Jay Madary: Supply, Demand in Check for Midwest Apartment Market

by Kristin Harlow

The following is a Q&A with Jay Madary, president and CEO of Oak Brook, Ill.-based JVM Realty, regarding the state of the multifamily market in the Midwest. JVM owns and operates Class A and B apartment communities in Midwest markets such as Cleveland, Indianapolis, Kansas City and suburban Chicago. Madary was also quoted in the March issue of Heartland Real Estate Business in an article discussing apartment amenities and property management trends.

Heartland Real Estate Business: What is your assessment of the health of secondary and tertiary multifamily markets in the Midwest?

Jay Madary: They’re healthy. Supply and demand are in balance, and rents are affordable for residents. When you combine those rents with the strong income levels in the region, you can see there’s room for steady rent growth, unlike some of the primary coastal markets such as San Francisco and New York.

Jay Madary, JVM Realty

Jay Madary, JVM Realty

From an investment perspective, the lower acquisition costs for apartment communities in the Midwest allow for higher returns than you’ll find in gateway markets.

Residents of the Midwest are commonly described as steady and reliable, and that describes the multifamily market in the region as well. It may not have a lot of sizzle in the form of enormous rent increases or huge community sales prices, but it has plenty of steak when you consider its dependable rent growth and solid operating fundamentals.

HREB: When it comes to multifamily investment sales in the Midwest, what are you seeing in terms of cap rates? What kinds of investors are active there?

JM: Secondary and tertiary multifamily markets in the Midwest definitely attract different investors than cities like New York, Boston, Washington and San Francisco, where institutional investors, international investors and the larger REITs are dominant.

In markets like Cleveland and Indianapolis, private investors, including high-net-worth individuals, are the most active.

As for cap rates in our markets, they are around 5.5 percent to 6 percent for Class A and B communities. Generally speaking, the cap rates for those types of properties are about 200 basis points higher here than in gateway markets such as San Francisco and New York. That means you can purchase them for less and have more financial upside in the near future.

HREB: Do you see the pace of apartment investment sales changing over the course of this year?

JM: 2016 was a very busy year in terms of multifamily investment sales, both nationally and in the Midwest, and we expect 2017 to be more of the same.

The Fed recently raised interest rates for the second time in three months, and it indicated more hikes are on the way this year. Rising rates can put the brakes on acquisitions and dispositions, but I think buyers also realize we’re still in a period of historically low rates and remain enthusiastic about the apartment sector.

Additional rate increases will be the result of an improving economy, and job growth is a powerful indicator of the health of the multifamily sector. Furthermore, a rise in interest rates will result in higher mortgage rates, which will increase the expense of buying a home and push more people to the renter pool.

HREB: Do you anticipate any challenges or issues for the Midwest multifamily market during the rest of 2017?

JM: Given that the apartment sector has enjoyed such a prolonged period of historically strong demand, it’s natural to be on guard for overbuilding. Certainly we’ve seen the national occupancy rate soften slightly over the past year, and big banks have grown more reluctant to lend to new developments. But across the Midwest, supply and demand generally remain in alignment. The last down cycle was so tough that developers learned some painful lessons.

HREB: Looking ahead, what is JVM’s strategy for the rest of 2017?

JM: We’ll adhere to the philosophy and practices we’ve followed since our founding in 1975. As for acquisitions, we’ll remain focused on secondary and tertiary Midwestern markets, and we’ll stay true to our conservative investment underwriting. We never get emotionally attached to investment opportunities and therefore don’t overpay in bidding wars.

We’re undertaking renovations of some of our communities in the metro Cleveland and Kansas City markets. In Cleveland, where there’s been almost no new development, these renovations will give our communities a bright new look and enable them to really stand out amidst aging housing stock.

In Kansas City, there’s been a fair number of new communities coming online. These upgrades will keep our properties extremely competitive with that new product, and enable us to drive rents there.

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