This is a report of the single-family rental asset classes in the Midwest region of the United States. The following market report is a comprehensive review of current market trends in Chicago, Columbus, Cincinnati, Indianapolis, Minneapolis, Kansas City, and St. Louis.
The Chicago market is large and has a lower Price-to-Rent ratio than the national average of 12.43 indicating higher than average initial yields. Chicago’s rental market has a noticeably weakening rental market with only 2,516 units absorbed and a net decrease in rental units of 82,030. The number of newly constructed units is 25,932 representing a healthy housing market meaning more residents are choosing to buy instead of continuing to rent. With such a large decrease in rental units the Chicago rental will become tighter, but not by a large amount. This will allow for incremental increases in yields for investors. While Chicago might not have the best overall yields or yield growth, it still looks to offer yields that are higher than national averages. The area will best accommodate investors that are looking to invest in the third largest metropolitan area while still achieving above long-term returns.
The Columbus market is a compelling choice for investors because it offers a balance between initial yields and yield growth. Yields are already higher than the national average with a Price-to-Rent ratio of 10.98, and the yields are likely to increase due to a tightening rental market. The demand in the market is moderate with a net absorption of 12,033 units or 1.4% of total housing units, but it is still rapidly outpacing supply. The supply side of the market is very weak with only 10,236 newly constructed units, but an even bigger concern for the supply is the net decrease of 65,529 rental units. This is largely accounted for by an increase in the number of owner-occupied units. Having more homeowners puts a long-lasting dent in the demand for rental units making Columbus a risky area for investors, but it still offers above-average yields and expected yield growth in comparison to the national average.
Cincinnati has a profitable rental market for investors with a price to rent ratio of 10.36, which is drastically lower than the national average. The initial Price-to-Rent ratio has the most power to increase yields for investors. This is illustrated by the cap rates that are calculated from yields with the national average resulting in around a 7.4% yield while the rents from the Cincinnati market yield about 9.75%. The market looks to become increasingly favorable for landlords in the future with 20,662 net units absorbed and a decrease of 20,350 rental units available in the marketplace. The demand is strengthening and the supply is weakening in Cincinnati, so yields should increase for investors making this a strong market for real estate investors. Even with the homebuyers market included, the overall housing market looks to be somewhat weak in Cincinnati due to its relatively low new constructions of only 6,708 units.
Indianapolis offers a good value for investors with a price-to-rent ratio of 8.93, which is drastically below the national average. It is clearly a landlord’s market and offers high yields to investors, although these yields are not likely to continue to grow. The net absorption rate of 1.59% is low, but the available supply also only increases slightly at a rate of 4.13%. Therefore, the market will likely become slightly weaker but won’t experience a significant change. Yields for investors will remain stagnant or experience a slight decline going forward, so Indianapolis is the best option for investors that are looking to achieve the highest initial yield but are not concerned with yield growth.
The market absorption and new unit construction is relatively low in the Minneapolis market. There is a significant net increase in the number of rental units of 82,290, indicating that supply is greatly outpacing demand. The result will be a weakening in the market for rental which will drive down rents and investor yields. With an initial yield close to the national average based on the Price-to-Rent ratio of 13.09 the Minneapolis market offers potential returns that are mediocre at best.
Kansas City, Missouri
The Kansas City market is the best market for investors when considering long-term returns due to its high initial yields as well much stronger demand than supply. The Kansas City rental market is high yielding for investors with a price-to-rent ratio much lower than the national average at 9.06. The market’s demand absorbs 21,764 units while the total rental supply only increases 1,761, meaning rental units are rapidly becoming harder to get which will drive rents up. The ratio of new units / total units is relatively moderate at 1.23%, so the supply will have a hard time keeping up in the future. The Kansas City market has a very high growth outlook as well as initial yields and is a winner for investors.
St. Louis, Missouri
The St. Louis market yields slightly more than the national average to investors, but offers a relatively stagnant market for rentals and is likely not well suited to growth investors. The supply of rental property to the market has decreased drastically with a net change in total rental properties of only 52 units and a total of 10,236 newly constructed units. The total net number of absorbed units is concerning for investors at a decrease of 13,772, but the supply in the market is weakening at a slower pace leading to vacancy rates increasing from 4.9% to 9.6%. The growth prospects for the area look to be negative very low with a significant risk of yields decreasing. The initial yields in the area only slightly above the national average meaning this area is not the most opportunistic area for investors.