily sector. Two primary factors are at play. One, the traditional renter’s segment is changing as millennials age and delay having children. Two, national population projections are showing a decline in the prime renter’s segment as Baby Boomers begin to move into seniors housing. As a result, developers and owners are beginning to plan more senior living communities.
Millennials are also impacting affordable housing occupancy rates as they want to live in walkable and amenity-rich areas without the cost of high-end apartments. This is leading to more rehabbed properties. At the moment, Class C properties in the Indianapolis area are reflecting greater occupancy movements, as occupancy declines when properties become distressed and increases when they are purchased and rehabbed.
Additionally, college debt is delaying graduates in purchasing traditional homes. Both of these factors are causing occupancy rate increases which, in turn, result in a shortage of affordable housing. New housing construction costs are rising and pushing rents on projects out of the affordable range. Developers and owners will be faced with the challenge of building new, affordable housing in order to keep up with demand.
Global investor interest
A third trend is the expanding universe of apartment investors interested in the Indiana multifamily market. This increase in prospective buyers is the result of several factors. First, a huge amount of capital from investors across the globe continues to flow into the U.S., as investors seek commercial real estate opportunities. The multifamily sector is generally viewed as the most attractive class of commercial real estate.
Second, steady and strong apartment fundamentals (rents and occupancies) in the Midwest currently offer higher yields than many other markets. Finally, soaring prices in core markets and larger high-growth areas have driven many investors toward more reasonably priced assets in secondary and tertiary markets.
More than 12,900 apartment units changed hands in the greater Indianapolis market in 2018, up 3.8 percent from the previous year. The total dollar volume of sales increased by 11.7 percent to $878 million, up from $786 million in 2017. Sale prices of Class B or better properties in the Indianapolis metro area increased due to overall strong competition and the sale of several Class A properties.
The most sought-after property type continues to be value-add properties, especially value-add properties in Class B or better locations. These properties offer buyers the best opportunity to significantly enhance rents through upgrades of units and amenities. The underwriting of increased rental income has allowed buyers to stretch to reach the higher prices commanded in this highly competitive market.
Interest rate increases in 2018 did not negatively impact sale prices or cap rates. Lenders have narrowed loan spreads somewhat to dampen the full impact of the Fed’s rate increases. Due to strong (and increasing) demand for apartment investments, buyers have accepted lower yields and/or adjusted their forecast post-sale rents to win deals.
The most active buyer type continues to be private equity. This includes equity syndicators with small investors, larger networks of high-net-worth individuals, real estate funds and family offices. Institutional investors are also more actively looking in Indianapolis, generally through funds or with a joint venture partner.
There was no shortage of debt financing in 2018 to close acquisitions. Fannie Mae and Freddie Mac have been active in Indiana. The fact that Indiana remains a pre-review state has been no real impediment to financing, as waivers of the pre-review restrictions seem to be easily obtained. Many buyers are striving to achieve “green” status through environmental improvements — not only to benefit the planet but also to reduce their interest rate.
To finance their value-add rehabs, many buyers are closing purchases with bridge loans and putting a permanent HUD or agency loan in place after renovations. HUD is still a viable financing option here, but some buyers who have used HUD loans in the past have recently favored agency loans that offer periods of interest-
only payments in order to increase current yield.
Market continues growth
The number of market rate apartment units in downtown Indianapolis has more than doubled since 2010. Recent developments include the opening of 360 Market Square, a 28-story, 292-unit, Class A+ property with a 42,000-square-foot Whole Foods Market. Penrose on Mass, a $45 million mixed-use project with 236 Class A+ apartments and 40,000 square feet of retail shops and restaurants, is nearly complete.
Construction is underway on the 402-unit CityWay 2.0, including Class A+ apartments and 29,000 square feet of commercial space. Construction is also beginning on the much-anticipated 12-acre, $300 million Bottleworks District project at the site of an iconic Coca-Cola bottling plant.
The area’s multifamily sector as a whole is experiencing significant growth with nearly 123 projects in various stages of development. The future looks bright as a total of 3,600 new units are expected to be delivered by years’ end, piquing even more investor interest.
— By George Tikijian and Hannah Ott, Executive Managing Directors, Cushman & Wakefield. This article originally appeared in the June 2019 issue of Heartland Real Estate Business magazine.