Signs of Life

Credit: Scott Crawford

The story said these cities face “fleeing populations, painful waves of unemployment and barely growing economies.” One might naturally conclude that multifamily investors are leaving the Midwest for greener pastures—except they're not. In fact, local and regional multifamily investors are still investing their money in America's heartland—even in Detroit and Cleveland. What could they be thinking, especially when almost all apartment REITs have exited these markets? (Equity Office, Archstone, and AMLI Residential have all left the smaller markets.)

“When it comes to the Midwest, a lot of people are throwing the baby out with the bathwater,” says Albert Berriz, CEO of McKinley, an Ann Arbor, Mich.-based multifamily owner and developer. “People who are not knowledgeable about specific markets may discount the entire region, even though there are parts of the Midwest that are fabulous.”

But the Midwest isn't for everyone, says Bob Bach, an economist with Grubb & Ellis. “Midwest markets are not as well suited for big investors searching for appreciation,” he warns. “They're more suited for local and regional investors who take a more hands-on approach.”

The Midwest appeals to investors who are in it for the long-run, says J o n a t h a n Holtzman, CEO of Village Green Cos., a Farmington Hills, Mich.-based apartment developer and owner with more than 35,000 units in five markets throughout the Midwest. “The apartment business in the Midwest is slow and steady, so you have to ask yourself [whether you are] a day trader or like Warren Buffet,” he says.

While it's true that several Midwestern markets are struggling, there are quite a few that are posting strong apartment occupancy and positive rental rate growth. Faced with two sides of the coin, MULTIFAMILY-EXECUTIVE went on a fact-finding mission to identify a handful of Midwest markets that illustrate what's good—and what's not so good—in this unpredictable region of the country. While each city has its own distinct story to tell, the common thread that weaves among them all is this: Although pronounced dead by many, the Midwest still has a lot of life left in it.

Orchard of Landen, in Cincinnati, Ohio

Credit: The Connor Group

As the state capital of Ohio and home to Ohio State University, Columbus continues to add jobs and new residents. According to the Columbus Chamber of Commerce, the area's employment growth for 2008 is likely to be 0.6 percent, ahead of the state and national averages. The city's population has grown at least 1 percent annually for the past eight years.

The Connor Group, a Dayton, Ohio-based firm that owns and manages 13,000 units in Georgia, Ohio, North Carolina, and Texas, recently acquired three properties with a total of 873 units in Columbus for $46.8 million. CEO Larry Connor says investors can expect cap rates of 7.5 percent to 8 percent in Columbus, which is about 150 to 200 basis points higher than the rest of the country. In overheated markets such as California, cap rates for Class A properties dipped into the 4 percent range. “In terms of ROI, Columbus rivals North Carolina, which is clearly one of the best growth markets in the nation,” he contends. [For more on the Columbus, Ohio, market, see “City of Industry” on page 21.]

The Connor Group also is investing heavily in another Ohio market: Cincinnati. Over the past 12 months, the firm has invested nearly $100 million in the market by acquiring five existing apartment assets totaling almost 1,200 units. The company, which has invested in Cincinnati for several years, is headquartered in nearby Dayton and is well aware of Cincinnati's strengths, including its diverse economic base, which includes corporate powerhouses such as Proctor & Gamble, Kroger, and Federated Department Stores. Moreover, Cincinnati has maintained its population over the years, and its unemployment rate actually decreased from 5.3 percent in May 2007 to 5.2 percent in May 2008, according to the U.S. Bureau of Labor Statistics (BLS).

As a result, Cincinnati's apartment market is among the healthiest in the Midwest, experts say. With very little new construction in the market—no new units have come online since January 2007—occupancy has increased to almost 95 percent, according to REIS.

Like The Connor Group, Cincinnati-based BRG Apartments is investing in its hometown. “Cincinnati has never experienced the ups and downs of the coasts,” says Bruce Hellman, president of BRG Apartments, which owns or operates 6,000 units. “Maybe we've not grown as fast, but we have grown. We think it's a great time to be investing in our backyard.” The firm has invested $36 million in northeast Cincinnati since December 2007, acquiring three Class B properties totaling 566 units.

Minneapolis skyline

Credit: University of Minnesota

Minneapolis/St. Paul is a Midwest market that many national investors seem to overlook. But several local and regional investors are increasingly interested in the area, which is the second-largest Midwest metro after Chicago. Even during this current economic slowdown, the Twin Cities have seen slight employment growth (0.5 percent), according to the BLS. At the same time, the area has benefited from in-migration, both foreign and domestic, according to Solomon Poretsky, regional manager in Marcus & Millichap's Minneapolis office.

Poretsky points out that many college graduates from Midwest universities are now moving to the Twin Cities instead of Chicago for the abundant job opportunities there. In the past, Chicago offered more job opportunities than any other market. While that is still true in terms of actual numbers, Minneapolis now also offers a lot of opportunities, giving graduates a choice. This influx of young professionals has benefited the rental market, pushing vacancies to 4.5 percent and encouraging rental rate growth of 2.7 percent so far this year. Village Green Cos. is just one investor that is pouring money into Minneapolis, particularly in the city's downtown. The firm has built four downtown apartment communities, totaling nearly 550 units, in the last five years and is proposing to build a fifth one, CEO Holtzman says.

With all the bad press Cleveland and Detroit receive, it's hard to believe that there's anything good to say about these two Midwestern cities. And it's even more surprising to find that there are apartment investors out there who feel good about these markets.

Village Green Cos. is continuing to invest in the Detroit metro area; it currently manages nearly 9,000 units in 39 properties throughout the region and has an ownership stake in 21 of those properties, totaling 5,577 units. Meanwhile, The K&D Group, a Willoughby, Ohio-based commercial real estate developer, is investing in Cleveland's apartment market primarily through new development.

Both Detroit and Cleveland have seen their multifamily inventories shrink considerably over the past several years. In metro Detroit, for example, obsolete apartment communities have been closed and demolished, and very few new properties have emerged to take their place, according to Village Green CEO Holtzman.

“The media has said for many years that Detroit is bad; therefore, the investors have not invested in Detroit,” Holtzman says. “So over the past eight years, there has been a negative number of apartments added to the market. Even if you have very little population growth, and even if you have very little employment growth, these people still need a place to live. That's created the highest economic and physical occupancy of all the Midwest cities. There are no concessions, and rents are increasing anywhere from 3 [percent] to 4 percent.”

Michael Barron, an associate in Marcus & Millichap's Cleveland office, is currently marketing a 19-property portfolio of assets located in and around Detroit. He says the properties are receiving a fair amount of interest from investors, most of which are local. “There are contrarian investors and local buyers who understand that there are exceptions to the negative news,” he says. “They know they're still able to get cash flow in these markets. They may not have the appreciation of other markets, but the cash flow should remain steady if owners off er a good product.”

In the Cleveland metro area, The K&D Group's portfolio, which consists of 13,000 units, is 95 percent occupied, according to CEO Doug Price. “We're probably in the best occupancy situation we've been in the last three to four years,” he says. “Foreclosures and the difficulty in getting a home loan have pushed more people into the rental market. We're going to be up 3 percent for rental growth this year.”

But Price says the apartment market is also improving because Cleveland's overall economy is getting better. He points to downtown Cleveland as proof of the regeneration: More than 11,000 people live there today, and 2,000 multifamily units are currently under construction. In 2000, only 4,300 people lived in downtown Cleveland, according to the U.S. Census Bureau. The K&D Group is now sitting on $250 million of new development in downtown Cleveland, including a mixed-use property with 236 apartments and 70,000 square feet of commercial space.

“We've lost jobs, but we also have a lot of other areas that are really coming on strong,” Price contends. “It's a changing environment, and I think we're back on the upswing again.”

University of Michigan

Outside of Ohio, Michigan is the only state in the Midwest that receives more negative attention. Detroit and its economic woes have given the whole state a black eye, despite the fact that Ann Arbor has a thriving economy and multifamily market.

“Ann Arbor's apartment market has had great success in staying full,” says Debbie Corson, a principal in Apartment Realty Advisors' Ohio office. “Investors can make really good returns in these markets, which primarily consist of regional and local owners.”

So what makes this city an exception to the Michigan rule? In a word: research. Ann Arbor is home to the University of Michigan, which boasts 45,000 students and another 45,000 employees.

The city benefits from the millions of dollars that pour into the university annually to facilitate the study of everything from engineering to medicine, notes Berriz of McKinley, which owns 15 apartment communities in and around Ann Arbor, totaling roughly 10,000 units. Village Green Cos. also owns two properties in Ann Arbor, and the company is so convinced of the city's strong future growth that it has plans to break ground on a 146-unit community in downtown Ann Arbor later this year.

INDIANAPOLIS

When talking about the Midwest, it's hard to ignore Indianapolis. “A lot of investors think Indianapolis is the hidden gem in the Midwest,” says Scott Pollom, a multifamily specialist in the Indianapolis office of brokerage firm Colliers Turley Martin Tucker.

Located just three hours from Chicago, Indianapolis has posted job growth of almost 2 percent so far this year, according to the BLS. Its professional business sectors, along with the logistics sector, continue to grow and add an element of stability to the market.

Moreover, the city's apartment market has benefited from the slowdown in the housing sector and the credit crunch. “The biggest enemy for the apartment market in Indianapolis is the entry-level home market,” Pollom explains. “With it much harder to get mortgages, more people are renting.”

As a result, vacancies are down, rents are up, and concessions have almost evaporated. In fact, Berriz says McKinley's Indianapolis portfolio, which consists of three properties in the northeast/Carmel submarket that total more than 800 units, is having its best year in a decade.

Philadelphia-based NWJ Properties has been buying multifamily assets in Indianapolis for three years. Today, the firm owns eight properties, totaling 500 units, throughout the city. “I don't feel that the economic drivers in Indianapolis are any better or any worse than anywhere else, but the cap rates are better,” says CEO Nick Jekogian III, adding that he's closing deals with cap rates at about 7.5 percent to 8 percent.

“There are still a lot of opportunities to make money in the Midwest, but you just have to be careful of which markets and submarkets you go into,” Jekogian says. “In other markets outside the Midwest, there's more room for error and time can heal mistakes. But if you make a mistake in the Midwest, you could be paying for it for a very long time.”

Jennifer Popovec is a freelance writer living in Fort Worth, Texas.