Apartment rents in Detroit are now the fastest rising in the United States among the nation’s largest cities, growing at an annual rate of 5.3 percent as of May 2018, according to Yardi Matrix and RENTCafé. Across the Midwest, the apartment market remains very strong with high demand and therefore increasing rents.
Jay Madary, president and CEO of Oak Brook, Ill.-based JVM Realty, spoke with REBusinessOnline to discuss the state of the market, including the pace of investment sales. JVM owns and operates Class A and B apartment communities in Midwest markets such as Cleveland, Indianapolis, Kansas City and suburban Chicago.
Jay Madary, JVM Realty
REBusinessOnline: How would you assess the overall state of the apartment market in the Midwest?
Jay Madary: I think it’s really strong. In general, supply and demand remain balanced. We’ve certainly seen a surge of new construction in most Midwestern markets, and those new units coming online have cooled rent growth a bit. Whereas we were seeing growth of 5 to 6 percent a couple of years ago, now 2 to 4 percent is more typical.
But the robust job growth in the region and the historically low unemployment rates have kept demand high, and those new units are largely being absorbed. We certainly don’t see demand dropping anytime soon.
REBO: Are there any particular challenges that the Midwest apartment market will face in the coming months and years?
Madary: The challenges in the Midwest are typical to the ones you’ll find in other areas of the country.
We are in an environment of rising interest rates, and that can be both good and bad for the industry. Rising rates mean the cost of debt for acquisitions and development is going up. But it also means the cost of homeownership is going up, and that’s going to put more people into the renter pool and increase demand for apartments.
Like I mentioned earlier, we continue to see new properties coming online, and the industry always has to be on guard for supply and demand getting out of balance. But I think owners, developers and lenders have learned some lessons from overbuilding in past cycles.
Furthermore, job growth is keeping absorption of new units high, and we also believe new construction will trail off as interest rates rise and increasing development costs make new projects cost-prohibitive.
REBO: How would you describe the pace of apartment investment sales in the region? What types of investors are most interested in Midwest multifamily properties, and how do the cap rates compare to other regions?
Madary: We continue to see investment sales take place at the same pace of the last couple of years. Investor interest in apartment communities in the Midwest definitely remains high. Of course, cap rates can vary quite a bit depending on the condition and location of the property. But generally speaking, a Class A suburban property in the Midwest might fetch a 5 to 5.5 percent cap rate, which is about 50 to 100 basis points higher than you’ll see in markets like San Francisco or Miami.
As for the types of investors interested in the area, we’re seeing a wide range that runs from institutional investors to private equity firms and high-net-worth individuals. We have yet to see the international equity that has been active in the coastal, gateway cities.
REBO: What trends are you seeing when it comes to amenities? What features are most in-demand by today’s renters?
Madary: Quality onsite fitness centers are extremely important. In the Class A space, you really need a facility that compares to what you would find in a commercial gym like LA Fitness or some similar chain. Long gone are the days when residents will be OK with a room that has just a treadmill and a bench press.
Pets continue to be a huge priority for residents. So if your community doesn’t have fenced-in dog parks, pet washing stations and those kinds of amenities, it’s going to be at a real competitive disadvantage.
Also, apartment communities need some type of package management/storage system that gives residents 24-hour access to their packages. The system needs to be able to accommodate not only UPS or FedEx deliveries, but also dry cleaning or groceries that might be delivered from a local store.
REBO: Looking ahead to the rest of 2018, what’s are JVM’s goals and plans?
Madary: We are aggressively exploring acquisition opportunities in the Midwest. Since our founding in 1975, JVM has focused on the acquisition of apartment communities in secondary and tertiary Midwestern markets. That won’t be changing.
We are targeting the acquisition of $200 million in Class A properties in our existing Midwestern markets this year. But we won’t meet that number just for the sake of meeting that number. We’ll adhere to our conservative investment underwriting, and we’ll never pursue something that’s out of our comfort zone just because we’re worried about not meeting that goal.
— Kristin Hiller