Multifamily markets in the Midwest have enjoyed significantly less attention over the past couple of years, as domestic migration and company relocations pushed Sun Belt metros to the top. However, investment in the Southeast and Southwest could become steadily unattainable, owing to rate increases and jumps in property values, prompting investors to turn to cities in the Midwest.

Due to more moderate growth over the past two years, Midwestern metros are predicted to experience a similarly more moderate slowdown in the coming quarters — especially compared to cities that registered highly unsustainable growth during the pandemic.

According to Freddie Mac’s Multifamily Apartment Investment Market Index (AIMI), the country and 11 markets saw the largest annual AIMI decline in the history of the index, falling by 11.7% in the second quarter of the year. However, while Atlanta or Charlotte experienced a more than 20% annual decline, Chicago’s AIMI fell only 4.6%. The AIMI index considers key economic drivers, such as employment, multifamily permits, net operating income, and property prices.

Chicago’s AIMI stood at 142.3 as of the second quarter of 2022 — well above the 109.4 national index — with its employment increasing 4.5% year-over-year, multifamily permits climbing 32.2%, NOI growing 19.2%, and property prices experiencing a 6.1% annual growth.

A Close-Up on Chicago’s Multifamily Fundamentals

Although multifamily permits increased considerably in the second quarter of 2022, developers completed approximately 3,600 units across 20 properties over the first seven months of the year, representing 1% of total stock, 10 basis points below the U.S. rate, according to Yardi Matrix research.

Thanks to low deliveries, vacancy levels are also bound to stay low, keeping rents in a healthy range. While lagging the national growth rate by 300 basis points, rents increased 9.6% in July on an annual basis, reaching $1,814.

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During the first seven months of the year, Chicago saw $1.4 billion in closed multifamily deals, 14% below the $3.9 billion transacted last year. The drop, however, is unsurprising: Last year was record shattering in terms of multifamily investment volumes nationwide, Yardi Matrix highlighted.

Over the 12 months ending in July, investors mostly picked Chicago’s suburban markets for investment, with $2.5 billion in sales recorded. Transaction volume in the metro’s urban zones totaled $1.1 billion during the same period.

All in all, while investments dropped compared to last year — and some deals will inevitably fail to materialize due to rising costs of capital — changes in Chicago's commercial real estate markets will be less stark, thanks to the relatively steadier and more sustainable growth over the past couple of years.