Multifamily Continues to Expand in the Midwest

 • High Interest Rates: The steep 2022 increases in interest rates shocked the market of buyers doing value-add with high 2020-2022 basis. Those under construction projects during this time had future refinance models based on continued low interest rates and aggressive rent growth. All regions showed slowing new developments and investment volumes even in markets like Chicago, Los Angeles and Atlanta where fundamental demand was strong. • Strong Demand and Low Vacancy Rates: Many markets reported balance in upcoming construction supply and continued strong demand resulting in positive rent growth in cities like Grand Rapids, Detroit, Indianapolis, New Jersey, Philadelphia, Boise, Denver, and Phoenix. • Regional Resilience: The South and Western US regions are just now delivering their major construction pipeline from 2021, and slower rent growth and increased vacancies are evident. Identifying markets where new supply exceeds 3%-5% of existing inventory reveals where current values are not likely to be sustainable in the short-term 2024 2025. The market continues to expect moderation of borrowing costs to resolve current negative leverage on deals completed pre-2022. • Changes to regional investment metrics from Q2 ’23 to Q2 ’24: • Cap Rates: Urban Class B properties in the East saw the highest regional cap rate increase, rising by 52 basis points to 6.48%, while Suburban Class B properties in the Central region experienced the smallest regional increase, up 26 basis points to 6.80%. Nationally, Urban Class A properties had the highest cap rate increase, rising by 42 basis points to 5.61%, whereas Suburban Class B properties saw the lowest increase, up 37 basis points to 6.29%. • Market Rents: The East region experienced the highest regional market rent growth for Class A properties, with an increase of 0.56% to $2,281.80, while the West saw the lowest regional growth for Class B properties, which decreased by 0.48% to $1,736.15. Nationally, Class A properties saw the highest market rent increase, rising by 0.11% to $1,950.50, while Class B properties only increased 0.01% to $1,307.66. • Vacancy Rates: Class A properties in the South had the highest regional increase, jumping by 116 basis points to 7.16%, while Class A properties in the East saw the smallest increase, rising by 11 basis points to 6.16%. On a national level, Class A properties experienced the highest vacancy rate increase, up 75 basis points to 6.65%, whereas Class B properties only increased by 55 basis points to 4.84%. 6 INTEGRA REALTY RESOURCES 7 MULTIFAMILY MARKET Cap Discount Market Vacancy Rate Rate Rent ($/Unit) Rate South Region Urban Class A 5.51% 7.05% ▲41 bps Suburban Class A 5.66% 7.19% ▲43 bps Urban Class B 6.16% 7.82% ▲35 bps Suburban Class B 6.27% 7.87% ▲43 bps East Region Urban Class A 5.96% 7.23% ▲47 bps Suburban Class A 6.02% 7.27% ▲43 bps Urban Class B 6.48% 7.75% ▲52 bps Suburban Class B 6.61% 7.84% ▲43 bps Central Region Urban Class A 6.06% 7.84% ▲42 bps Suburban Class A 6.01% 7.70% ▲33 bps Urban Class B 6.88% 8.53% ▲38 bps Suburban Class B 6.80% 8.43% ▲26 bps West Region Urban Class A 5.04% 6.79% ▲40 bps Suburban Class A 5.18% 6.89% ▲35 bps Urban Class B 5.42% 7.19% ▲34 bps Suburban Class B 5.61% 7.36% ▲33 bps National Averages/Spreads Urban Class A 5.61% 7.19% ▲42 bps Suburban Class A 5.69% 7.25% ▲39 bps Urban Class B 6.21% 7.81% ▲39 bps Suburban Class B 6.29% 7.86% ▲37 bps Q2'23 - Q2'24 Cap Rate △ $1,116.29 5.98% $1,672.79 7.16% $1,572.40 3.98% $2,281.80 6.16% $978.09 3.93% $1,562.91 6.66% $1,736.15 4.18% $2,536.31 6.07% $1,307.66 4.84% $1,950.50 6.65% Regional Rates Comparison - Multifamily INTEGRA REALTY RESOURCES MULTIFAMILY MARKET Between Q4'2023 and Q2'2024, the multifamily market cycles exhibited several changes. In the East, Expansion increased from 23.1% to 38.5%, while Hypersupply decreased from 69.2% to 38.5%. The South saw a slight decrease in Expansion from 18.5% to 14.8% and an increase in Hypersupply from 51.9% to 55.6%. In the Central region, Expansion rose significantly from 15.4% to 46.2%, and Hypersupply decreased from 76.9% to 46.2%. The West saw Expansion remain stable at 14.3%, Hypersupply decrease from 42.9% to 28.6%, and Recession remain constant at 35.7%. Nationally, Expansion increased from 19.4% to 27.4%, while Hypersupply decreased from 62.9% to 48.4%. The Recession phase slightly decreased from 12.9% to 11.3%, and Recovery increased from 4.8% to 12.9%. For CRE investors, these trends indicate a shift from Hypersupply towards Expansion and Recovery, particularly in the Central and East regions, suggesting improving market conditions in these areas.